CHAPTER I Assessing Competitiveness in Chad1
1. This paper analyzes competitiveness in Chad since the advent of the oil era in the 2000s. Oil has since positioned itself as the key sector of a traditional economy that previously depended on agriculture and some light manufacturing. Oil is changing many features of an economy in which some part of the population is nomad and which has been in a state of war for over the last 30 years. The question here is whether Chad’s competitiveness has been affected by oil production. Answering it is not easy for a number of reasons. First, the unstable security situation distorts the economic variables, and security risks may not be properly reflected in the data. Second, the quality of data, particularly on the external sector, is poor. Third, other than in the traditional sectors Chad does not have a solid production base against which to compare the impact of the oil economy.
2. The paper first describes Chad’s trade performance and analyzes its balance of payment vulnerabilities. It then presents an econometric evaluation of the competitiveness of Chad’s exchange rate. The quantitative assessment is supplemented by an analysis of indicators that capture Chad’s competitiveness more directly, especially the fragile security situation and the poor quality of governance. Barriers to internal and external trade are identified in the last section.
I. Trade Performance
3. Over the past decade Chad’s external trade relations have been fundamentally altered. The coming on stream of oil production in 2003 was preceded by construction of the Chad-Cameroon oil pipeline and the development of the Doba oil fields in southwestern Chad close to the Cameroon border. Doba reserves are estimated at about one billion proved barrels and are projected to be substantially depleted by 2025, and none of the companies actively exploring has so far announced evidence of new profitable reserves. Total exports and imports over the past decade reflect pipeline construction and oil field development between 1999 and 2004 and the start of oil exports in 2004s. Because Chad is a price taker in the world oil market, and its production is determined by supply constraints, its competitiveness should be analyzed based on its non-oil exports and imports (Figure 1).
Figure 1.Chad: External Trade Performance, (1994-2007)
Source: Chadian authorities.
4. Chad’s non-oil exports over the past decade have been flat. After the large devaluation of the CFA franc in 1994, export volumes rose for a few years but then fell back (see Table 1). In terms of GDP non-oil exports ended in 2008 at about the level of 1994 as well the share of non-oil exports in world imports. Chad’s main non-oil export products are livestock and cotton. The relative importance of cotton is decreasing while gum Arabic—a traditional product for Chad and Sudan—is gaining importance. “Other” exports are mostly agricultural, such as corn, sorghum, and peanuts.
|(in billions of CFA)|
|(in percent of total)|
|(in percent of non-oil GDP)|
|Non-oil exports/world imports||100||149||145||135||149||164||99||103||98||133||130||127||111||104||100|
5. The overall openness of the economy remained roughly the same, with exports and imports of non-oil goods each equaling 15 percent of GDP, until oil revenues in 2004 boosted non-oil imports. Since oil production began in 2003, Chad’s terms of trade are dominated by international oil price movements, which through 2008 were extremely favorable. Chad’s trade performance, while not signaling any trend in competitiveness, clearly indicates that Chad has not been able to take advantage of the opportunities offered to increase its share in world trade and diversify the economy beyond oil. Diversifying the economy will become more pressing as oil resources are depleted but is already necessary while oil resources are still abundant to help mitigate the deleterious effects of oil sector volatility.
