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Chad

Author(s):
International Monetary Fund
Published Date:
February 2009
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I. Introduction

1. Chad is mired in security and political instability and this has impeded growth. Ranking 170th on the UN’s Human Development Index, Chad is among the poorest countries in the world. It has experienced some form of civil conflict for all but four of the past thirty years. Most recently, Chad has been embroiled in conflict with Sudan and has endured several major rebel assaults on its capital. The Darfur crisis has driven 290,000 Sudanese refugees into Chad, adding to some 180,000 internally displaced persons.1

2. Oil production started in 2003 and offers a great opportunity while posing difficult challenges. By 2008, oil accounted for 47 percent of GDP and oil revenues had risen to 41 percent of GDP.2 If well spent, oil revenues could expand scarce physical and human capital, diversify the economy, and make inroads into poverty. But s far Chad has exhibited symptoms typical of the “resource curse:” weak growth, non-productive spending, corruption, and conflict. How this will play out depends on many factors beyond the Fund’s mandate, including progress towards peace and inclusive development. The Fund’s role is critical in advising on sound macroeconomic policies, efficient public financial management, and good-quality economic institutions and governance.

Figure 1.Chad: Oil Outlook 2003-11

3. A new poverty reduction strategy paper (PRSP) identified the key issues. The second PRSP, adopted in 2008, sets out the government’s economic strategy through 2011.3 With good governance and an environment conducive to growth as main objectives, it highlights the importance of fiscal sustainability, sound public financial management, and effective spending of oil revenue to promote economic diversification. It also argues for continuation of structural reforms in the cotton and energy sectors.

4. Relations with the donor community have been strained. Dissatisfied with the implementation of the 1999 Petroleum Revenue Management Law—in particular the amount and quality of spending in priority sectors—the World Bank asked Chad to prepay all pipeline-related loans, permitting it to withdraw from the oil sector. But the Bank is expected to reopen its field office—closed after the February 2008 rebel attacks—soon and start discussions on its future engagement outside the oil sector. Disbursements of other donors have also been delayed. The 2005-08 Fund-supported PRGF arrangement went off track due to widening non-oil fiscal deficits, inadequate poverty orientation of spending, and slow structural reform. A staff-monitored program (SMP) negotiated in July 2008 was not approved by management due to additional expenditure overruns.

II. Recent Economic Developments

5. The main economic developments are summarized in Figure 2. Key points to note are:

Figure 2.Chad: Recent Economic Developments, 2002–08

Sources: Chadian authorities; and staff estimates and projections.

  • Economic growth has been subdued in 2007 and 2008. Real GDP increased by only ¼ percent in 2007 due to weak non-oil growth and a sharp decline in oil production owing to technical problems in several fields. Weak agricultural production dampened non-oil sector growth, despite growing construction and service activities related to higher public spending. Real GDP in 2008 is expected to decline by ½ percent because of a further drop in oil production and the impact of the 2008 February rebel attack on economic activity over the first half of the year. Chad’s growth rates are amongst the lowest in sub-Saharan Africa (Text Table 1).

Text Table 1.Chad: Macroeconomic Performance, 2002-08
2002-062007 Est.2008 Proj.
OilOilOil
ChadExportersSSAChadExportersSSAChadExportersSSA
Real GDP (annual percentage change)13.010.16.30.28.96.7−0.48.36.1
Real non-oil GDP growth (annual percentage change)6.112.16.93.112.17.73.210.97.0
Consumer price index (annual percentage change)2.816.19.1−8.85.77.18.110.111.7
Government expenditure (percentage of GDP)17.220.823.720.920.623.922.818.723.3
Non-oil revenue excl. grants (percentage of non-oil GDP)9.120.6n.a.11.018.2n.a.9.717.7n.a.
Overall fiscal balance excl. grants (percentage of GDP)−7.34.1−1.02.04.90.45.07.01.1
Overall fiscal balance incl. grants (percentage of GDP)−2.44.70.53.55.01.66.57.22.3
Non-oil primary balance (percentage of non-oil GDP)−15.3−37.8n.a.−22.0−37.8n.a.−28.1−34.2n.a.
Current account balance excl. official currrent transfers (percentage of GDP)−36.70.8−2.5−13.03.8−3.2−11.510.0−0.9
Sources: Chadian authorities; and IMF staff estimates and projections.
Sources: Chadian authorities; and IMF staff estimates and projections.
  • The global economic crisis has affected the budget and reserves through lower oil prices. Beyond this, Chad’s limited financial and trade integration has insulated it from the financial crisis and ensuing global recession. Nevertheless, risks include lower demand for exports and weaknesses in the foreign banks that own most of Chad’s banking system.