II. Balance of Payments Analysis and Vulnerabilities
6. Chad’s balance of payments is much affected by flows originating in the oil sector. The sector currently consists of a consortium of three international companies—Esso, Chevron, and Petronas—which produce 125,000 barrels of oil a day from six fields in the Doba region. Because Chad has no refinery, all oil produced is exported as crude through the Chad-Cameroon pipeline to the port city of Kribi. In an aggregate presentation of balance of payments factors, the size and volatility of the oil-related flows swamp the other flows. Moreover, oil sector vulnerabilities are quite distinct from other vulnerabilities. Therefore, although Chad does not prepare balance of payments reports separately for the oil and non-oil sectors, as do neighboring oil producers, it is useful to analyze the balance of payments based on consideration of estimates of oil-sector-related flows (see Table 2).2
|(in percent of total GDP)|
|Current account balance||−9.7||−8.4||−9.7||−11.4||−8.5||−10.7||−15.4||−31.8||−94.7||−48.8||−17.4||2.4||−9.0||−10.5||−9.6|
|excl. oil sector||−8.5||−7.4||−8.4||−9.9||−5.5||−5.3||−9.3||−8.0||−14.7||−8.3||−5.2||−4.4||−4.5||−8.0||−10.9|
|excl. oil sector||−5.8||−1.3||1.0||0.9||2.2||4.0||2.0||−0.5||−5.3||−1.4||−4.5||−4.1||−5.0||−6.7||−8.5|
|excl. oil sector||11.0||16.9||14.9||15.2||15.3||15.8||13.2||11.0||9.3||13.4||10.3||7.3||7.0||6.8||6.6|
|excl. oil sector||−16.8||−18.2||−13.9||−14.3||−13.1||−11.8||−11.2||−11.5||−14.6||−14.7||−14.8||−11.4||−12.0||−13.5||−15.2|
|excl. oil sector||−10.3||−9.5||−11.3||−11.6||−10.0||−11.5||−13.7||−10.7||−11.3||−10.6||−8.9||−5.9||−4.2||−5.8||−5.9|
|excl. oil sector||−0.7||−0.4||−0.6||−1.1||−1.2||−1.0||−1.2||−1.3||−3.0||−0.6||3.2||0.3||0.3||0.4||0.4|
|Capital and financial account||10.9||10.4||11.3||10.2||5.5||8.4||16.3||32.8||98.0||45.3||17.9||−1.8||14.9||14.2||16.8|
|excl. oil sector||10.9||10.4||11.3||10.2||6.3||8.8||8.2||6.1||51.7||19.4||7.4||0.0||4.6||4.2||2.6|
|oil sector FDI||0.0||0.0||0.0||0.0||−0.8||−0.4||8.1||26.7||46.3||25.9||10.5||−1.8||10.3||10.0||14.2|
|Oil sales (millions of barrels)||...||...||...||...||...||...||...||...||...||8.6||61.3||56.3||55.9||52.4||46.5|
|Chadian oil price (ex-Kribi; $/barrel)||...||...||...||...||...||...||...||...||...||17.0||18.8||33.3||42.1||51.1||75.8|
|Nominal GDP (billions of US$)||1.2||1.4||1.6||1.6||1.7||1.5||1.4||1.7||2.0||2.7||4.4||5.9||6.3||7.0||8.4|
7. Starting in 2000, foreign direct investment (FDI) in development of the Doba fields and construction of the pipeline dominated the capital and financial account. This generated substantial imports of oil-sector-related goods and even more so of services. When production began in 2003, the income account started showing sizable outflows representing the earnings of the oil companies, much of which re-enters the balance of payments as FDI. Oil exports peaked almost immediately, in 2004, and by 2008 had dropped about one quarter due to unforeseen problems with the geology of the field. Large investments in 2006–08 went to stabilize production levels, and further substantial investments will be required regularly simply to maintain production levels.
8. Because oil now accounts for 90 percent of exports, the trade account is obviously very sensitive to its price fluctuations, but the related vulnerability of the balance of payments is limited. First, production from the Doba field is profitable even at a Brent oil price of only $20–$25 per barrel. Second, the impact of a drop in oil prices is offset by reduced factor income outflows. Third, the substantial imports of goods and services necessary to maintain production are financed by the oil companies from retained earnings, supplemented if needed by internal financing. Thus, Chad’s reserves are largely insulated from the direct effects of oil export shocks. However, the balance of payments is vulnerable to the possibility that fiscal policy would not react appropriately to adverse oil export shocks and the attendant reduction in revenue. If non-oil imports do not adjust in a timely manner, reserves could be depleted.
III. Dutch Disease in Chad
9. Dutch disease can emerge in an economy that benefits suddenly from increased revenues from rents, such as from mineral resources, or other external sources, such as foreign aid. To the extent that the increased aggregate demand is not fully directed to more imports, it bids up the price of nontradables in relation to tradables, which can be imported. This promotes a switch of production from tradables to nontradables, harming the export sector.
10. The effects of Dutch disease in Chad are hard to evaluate not only because data are lacking but also because the non-oil sector is underdeveloped. Before oil, the most important economic sector was agriculture, with cotton and cattle as the main exports. The risk of Dutch disease is that the increase in the price of nontradables (local construction materials, services, food production for local consumption) would squeeze key and potential tradables, depriving the economy of an important source of employment and technological change. The findings of this paper suggest that the priority for the non-oil economy is to remove obstacles to growth, thereby improving the business environment in which the private sector must operate. Even before oil production, cotton was mired in problems that have not been worsened by oil production. However, oil rents may have reduced the incentives to proceed with the reform of the cotton sector.