  • Inflationary pressures picked up in the first half of 2008 owing to rising food prices. After average inflation declined by 8¾ percent in 2007 as food prices fell from the spike in 2006, inflation reached 11¾ percent on a 12-month basis at end-November 2008, driven by a 21 percent increase in food prices over the same period. This reflected a drop in food production, higher transportation costs from the fuel price shock, and additional demand from international humanitarian organizations.

  • Chad has not suffered from the food price crisis as much as other Sub-Saharan African countries. Imported food accounts for only one quarter of the average household consumption basket. The policy response has been to eliminate taxes and fees on domestic sales of cattle, temporarily suspend cattle exports (lifted in mid-September), ban food crop exports, provide a temporary lump-sum allowance to low-income civil servants, and sell cereals to civil servants through the national food security agency (ONASA).

  • High oil prices did not lead to significant retail fuel price subsidies. Retail fuel prices—liberalized in 2001—rose by only 25 percent since end-2006 despite the near doubling of international prices. Over half of Chad’s fuel is informally imported from neighboring countries that subsidize prices. Pass-through is also limited through the base for the VAT being administratively set below market prices, and remaining unchanged since early 2006. The implicit subsidy is estimated at about ½ percentage point of GDP in 2008.

  • The BEAC tightened monetary policy by raising reserve requirements and policy interest rates. In response to emerging inflationary pressures, the central bank increased its policy rates (¼ percent) and reserve requirements in July 2008. Broad money has been growing rapidly (19 percent in the year to September 2008).

  • Non-oil fiscal deficits have been widening rapidly as oil revenues have increased. The non-oil primary deficit (NOPD) deteriorated from 4 percent of GDP in 2004—the onset of oil revenues—to 22 percent (commitment basis) in 2007. All spending increased, but higher security and domestically-financed investment spending accounted for about 40 percent and 30 percent of the increase respectively. A further widening of the non-oil primary deficit to 28 percent of GDP is expected in 2008, mainly on account of higher security spending following the February attacks. Spending on security has risen very rapidly—from 2¼ percent of GDP in 2005 to almost 14½ percent projected in 2008.4 It is highly unpredictable and nontransparent, and is subject neither to budgetary scrutiny ex ante nor to audits ex post.

  • Domestically-financed priority sector spending5 tripled since the advent of oil revenues in 2004. From 2006 to 2008, spending on health and basic education each increased by ½ percentage point of GDP.

  • Aid flows have declined significantly in the oil era. Total aid (grants and loans) was equivalent to 10 percent of GDP in 2004 but declined to 5 percent in 2007. While loans decreased, grants have remained relatively stable.

  • The REER has depreciated since end-2006 through November 2008 by 1¾ percent. The REER appreciated by 27 percent over 2000–06, reflecting higher domestic inflation than trading partners and the strong appreciation of the Euro against the dollar. However, over 2007–08, the REER depreciated mainly due to lower inflation while other CEMAC countries, most of them significant oil producers, experienced appreciation.

  • Steadily increasing oil prices through mid-2008 have helped strengthen the external current account and official reserves. The 45 percent improvement in the terms of trade over 2006-08, despite declining oil production, raised export proceeds by 22 percent. But imports also grew strongly, by 66 percent overall and 60 percent outside the oil sector, and the trade surplus moved from 37 percent of total GDP in 2005 to 32 percent in 2008. Oil production was also responsible for large earnings outflows, most of which were reinvested so that the capital account was highly positive. On balance, despite a negative current account balance, substantial reserves were accumulated. Import cover is expected to rise to 10½ months of imports of nonoil goods and services in 2008, from 5¼ months in 2006.

  • Chad has improved its compliance with the CEMAC convergence criteria thanks to the oil windfall (Text Table 2). Since 2005 it no longer has a negative basic fiscal balance nor has it accumulated arrears since that time.

Text Table 2.Chad’s Compliance with CEMAC Convergence Criteria, 2003-08(Percent of GDP, unless otherwise indicated)
Criteria200320042005200620072008

Proj.
Basic fiscal balance1≥0−3.4−0.21.13.84.37.1
CPI inflation (annual percentage change)≤3−1.8−5.47.97.9−8.87.5
Stock of public debt≤7043.031.933.828.824.521.6
Net change in government arrears≤00.20.90.1−0.2−0.5−0.6
(In number of fulfilled criteria/total criteria)
Chad’s compliance2/42/42/43/44/43/4
CEMAC’s compliance (average)2/43/43/43/43/43/4
Sources: Chadian authorities; and staff estimates.

Overall fiscal balance excluding grants and foreign-financed investment.

Sources: Chadian authorities; and staff estimates.

Overall fiscal balance excluding grants and foreign-financed investment.