11. The analysis of the prices of nontradables in the CPI finds no sign of Dutch disease. The only variable showing any evidence is the increase of the wage bill, which went from 5 percent of non-oil GDP in 2000 to 9¼ percent in 2008, with half of that increase explained by an increase of military wages. Total public sector employment increased from 57,000 in 2001 to 117,000 in 2008, and the average wage in real terms increased by about 47 percent. Though oil production is an enclave economy with not much impact in shifting labor, the expansion of government expenditures during the oil boom, which fueled the rise in the wage bill, could lead to a shift in labor from other sectors to the public sector. However, there is not much evidence that these resources are coming from active non-oil sectors rather than from a pool of previously idle labor.
Figure 2.Chad: Price of Key Non-tradables (index, base 1994)
12. Though the quality of investment is not optimal, the use of oil resources to build needed infrastructure and invest in education and health, by helping build up the non-oil sector, addresses the risk of Dutch disease.3 It appears that labor availability and costs in the agricultural, especially livestock, sectors have not been affected by the emergence of an oil sector or expansion of government employment. Rather, increased government spending has helped agriculture by providing essential infrastructure.
IV. Chad’s Real Effective Exchange Rate
13. This section assesses Chad’s real effective exchange rate (REER) using the methodologies designed by the Consultative Group on the Exchange Rate (CGER): (i) the equilibrium real exchange rate approach; (ii) the macroeconomic balance approach; and (iii) the external sustainability approach. However, poor data quality makes it difficult to conduct a comprehensive quantitative analysis. Not only are its external sector data unreliable but Chad also has a substantial amount of unrecorded trade with Nigeria and Cameroon that would not be reflected in such statistics as the REER and the terms of trade. This consists mainly of refined oil and small manufactures smuggled into to Chad and some livestock exported from Chad. The REER appreciated by 16½ percent over 2000–07, because domestic inflation in Chad was higher than in trading partners and the Euro appreciated significantly against the dollar. The results of the three approaches are summarized in the below table.
(+) Undervaluation (-)
A. The Equilibrium Real Exchange Rate Approach
14. This backward-looking approach is designed to estimate the level at which the real effective exchange rate is aligned with fundamentals. The methodology directly estimates an equilibrium real exchange rate and compares it with the current exchange rate to derive conclusions on any needed exchange rate adjustment.
The equilibrium REER can be estimated using the following basic specification:
Ln REER = Α +Β1 Ln TOTt+Β2 LnProdt +Β3 LnOpnt +Β4 Ln GCt +μ
REER: Real effective exchange rate
TOT: Terms of trade
GC: The ratio of government consumption to GDP
μ: Error term
15. The model was estimated using the autoregressive distributed lag (ARDL) technique, which allows to test for cointegrating relationships and is appropriate for short time series. The ARDL technique estimates the long-run parameters and determines whether there is a cointegrating relationship among regressors at different lag definitions. The augmented Dickey-Fuller, Philips and Perron, and Zivot and Andrews tests (see Table 4 for results) enables to detect the presence of unit roots and structural breaks in the series. The Philips and Perron test also enables through a nonparametric process to correct error autocorrelation and heterokedasticity. The hypothesis of the presence of unit roots is rejected after applying first differences to the variables because in the Philips-Perron and the Zivot-Andrews tests the values are below the critical benchmark of significance when the variables are not differentiated.
|Long Run Coefficients||Dependent Variable: ln (REER)|
|Two Lags||One Lag||Three Lags|
|ln (Terms of Trade)||−0.350||−0.377||−0.560|
|ln (Government Consumption)||−0.099||0.009||−0.072|
|F-Statistic for Bound Test1||3.54||25.30||4.23|
|Akaike Information Criteria||−45.90||−48.81||−55.62|
|Schwarz Information Criteria||−27.03||−35.85||−31.24|
Upper level bounds are 6.36 for two lags, 7.84 for one lag, 5.61 for three lags.
Upper level bounds are 6.36 for two lags, 7.84 for one lag, 5.61 for three lags.