III. Medium-Term Outlook and Policy Discussions

6. The policy discussions focused on ensuring fiscal sustainability and external stability and competitiveness against the backdrop of the global economic slowdown and weakening commodity prices. The mission recommended fiscal adjustment start with the 2009 budget signaling a policy stance that is sustainable and consistent with available financing over the medium term. External vulnerabilities and major constraints to competitiveness exist, even though estimates of the equilibrium real exchange rate found limited evidence of inconsistency with Fundamentals.

A. Medium-Term Macroeconomic Framework

7. The medium-term macroeconomic outlook is fragile given the global recession and the outlook for oil prices (Table 1). Non-oil growth is expected to average 4¾ percent over 2009–11 driven by the service sector, construction, and manufacturing. Oil growth reflects gradually declining production absent the discovery of new exploitable reserves. With adoption of a sustainable fiscal policy (see the “adjustment” scenario in Text Table 3)—where the non-oil deficit is reduced to 10½ percent by 2011 in line with the permanent income framework described in Box 1—import cover would increase to over one year by 2012. The less ambitious adjustment in the 2009 budget combined with the lower WEO oil prices would lead to fiscal financing gaps in 2009 and over the medium term (see “WEO oil prices” scenario in Text Table 3). Absent further domestic shocks, inflation is projected to revert to its historical level of 3 percent over the medium term. Important risks to macroeconomic stability exist from security and political instability, further declines in oil prices, and failure to re-establish strong relations with key donors, impeding financing and policy support.

Table 1.Chad: Selected Economic and Financial Indicators, 2006-12
2006200720082009201020112012
Proj.Proj.Proj.Proj.Proj.
(Annual percentage change, unless otherwise specified)
National income
GDP at constant prices0.20.2−0.43.53.53.62.7
Oil GDP−10.5−7.7−11.7−1.7−1.1−1.0−6.1
Non-oil GDP4.73.13.25.04.74.74.7
Consumer price index (average)7.9−8.88.13.03.03.03.0
Chadian oil price (U.S. dollars/barrel) 142.151.175.728.137.643.666.8
WEO assumptions (U.S. dollars/barrel)64.371.197.554.364.871.375.0
Oil production (in million barrels)56.752.446.545.645.645.643.3
Exchange rate FCFA per US$ average522.4478.6
Money and credit
Net foreign assets of the banking system 275.240.671.7−46.628.935.046.4
Net domestic assets 2−23.3−35.2−60.755.0−20.6−27.2−38.5
Of which: net claims on central government 2−25.2−33.3−40.164.54.3−13.8−26.2
credit to nongovernment sector2.8−4.23.22.52.52.42.4
Broad money51.95.411.18.48.37.97.9
Income velocity of money (M2)4.74.64.64.64.64.64.6
External sector (valued in CFA francs)
Exports, f.o.b.8.1−1.014.0−44.119.310.51.5
Imports, f.o.b.12.63.34.4−10.23.16.50.7
(Percent of GDP, unless otherwise specified)
Investment and Saving
Gross investment20.318.014.015.414.214.514.3
Government6.07.36.86.85.76.56.7
Private sector14.310.77.28.58.68.07.6
Of which: oil sector9.35.62.42.83.22.62.2
Gross national savings11.47.54.3−1.76.97.48.2
Government9.411.413.60.67.19.410.6
Private sector2.0−3.9−9.3−2.3−0.2−2.0−2.4
Current account balance, incl. official current transfers−9.0−10.5−9.6−17.1−7.3−7.0−6.1
(In percent of non-oil GDP, unless otherwise specified)
Government finance
Revenue31.841.651.216.822.825.425.4
of which: non-oil revenue8.811.09.79.710.210.510.8
Total expenditure30.938.642.130.224.824.924.1
Current expenditure19.625.229.620.116.215.014.3
Capital expenditure11.313.312.510.18.69.99.9
Non-oil primary balance (commitment basis, excl. grants) 3−15.0−22.0−28.1−16.8−10.7−10.6−9.7
Overall fiscal balance (commitment basis, excl. grants)0.93.09.1−13.4−1.90.51.3
(Percent of GDP, unless otherwise specified)
External sector
Current account balance
Excluding official current transfers−11.8−13.0−11.5−19.9−10.0−9.6−9.1
Excluding oil-related operations and official current transfers (in percent of non-oil GDP)−13.8−19.2−23.5−16.5−14.9−15.8−15.7
(In billions of CFA francs, unless otherwise specified)
Nominal GDP3,2943,3583,7443,2393,6103,9094,102
Nominal non-oil GDP1,7561,8402,0322,2032,3862,5752,778
Nominal GDP (in millions U.S. dollars)6,3067,0188,4196,6157,4048,0538,486
Sources: Chadian authorities; and IMF staff estimates and projections.

Chadian oil price is WEO price minus prudence factor and quality discount.

Changes as a percent of broad money stock at beginning of period.

Defined as the total revenue excluding grants and oil revenue, minus total expenditure excluding interest payments and foreign-financed investment.

Sources: Chadian authorities; and IMF staff estimates and projections.

Chadian oil price is WEO price minus prudence factor and quality discount.

Changes as a percent of broad money stock at beginning of period.

Defined as the total revenue excluding grants and oil revenue, minus total expenditure excluding interest payments and foreign-financed investment.

Text Table 3.Chad: Fiscal Scenarios, 2008-11(Percent of non-oil GDP)
2008200920102011
Adjustment1
Oil revenues41.57.112.614.9
Current expenditure29.620.116.215.0
Transfers14.96.84.43.6
of which exceptional military spending9.32.11.20.4
Domestically-financed investment8.76.95.26.5
Non-oil primary deficit−28.1−16.8−10.7−10.6
Overall balance8.1−14.0−2.40.5
Deposits at the BEAC14.80.50.41.9
Authorities2
Oil revenues41.522.822.421.9
Current expenditure29.622.018.417.2
Transfers14.97.95.14.6
Of which: exceptional military spending9.32.1----
Domestically-financed investment8.79.68.57.5
Non-oil primary deficit−28.1−21.2−15.6−12.6
Overall balance8.1−5.6−0.82.3
Deposits at the BEAC14.812.013.117.2
Financing gap0.00.00.00.0
WEO oil prices3
Oil revenues41.57.112.614.9
Overall balance8.1−21.3−10.7−4.7
Deposits at the BEAC14.80.00.00.0
Financing gap0.04.68.53.0
Sources: Chadian authorities’ information; and staff estimates.

Using WEO oil price and staff’s spending plan.

Authorities’ oil price assumptions and their spending plan.

Authorities’ spending plans with WEO oil price assumptions.

Sources: Chadian authorities’ information; and staff estimates.

Using WEO oil price and staff’s spending plan.

Authorities’ oil price assumptions and their spending plan.

Authorities’ spending plans with WEO oil price assumptions.

B. Fiscal Sustainability

8. The mission proposed a modified permanent income framework to guide fiscal policy (Box 1).6 Fiscal policy can become sustainable if expenditures are gradually reduced to the level of permanent (non-oil) revenues. The declining path for the non-oil primary deficit the mission proposed recognizes that Chad’s large investment needs and potential for catch-up growth justify a drawdown of accumulated reserves, and protects priority sector spending (see adjustment scenario in Text Table 3 and Box 1). Staff simulations suggest the sustainable long-term non-oil balance ranges from a small surplus to deficits of around 3 percent of GDP depending on the model used and the speed of adjustment.

9. Staff advised a three-pronged approach to reducing the non-oil primary balance while strengthening poverty reduction efforts: (i) improving public financial management (PFM) through the strict respect of budgetary procedures and other key PFM reforms; (ii) enhancing non-oil revenue collection through reforms in tax and customs administration; and (iii) improving the efficiency and targeting of spending, including efforts to increase the returns to public investment and raise absorptive capacity.

10. The authorities agreed with the analysis of fiscal sustainability and proposed adjustment strategy but stressed the attendant challenges. Fiscal policy is under constant pressure from security shocks and demands from a population with large unmet basic service needs. Nevertheless, they agreed that the large non-oil fiscal deficit should be reduced. The 2009 budget already aimed for a sizeable reduction, particularly its efforts to curtail security spending. The authorities acknowledged that the wage bill and transfers to inefficient public entities were placing an excessive claim on resources, concurring that these outlays had to be forcefully addressed as part of medium-term fiscal consolidation.

11. Progress on the fiscal strategy has been limited to date:

  • PFM remains weak across the board. Budgets experience excessive delays, normal budget procedures are often bypassed, extrabudgetary spending occurs,7 medium-term budgeting and cash management are underdeveloped, and non-competitive procurement is prevalent. Concerns also exist over the weak links between annual budgets and the PRSP and priority actions programs, with ad-hoc budgetary additions undermining established priorities. Moreover, line ministries play too limited a role in formulating their budgets and their capacity for budget execution and monitoring needs strengthening. The authorities agreed that concerted efforts were required. They have introduced a visa de crédit system to stop commitments without budget appropriations, and established an investment database. They also emphasized the importance of donor support for the PAMFIP (Plan d’Action pour la Modernisation des Finances Publiques). The authorities have started to clear domestic arrears (CFAF 14 billion or ¾ percent of GDP in 2008) and intend to finalize a comprehensive arrears clearance plan in 2009 (under preparation since 2005).