16. The best equation at two lags does not give enough evidence that a cointegrating vector exists because productivity is the only significant variable. The REER was overvalued by an average of 16½ percent for 2000–07, a period that coincides with the advent of the oil era (see Appendix Figure 3). However, given the lack of significance of most of the variables and the wrong sign for terms of trade and openness, no firm conclusions can be drawn from the estimation. The wrong sign of the terms of trade is puzzling and only could be explained by poor data or the fact that spending from the oil boom is increasing imports substantially and thus neutralizing the effects on the REER.
17. A second approach is to drop all the nonsignificant variables and leave only productivity. The equilibrium REER estimated with the ARDL technique at two lags shows an average undervaluation of 6.1 percent for 2000–07 (see Appendix Figure 4). The limitation of this approach is that it relates the REER to only one fundamental, making it difficult to draw definite conclusions.
Ln REER = 4.5 + 0.62 LN Prodt
Z statistics (−1.6)
18. A third approach imposes the coefficients from a CEMAC pool single time-series estimation to fit the equilibrium exchange rate with Chadian data (Table 5). The results from using the long-term CEMAC coefficients show an average moderate overvaluation of 5 percent for 2000–07.
|Long Run Coefficients||Dependent Variable: in (REER)|
|Johansen single time series|
|in (Terms of Trade)||0.63|
|in (Government Consumption)||−0.59|
|Error-Correction Term Estimates|
|D (in REER)||−0.18|
19. Although the REER has appreciated since 2000 there is no solid evidence that it is inconsistent with fundamentals. Results from the equilibrium exchange rate approach were inconclusive, showing no significant under- or overvaluation.
B. The Macroeconomic Balance Approach
20. This three-stage approach computes how much exchange rate adjustment is needed to achieve a sustainable current account. It first defines an underlying current account, then defines a saving-investment norm, and finally computes the size of the REER adjustment needed to bring to equilibrium the current account and the saving investment norm. The basic working identity is the saving investment equation:
Current account = Saving investment
21. There are several techniques to estimate the underlying current account. The CEMAC consultation SIP paper finds that in most CEMAC countries the difference between the underlying and the projected current account is not statistically significant.4 We assume that the underlying current account is −8.8 percent of GDP, which is the long-term current account (2010–28) after the oil production and investment spikes have subsided. Other approaches, such as smoothing filters or moving averages, are distorted by the spikes at the start of oil production in Chad. For instance, the current account widened sharply at the beginning of the 2000s when the pipeline was being constructed. Since data limitations make it impossible to run a regression on the current account fundamentals, it is computed using panel estimates of current account regressions based on previous research from developing countries. We use the CGER (2008) paper’s hybrid pooled estimations to estimate the norm as Table 6 below shows.
|Government budget balance||2.5||0.19||0.5|
|Lagged current account||−9.0||0.37||−3.3|
|Youth dependency ratio||2.0|
22. Finally, using elasticity estimations for countries with similar profiles,5 the impact of devaluation on the current account is computed by obtaining the elasticity of the current account with respect to the REER. Here the macroeconomic-balance approach shows a slight overvaluation of the REER of about 2¾ percent (Tables 7 and 8).
|Share of exports in GDP *||0.5|
|Share of imports in GDP *||0.4|
|Required percentage change in the REER to improve the current account by 1 percentage point of GDP||−1.2|
Elasticity = (Export elasticity * Share of exports in GDP) ‒ (Import elasticity * Share of imports in GDP).
Elasticity = (Export elasticity * Share of exports in GDP) ‒ (Import elasticity * Share of imports in GDP).
|Underlying current account||−8.8|
|Current account - Saving investment norm||−5.8|
|Needed adjustment in the current account||3.0|
C. External Sustainability Approach.
23. Assuming no capital gains, zero errors and omissions, and no capital transfers, the current account that stabilizes net foreign assets (NFAs) at the benchmark level, bs, is given by
where g is the GDP growth rate and π is the inflation rate. The key issue is selecting a benchmark level for NFAs: using a backward-looking benchmark such as the NFA level of previous years is not appropriate because most of the variables are distorted by the first years of oil production. The country has a relatively short production horizon (30 years) with output picking up in the first years and then declining gradually. It is appropriate to select a benchmark based on the key components of the NFA position (NFAP) in the long run, including the level of reserves, external debt, and particularly FDI, which in Chad plays a key role in financing the current account because constant investment is needed to maintain a given level of production.