  • Staff encouraged public dissemination of the budget, budget execution reports and procurement information. Staff expressed concerns over the Cabinet’s decision to request Parliament to exempt the government from submission of draft budget review laws (Lois de Règlement) for 2004 through 2008.

  • Non-oil revenues are well below other African oil exporters (Text Table 1), but tax reforms are proceeding slowly. The authorities reiterated their intention to undertake a comprehensive review of tax policy, including the fiscal regime for the oil sector. Tax administration would benefit from making the large taxpayers unit operational, and from a medium-term action plan to address the large leakages in customs (IMF technical assistance in tax and customs administration has been requested).

  • Development partners, including the Fund, have drawn attention to problems with the composition, cost and quality of public spending. The authorities agreed the wage bill could be rationalized, including through an employee census, computerization of the payroll, and some demobilization if security permitted. They also agreed existing investments should be rendered productive through adequate allocations for recurrent costs. Staff stressed the need to complete existing projects before launching new ones, and to restrain for now investment in sectors—such as health and education—with absorptive capacity constraints.

Box 1.PIH Frameworks and the Sustainable Non-Oil Primary Deficit (NOPD)

Permanent income hypothesis (PIH) frameworks are flexible in accommodating country-specific circumstances. In a PIH framework, government consumption depends on stable oil wealth, not volatile oil revenue. Convergence to a sustainable NOPD may be achieved by front-loaded fiscal adjustment or more gradually to minimize adjustment costs or allow for habit persistence. A LIC could opt for gradualism permitting higher levels of investment spending early on. However, unless that investment is productive, the delayed adjustment implies a lower sustainable non-oil primary deficit. PIH approaches can also assume that oil wealth is consumed over a relatively long but finite time period to capture political economy considerations. As a result, PIH frameworks have been applied to several oil-producing countries including those facing similar challenges to Chad, such as Congo, Cameroon and Gabon. *

Non oil primary balance path and net debt path using Carcillo, Leigh, and Villafuerte 2007

The application of the PIH and other frameworks points out that Chad’s current NOPD is far too high. The results in the table below suggest that the long-run sustainable NOPD ranges from a small surplus to low single-digit deficits. Chad’s 2008 NOPD will be close to 28 percent. These results are robust to sensitivity analysis on the parameters of the models including on oil revenues.

Average Levels of non-oil primary fiscal balances under different approaches2009-122013-162017-202021-452046-70
Bird in Hand−1.4−4.4−5.1−2.80.0
Balanced Budget−10.1−8.5−3.7−0.10.9
PIH: Villafuerte, Leigh and Carcillo (2007) (infinite horizon)−13.1−8.9−6.5−1.00.4
PIH: Constant government consumption annuity as a share of GDP (finite horizon)−1.1−2.3−2.6−2.6−2.6
Source: Fund Staff Estimates.
Source: Fund Staff Estimates.
* The approaches presented in the table are elaborated in a Selected Issues Paper accompanying this staff report. See also WP/07/80 “Catch-up Growth, Habits, Oil Depletion, and Fiscal Policy: Lessons from the Republic of Congo,” Villafuerte, Leigh, and Carcillo (2007).

C. The 2009 Budget

12. The 2009 budget envisages a significant reduction in the non-oil primary deficit but needs to go further. Cabinet approved a non-oil primary deficit that is 7 percentage points lower than the expected 2008 outturn, or 21¼ percent of GDP (Tables 2-3). While commending these efforts, staff pointed out that the overall balance turns sharply negative in 2009 due primarily to lower prices.8 Additional spending adjustment in the order of 4½ percent of non-oil GDP is needed in 2009 to avoid financing problems.

Table 2.Chad: Consolidated Fiscal Operations, 2006-12(Billions of CFA francs)
2006200720082009201020112012
Proj.BudgetProj.Proj.Proj.Proj.
Revenue558.0764.91,040.9716.2369.6544.9654.5705.4
Oil revenue 1403.4563.2843.1502.4155.7300.6382.9404.0
Royalties and dividends160.6132.5207.2145.885.1103.1121.2128.0
Emissions fee/Statistical Fee13.44.953.015.712.113.114.514.4
Profit taxes229.4425.8582.9340.958.5184.3247.2261.6
Non-oil Tax revenue143.7188.9189.7207.1207.1237.0263.6291.4
Non Tax revenue10.912.78.16.76.77.48.010.0
Expenditure542.3709.3855.3824.6664.2590.8640.6670.6
Current expenditure343.4464.2602.2485.6442.8386.6385.9396.4
Wages and salaries118.2153.2185.4194.9188.8185.8181.7186.9
Civil service85.0110.8120.6127.4121.7122.1121.1127.9
Military33.242.464.867.567.163.760.559.1
Goods and services44.682.299.3101.492.486.0102.4111.2
military good and services11.221.332.626.026.024.723.523.5
Transfers73.0104.2114.5128.6104.076.982.989.5
Exceptional defense spending92.9111.5188.946.146.127.910.00.0
Interest14.613.014.114.611.410.18.88.8
Domestic5.13.03.74.61.40.60.00.0
External9.510.010.410.010.09.58.88.8
Investment expenditure198.9245.1253.1339.0221.4204.2254.7274.2
Domestically financed88.5154.9177.7210.4152.1123.1167.4180.6
Foreign financed110.490.275.4128.569.381.187.493.6
Non-oil primary balance (excl. grants, commitment basis) 2−262.6−404.4−570.8−467.6−369.7−255.2−272.9−268.3
Overall balance (excl. grants, commitments)15.855.5185.6−108.3−294.7−45.913.934.7
Arrears and float−6.0−18.3−21.0−14.0−14.0−11.80.00.0
Errors and omissions−37.95.10.00.00.00.00.00.0
Overall balance (excl. grants, cash)−28.142.3164.6−122.3−308.7−57.613.934.7
Financing28.1−42.3−164.6122.3308.757.6−13.9−34.7
Domestic financing−63.5−113.0−178.327.1266.35.7−71.4−146.4
Central Bank (BEAC)−62.7−98.8−159.545.8285.020.6−71.4−146.4
Commercial banks−0.64.10.00.00.00.00.00.0
Non-bank financing−0.2−18.3−18.8−18.7−18.8−14.90.00.0
Privatization0.00.00.00.00.00.00.00.0
Foreign financing91.670.713.795.242.451.957.5111.7
Grants62.649.456.468.841.468.573.798.4
Budget support grants7.60.00.00.00.00.00.019.4
Project grants55.049.456.468.841.468.573.779.0
Loans (net)29.021.3−42.726.41.1−16.5−16.213.2
Disbursements55.440.819.059.728.012.713.642.4
Project loans55.440.819.059.728.012.713.614.6
Amortization−33.9−19.5−61.7−33.3−26.9−29.2−29.8−29.2
Debt relief8.00.00.00.00.00.00.00.0
Memorandum items:
Non oil GDP1,756.21,840.02,032.32,203.12,203.12,386.52,574.62,778.2
Total military spending147.3186.5292.6146.6146.3123.4101.1108.2
Deposits at the BEAC51.9158.8301.5264.210.010.050.0196.5
Sources: Chadian authorities; and IMF staff estimates.

Oil export price based on WEO minus prudence factor and quality discount.

Defined as the total revenue excluding grants and oil revenue, minus total expenditure excluding interest payments and foreign-financed investment.

Sources: Chadian authorities; and IMF staff estimates.

Oil export price based on WEO minus prudence factor and quality discount.

Defined as the total revenue excluding grants and oil revenue, minus total expenditure excluding interest payments and foreign-financed investment.