24. The NFAP (see Table 9) is based on the Debt Sustainability Analysis (DSA). FDI and external debt represent the average long-term levels (2010–28) used in the DSA. External debt is therefore projected to decline over time as debt is repaid. The stock of FDI as of 2007 is also projected to decrease as oil production gradually declines.
|Niger's Benchmark||Chad 2007||Chad's benchmark|
|Net Foreign Assets Position (NFAP)||−86.0||−114.9||−98.0|
|Direct Investment Abroad||0||0||0|
|Direct Investment *||40||105.5||86.5|
For Chad long term average 2010–28.
For Chad, long-term average 2010–28 in the DSA.
For Chad long term average 2010–28.
For Chad, long-term average 2010–28 in the DSA.
25. Selecting as benchmark the NFAP target of −95 percent of GDP, the current account balance that would stabilize that is computed using the following assumptions: g: 4.5 percent (long-term growth); and π: 3 percent (the CEMAC convergence criterion). Using recent oil price assumptions the long-term current account is slightly higher than the stabilizing current account, which implies a moderate overvaluation of 2 ¼ percent.6
|NFAP||Stabilizing CA||Long-term CA|
|Difference||Implied Over (+) Under (‒)|
valuation of the REER
26. The conclusion that can be drawn from using all three methods is that there is no solid evidence that the REER is not in line with fundamentals. Some evidence was found of a modest overvaluation of the exchange rate by 2 to 4 percent.
V. Non-Exchange Rate Indicators of Competitiveness
27. In addition to the exchange rate assessment, other determinants of competitiveness are associated with transaction costs and the environment in which the private sector must operate. Chad’s ability to compete in the international marketplace is very much influenced by the quality of its business climate. In a competitive economy the private sector will be able to exploit the country’s comparative advantages to efficiently produce goods and services that can then be traded for goods and services produced more efficiently abroad. To do this the private sector needs stable economic policy, a legal system that enforces property rights, quality economic regulation, and an adequate supply of public goods, such as education, health, and energy and transportation infrastructure. The ability of a government to create such an environment is determined by the quality of its governance.
28. The recognition that poor governance is one of the main obstacles to development has given rise over the past decade to numerous indicators that measure governance in its many facets.7 The conclusion from the better-known of these indicators is that the quality of governance in Chad is extremely poor. Since developing countries generally score low on governance indicators, Chad’s performance within the group of low-income countries is telling (see Table 11). Chad ranks consistently in the bottom quartile of major governance indicators compared to other low-income countries. The World Bank’s Country Policy and Institutional Assessment (CPIA) is an index of government effectiveness based on assessments by World Bank staff intimately familiar with the country. The Bank’s Doing Business indicators indicators focus on the ease of setting up and running a business based on responses from local observers familiar with the country’s business climate. The World Bank Institute (WBI) Governance Indicators aggregates the results of many perception surveys and expert reviews into an assessment of performance on six governance dimensions. The Transparency International (TI) Corruption Perception Index is similarly an aggregate index. And the United Nations Development Programme’s (UNDP’s) Human Development Index combines indicators of economic performance with indicators of a country’s success in satisfying the basic human needs of its people.8
|Overall CPIA (WB)||2.575||8||74||bottom|
|Ease of Doing Business (WB)||172||7||76||bottom|
|Governance Indicators (WBI)|
|Control of Corruption||−1.22||9||78||bottom|
|Rule of Law||−1.40||11||78||bottom|
|Voice and Accountability||−1.43||10||78||bottom|
|Human Development Index (UNDP)||0.388||8||74||bottom|
|Corruption Perception Index (TI; 2006)||2||5||62||bottom|
Rating relative to group of IDA-eligible Low Income Countries.
Rating relative to group of IDA-eligible Low Income Countries.
A. Doing Business Indicators
29. The Doing Business Indicators (DB) are widely used for assessing a country’s business climate.9 The DB’s popularity is due to the fact that all the indicators are quantifiable, they are detailed enough to identify specific areas requiring policy attention, and can be used to measure performance over time. The DB measures performance on 11 critical aspects of starting and running a successful business. Again, a comparison of Chad’s performance relative to its peers may be particularly informative.