Table 3.Chad: Consolidated Fiscal Operations, 2006-12(Percent of non-oil GDP)
2006200720082009201020112012
Proj.BudgetProj.Proj.Proj.Proj.
Revenue31.841.651.232.516.822.825.425.4
Oil revenue123.030.641.522.87.112.614.914.5
Royalties and dividends9.17.210.26.63.94.34.74.6
Emissions fee/Statistical Fee0.80.32.60.70.50.50.60.5
Profit taxes13.123.128.715.52.77.79.69.4
Non-oil Tax revenue8.210.39.39.49.49.910.210.5
Non Tax revenue0.60.70.40.30.30.30.30.4
Expenditure30.938.642.137.430.224.824.924.1
Current expenditure19.625.229.622.020.116.215.014.3
Wages and salaries6.78.39.18.88.67.87.16.7
Civil service4.86.05.95.85.55.14.74.6
Military1.92.33.23.13.02.72.42.1
Goods and services2.54.54.94.64.23.64.04.0
military good and services0.61.21.61.21.21.00.90.8
Transfers4.25.75.65.84.73.23.23.2
Exceptional defense spending5.36.19.32.12.11.20.40.0
Interest0.80.70.70.70.50.40.30.3
Domestic0.30.20.20.20.10.00.00.0
External0.50.50.50.50.50.40.30.3
Investment expenditure11.313.312.515.410.18.69.99.9
Domestically financed5.08.48.79.66.95.26.56.5
Foreign financed6.34.93.75.83.13.43.43.4
Non-oil primary balance (excl. grants, commitment basis)2−15.0−22.0−28.1−21.2−16.8−10.7−10.6−9.7
Overall balance (excl. grants, commitments)0.93.09.1−4.9−13.4−1.90.51.3
Arrears and float−0.3−1.0−1.0−0.6−0.6−0.50.00.0
Errors and omissions−2.20.30.00.00.00.00.00.0
Overall balance (excl. grants, cash)−1.62.38.1−5.6−14.0−2.40.51.3
Financing1.6−2.3−8.15.614.02.4−0.5−1.3
Domestic financing−3.6−6.1−8.81.212.10.2−2.8−5.3
Central Bank (BEAC)−3.6−5.4−7.82.112.90.9−2.8−5.3
Commercial banks0.00.20.00.00.00.00.00.0
Non-bank financing0.0−1.0−0.9−0.8−0.9−0.60.00.0
Privatization0.00.00.00.00.00.00.00.0
Foreign financing5.23.80.74.31.92.22.24.0
Grants3.62.72.83.11.92.92.93.5
Budget support grants0.40.00.00.00.00.00.00.7
Project grants3.12.72.83.11.92.92.92.8
Loans (net)1.71.2−2.11.20.0−0.7−0.60.5
Disbursements3.22.20.92.71.30.50.51.5
Project loans3.22.20.92.71.30.50.50.5
Amortization−1.9−1.1−3.0−1.5−1.2−1.2−1.2−1.0
Remaining financing gap0.00.00.00.00.00.00.00.0
Memorandum items:
Non oil GDP (in billions of CFAF)1,756.21,840.02,032.32,203.12,203.12,386.52,574.62,778.2
Total military spending8.410.114.46.76.65.23.93.9
Deposits at the BEAC3.08.614.812.00.50.41.97.1
Sources: Chadian authorities; and IMF staff estimates.

Oil export price based on WEO minus prudence factor and quality discount.

Defined as the total revenue excluding grants and oil revenue, minus total expenditure excluding interest payments and foreign-financed investment.

Sources: Chadian authorities; and IMF staff estimates.

Oil export price based on WEO minus prudence factor and quality discount.

Defined as the total revenue excluding grants and oil revenue, minus total expenditure excluding interest payments and foreign-financed investment.

13. Staff urged the authorities to present to Parliament a revised budget that addressed the following fiscal risks:

  • Oil revenue projections underpinning the budget were overly optimistic. Due to a higher oil reference price, the 2009 budget projects almost 16 percent of non-oil GDP more in oil revenue than the staff’s forecast using WEO prices. If these higher prices do not materialize, financing gaps will emerge and costly expenditure adjustments may be inevitable. The authorities also need to fully take into account the impact of a September 2008 agreement with the oil consortium.

  • Expenditure adjustment banking solely on lower military outlays was highly risky. Non-security spending should be rationalized, notably the wage bill—which alone consumes almost all non-oil revenues—and transfers to public enterprises. The dramatic growth in investment spending should also be contained to avoid disruptions of projects critical to growth, and to support a cushion of savings for possible further shocks. Addressing weaknesses in tax collection should begin vigorously in this budget.

14. Despite these risks, the authorities preferred to proceed with their budget but stood ready to undertake mid-course corrections. The authorities committed to stronger non-oil revenue collection, accelerated reforms of the state water and electricity utility (STEE) and cotton company (Cotontchad), and efforts to moderate the wage bill. They would execute the budget in a restrained manner, and issue a budget amendment in mid-year if oil prices did not recover. Staff counseled that a revised budget would be more prudent in an environment of weak expenditure control and any windfall revenues could be used to reconstitute savings or amend the budget if needed.

15. Staff urged removal of the export ban on food crops with immediate effect. Recognizing that the ban impedes trade and negatively affects incentives for producers, the authorities committed to do this at the earliest opportunity. Staff recommended vigilance on food prices. There should be adequate budgetary appropriations for the food security agency to replenish its stocks. And there should be better targeting than directing assistance to civil servants.

D. Oil Revenue Management

16. Oil revenues appear well captured in the budget but improvements in monitoring and transparency are desirable. Chad’s oil sector and oil fiscal regime are relatively simple compared with other oil producers in the region. Moreover, Chad is unique in that all royalties and dividends are paid into a single offshore account, while all income taxes and other fees go directly to the central bank.9 But in anticipation of a more complex oil revenue situation, staff encouraged the authorities to strengthen monitoring, including through improved flows of oil sector information within government. To maximize oil revenues, the authorities should exercise all their audit rights, using independent auditors with an international reputation. Staff encouraged the authorities to move on the Extractive Industries Transparency Initiative (EITI) and join all other CEMAC countries in becoming an EITI candidate country.