30. Table 12 compares Chad’s performance on the DB with that of the other CEMAC countries plus neighboring Niger and Nigeria, which are not members of CEMAC. The countries are ranked within the group of 46 sub-Saharan countries. The first column, Ease of Doing Business, shows the composite ranking. Chad does particularly poorly in permitting a business to start up and in enforcing contracts. Its best relative performance is in dealing with construction permits. The data also point to a regional effect in that on the overall indicator Chad and its neighbors, except for Nigeria, all fall within the bottom two quartiles compared to other sub-Saharan countries.
|Ease of Doing Business Rank||Starting a Business||Dealing with Construction Permits||Employing Workers||Registering Property||Getting Credit||Protecting Investors||Paying Taxes||Trading Across Borders||Enforcing Contracts||Closing a Business|
|Republic of Congo||43||33||10||40||43||19||32||46||46||36||21|
Rankings are within group of 46 Sub-Saharan African countries.
Rankings are within group of 46 Sub-Saharan African countries.
31. The Doing Business Indicators permit analysis at a detailed level since the 11 topics are measured with the help of 41 specific indicators. Table 13 compares Chad’s performance with that of other sub-Saharan countries and with the OECD countries, which can be considered as adhering to international best practice. Compared with other countries in the region, Chad’s performance has some favorable elements: It does relatively well in “dealing with licenses,” which relates to “the procedures, time, and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections.” Chad also does relatively well on several labor market indicators, and on the time it takes to register property (although the cost is high). On the other hand, Chad performs particularly poorly on procedures, time, and cost for starting a business, and on the time and cost of importing and exporting, which are staggering. The cost of exporting a container is $4,867 and it takes 78 days, compared with $1,660 and 36 days for the region. Importing is even more costly and time-consuming: $5,520 per container and 102 days compared with $1,986 and 44 days. And even the sub-Saharan average is far higher than in the OECD, where exporting or importing a container costs less than $1,000 and on average takes less than 10 days.
|Chad||Region||OECD||Chad better than region|
|Starting a Business|
|Cost (% GNI per capita)||188.8||148.1||5.1|
|Dealing with Licenses|
|Cost (% of income per capita)||1,064||2,549||62.2||Better|
|Difficulty of Hiring Index||39.0||41.7||25.2||Better|
|Rigidity of Hours Index||60.0||43.9||39.2|
|Difficulty of Firing Index||40.0||42.2||27.9||Better|
|Rigidity of Employment Index||46.0||42.6||30.8|
|Nonwage labor cost (% of salary)||21.0||12.3||20.7|
|Firing costs (weeks of wages)||36.0||68.3||25.7||Better|
|Procedures (numbered)||6.0||0 7.||4.9||Better|
|Duraction (days)||44.0||6 104.||28.0||Better|
|Cost (% of property value)||21.2||11.1||4.6|
|Legal Rights Index||3.0||0 4.||6.4|
|Credit Information Index||1.0||3 1.||4.8|
|Public registry coverage (% adults)||0.2||1 2.||8.6|
|Private bureau coverage (% adults)||−||5 4.||3 59.|
|Disclosure Index||6.0||7 4.||6.4||Better|
|Director Liability Index||1.0||1 3.||5.1|
|Shareholder Suits Index||5.0||0 5.||6.5|
|Investor Protection Index||4.0||3 4.||6.0|
|Profit tax (%)||31.3||21.4||20.0|
|Labor tax and contributions (%)||23.9||13.3||22.8|
|Other taxes (%)||8.5||33.3||3.4|
|Total tax rate (% profit)||63.7||68.0||46.2|
|Trading Across Borders|
|Documents for export (number)||6.0||1 8.||4.5||Better|
|Time for export (days)||78.0||35.6||9.8|
|Cost to export (US$ per container)||4,867||1,660||905|
|Documents for import (number)||9.0||0 9.||5.0|
|Time for import (days)||102.0||43.7||10.4|
|Cost to import (US$ per container)||5,520||1,986||986|
|Cost (% of claim)||77.4||48.7||17.7|
|Closing a Business|
|Time (years)||−||4 3.||1.3|
|Cost (% of estate)||−||20.0||7.5|
|Recovery rate (cents on the dollar)||−||17.1||74.1|
VI. Barriers to Internal and External Trade
32. Internal and external trade are closely related. The ease with which economic operators can trade within their country has a great impact on their business costs and therefore on their external competitiveness. Internal trade determines the resilience of the country’s supply side. For that reason, a comprehensive trade diagnostic carried out by six international institutions led by the World Bank, the Diagnostic Trade and Integration Study (DTIS) of January 2007, looked at both internal and external trade.10 Its purpose was to help the government define a strategy and an integrated approach for raising Chad’s participation in regional and global markets. The DTIS provided a rich analysis of the many factors that adversely affect the country’s business climate and impair trade. Notwithstanding the improved outlook for growth and poverty reduction thanks to the additional resources from oil, the DTIS concluded, major reforms within Chad’s borders are necessary to raise the growth rate sustainably and make inroads into poverty. The main constraints to growth it identified were inadequate infrastructure and public services; deficiencies in the business climate; weak governance, and bad collaboration between the public and private sectors.
33. The DTIS observed that while constraints on the production of goods and services are the more serious hindrance to trade integration, there is still much to be done to remove obstacles to exports and thus encourage economic diversification. The DTIS recommends simplifying and reducing the tariff regime, such as shrinking the number of categories of goods from four to three; lowering the maximum common external tariff (CET) from 30 to 20 percent; and implementing a duty drawback scheme for exporters.
34. Chad is beset with barriers to trade within its borders. According to the DTIS, production in the sectors where Chad has the greatest comparative natural advantage—cotton and livestock—is suboptimal. Cotontchad, the country’s sole cotton buyer, is virtually bankrupt. Its equipment is inadequate and its management is bad. As a result, it does not fulfill its role of buying and transporting cotton. The problems are compounded by fraud, black market operations, and extortion. There is a serious risk that farmers will abandon cotton production. The extra income that could be generated with improvements in the cotton sector would spill over into other parts of agriculture, such as livestock, where the country’s comparative advantage can be better exploited.
35. Basic infrastructure and public services, the DTIS finds, are inadequate. Fewer than 2-3 percent of the population has access to electricity. The state electricity company (STEE, Societe Tchadienne de l’Eau et de l’Electricite) in theory has a capacity of 38 megawatts but produces only 20—barely enough to power the pumps of the public water system and a few large buildings in the capital. Well-to-do households and all enterprises produce their own electricity at high cost using imported diesel. The roads are in such bad shape that trucks in Chad wear out at an accelerated pace, and access to the communications infrastructure is well below the regional average.
36. The climate for doing business is poor. The quality of governance poses problems at all levels of government. Businesses complain about fiscal harassment, competition from smuggled imports (e.g., sugar); state interference (e.g. telecommunications); and government agencies playing favorites. The business climate suffers from
(i) distortions that raise the cost of production (lack of access to financing, improper taxation, inadequate roads and communications, excessive bureaucracy, predatory behavior by civil servants, corruption, and rent-seeking); and
(ii) heightened risk (poor protection of property rights, poor functioning of titling system, an ineffective court system, and a bad system for enforcing contracts).
37. A number of serious barriers to Chad’s external trade lie beyond its borders and are thus essentially outside its control. A major distortion on the global market holds back the cotton sector: large subsidies to cotton growers in developed countries depress prices to cotton growers in developing countries. Furthermore, it will be difficult for Chad to take advantage of the growing international commerce in food and agricultural products because compliance with sanitary and phytosanitary norms is far in the future. And being landlocked, Chad is particularly sensitive to the costs of overland transportation. Lack of cooperation with the administrations in Cameroon and Nigeria is part of the problem. The main transit corridor is from Douala in Cameroon to N’djamena. Customs operations in Douala are slow, as are those at the border crossing into Chad. The export of livestock into Nigeria is equally affected by delays at customs.
38. But Chad also experiences trade barriers at its borders that are in principle amenable to government reform. The DTIS concludes that customs administration is highly ineffective. It does not respect international norms, makes very limited use of information technology, grants exemptions on an ad hoc basis, exacts irregular payments, permits contraband, rarely observes elementary rules, and insists on time-consuming formalities for exports. Reform of the customs administration is urgent. Tariffs and duties themselves are not so high as to be a major obstacle to trade but efforts to reduce, simplify, and improve them would nonetheless be helpful.
39. The DTIS assessment is reflected in the government’s latest Poverty Reduction Strategy Paper (PRSP), adopted in March 2008.11 The section describing the five axes of the government’s growth strategy describes how some of those challenges are being addressed. With respect to governance, the government places a high priority on maintaining the political dialogue, consolidating peace, and improving security all around.12 Better governance in economic policy is being pursued through a strategy of enhanced transparency of all government operations and functions, notably budget execution and procurement. The government commits to reforming Cotontchad and thereby improving the prospects of the cotton sector. It also reaffirms its plans for improving and enlarging the supply of electricity by reforming the STEE, building a topping plant to produce diesel for electricity generation, constructing a refinery plus power plant, and connecting Chad to Cameroon’s electricity grid. Finally, the PRSP outlines the government’s ambitious plan for having 1,546 km of asphalt roads by 2011 (the network grew from 346 km. in 2000 to 669 km. in 2005 and to 1,021 km in 2006).
40. Dominated by developments in the oil sector, Chad’s balance of payments is vulnerable to the indirect effects of the sector’s volatility. The country’s ample reserves are insulated from oil sector shocks to the extent that oil-sector-related flows for trade in goods and service, factor income and capital automatically offset each other. However, an inadequate fiscal policy response to declining oil revenue would put the reserves at risk. Economic diversification is the answer both to the short-run problem of oil sector volatility and the long-term challenge presented by gradual depletion of current oil resources.
41. The conclusion of the analysis using the CGER methodologies is that Chad’s REER is not out of line with fundamentals and is consistent with external stability. However, the limitations of the data are significant. The equilibrium real exchange rate approach found no robust relation between the REER and the fundamentals. The macroeconomic balance approach shows an overvaluation of 3½ percent and the external sustainability approach an overvaluation of 2¼ percent.
42. Inadequate human and physical infrastructure and the poor quality of Chad’s governance places private producers at a serious disadvantage when competing in the international marketplace. These factors, which are amenable to government reform, are compounded by factors outside government control, notably the country’s landlocked location. In its March 2008 PRSP the government acknowledges the serious problems afflicting its internal and external trade and lays out a medium-term strategy for addressing them. Chad’s current substantial oil revenues—the recent price decline notwithstanding—present a historic opportunity for implementing it.
Figure 3.Chad. REER and Equilibrium REER Figure 4.Chad: REER and Equilibrium REER
International Monetary Fund2008 “Methodology for CGER Exchange Rate Assessments” (Washington: International Monetary Fund)
International Monetary Fund2008CEMAC—Selected Issues and Statistical Appendix (www.imf.org) (Washington: International Monetary Fund).
International Monetary Fund2008Niger—Selected Issues and Statistical Appendix (www.imf.org) (Washington: International Monetary Fund).
International Monetary Fund2008WAEMU—Selected Issues (www.imf.org) (Washington: International Monetary Fund).
Prepared by Oscar Melhado and Anton Op de Beke.
The estimates in Table 2 do not properly treat transactions between the oil and non-oil sectors. It has proven a major challenge for those compiling Chad’s balance of payments statistics to obtain the necessary information to adequately register oil-sector-related flows, especially financial flows internal to the consortium.
A paper by Levy (2007) reaches similar conclusion arguing that policies supporting vulnerable parts of the economy, notably irrigation and road infrastructure, prevent the occurrence of Dutch Disease and creates the opportunity for development and poverty reduction.
IMF, “CEMAC. External Stability and Exchange Rate Assessment in an Oil-Dependent Region,” Selected Issues paper for the 2008 Article IV consultation.
Estimate of imports and exports with respect to changes in the REER are in the order of 0.5 to 1.5. We use here estimates from IMF, “Niger- Selected Issues” (www.imf.org) and IMF, WAEMU (www.imf.org).
The implied adjustment is computed by using the elasticities and parameter from the macroeconomic balance approach, in which the REER has to change by 1.2 percent for the current account to change by 1 percent.
The UNDP’s Governance Indicators—A Users’ Guide informatively describes many governance indicators and how they might be used (see http://www.undp.org/oslocentre/flagship/governance_indicators_project.html).
See the World Bank website at http://rru.worldbank.org/businessplanet/.
The DTIS was carried out in the context of the Integrated Framework supported by six institutions, including the World Bank, the IMF, the UNDP and the WTO. For Chad’s DTIS (Tchad—Étude diagnostique sur l’intégration commerciale) see http://www.integratedframework.org/countries/chad.htm.
See Document de Strategie de Croissance et de Reduction de la Pauvrete, Republique du Tchad, Mars 2008.
For a recent assessment of political governance, see Chad: A New Conflict Resolution Framework, International Crisis Group, Africa Report No. 144, 24 September 2008 at http://www.crisisgroup.org/home/index.cfm?id=5694&l=1