17. A new petroleum revenue management law (PRML) is needed. Key features of the 1999 PRML have been abolished (Fund for Future Generations), modified (definition of priority sectors) or are uncertain (future of the College10 and offshore account). A new PRML should focus on the key principles of fiscal sustainability, use of oil revenues to support priority sectors, unified budget management, improved transparency and reinforced accountability. The authorities are interested in a new PRML to replace the current interim mechanism that would cover all oil revenues and extend College oversight to all investment spending. Discussions on design are expected in 2009, in collaboration with key partners.11

E. Structural Reform

18. Reform of large public enterprises has stalled and their fiscal burden has continued to mount. Two loss-making parastatals require transfers that increased from ¾ percent of GDP in 2005 to 1¾ percent in 2008. The mission recommended that all parastatals prepare and publish properly audited financial statements.

  • Cotontchad’s production is in serious decline—by one-third from 2004-06 to 2007-08—and it has accumulated losses of 1½ percent of GDP. Progress towards the planned privatization has been slow but contracts have be signed for a financial and technical audit. One third of the population depend on cotton and the authorities indicated that official support to the sector through direct subsidies and government-guaranteed loans will therefore continue. However, recognizing the difficulty of competing internationally against highly-subsidized cotton, the authorities were open to encouraging farmers to pursue other opportunities.

  • STEE’s finances have deteriorated due to poor management, weak bill collection, rising fuel costs, and technical problems, and subsidies are increasing to 1¼ percent of GDP in 2008. In response, the authorities have decided to break up the company into separate water and electricity entities, and devise a roadmap of reform by end-2008 which will include performance contracts. Given the vital importance of cost-effective energy to Chad’s development, the mission urged progress on initiatives such as a “topping plant” to lower fuel costs.

19. Fiscal risks from the new state-oil company need to be carefully managed. The Société d’Hydrocarbures du Tchad(SHT) was established in 2007, and will be the government’s vehicle for greater participation in the oil sector.12 This company has already begun to receive transfers, and presents further fiscal risks in terms of foregone revenue. The mission argued that state-oil companies can make a positive economic contribution provided they have good corporate governance, adequate political oversight and transparent relations with the budget. The authorities confirmed the Council of Ministers will exercise political oversight over all major SHT decisions with budgetary implications.

F. External Stability and Debt Sustainability

20. The REER has appreciated since 2000 but there is no strong evidence that it is inconsistent with fundamentals (Box 2). The CEMAC’s fixed exchange rate regime provides a reliable nominal anchor for an economy regularly hit by fiscal and price shocks. Assessments of the equilibrium exchange rate found no significant under- or over-valuation. Problems with data on prices of non-tradables and profitability in the non-oil sector impede an evaluation of Dutch disease symptoms, although the high import content of oil activity and its relatively recent start may explain the limited incidence to date. However, Chad’s non-oil export performance over the past decade has been stagnant. This is consistent with the findings of the 2006 Diagnostic Trade Integration Study that structural factors such as inadequate infrastructure and public services, deficiencies in the business climate, and weak governance are major constraints on competitiveness.13 The authorities concurred with staff’s assessment of the real exchange rate, and stressed their efforts to lower production costs by improving infrastructure.

21. Chad’s balance of payments will deteriorate in 2009 but does not appear to be acutely vulnerable. Large fluctuations in the capital and financial account (Table 5) mostly represent foreign direct investments by the oil companies, offset by oil-related imports and services and income outflows. With oil accounting for ninety percent of exports, the main external vulnerability relates to the trade account impact of a further drop in oil prices. Oil production itself would not appear to be a risk: output has been stabilized and is deemed profitable even at world oil prices of $20-25 per barrel. The authorities were satisfied with the protection offered by current and projected reserves levels: around five months coverage of all imports (including oil-related imports) and 10 months of non-oil imports. The pooling of reserves at the BEAC provides another layer of comfort.

Table 4.Chad: Monetary Survey 2006-12.(Billions of CFA francs)
2006200720082009201020112012
Proj.Proj.Proj.Proj.Proj.
Net foreign assets265.7418.9704.3498.3636.6818.41078.1
Central bank280.3404.2688.8481.9619.5794.21050.0
Commercial banks−14.614.815.516.417.124.228.1
Net domestic assets111.6−21.2−262.5−19.3−117.8−258.7−474.1
Domestic credit159.818.2−128.7167.5200.1141.07.9
Claims on the government (net)23.3−102.3−261.823.243.8−27.6−174.0
Treasury (net)72.1−83.4−274.511.633.2−37.3−182.7
Banking sector38.4−108.3−295.0−5.020.1−47.9−192.1
Central bank31.1−106.6−293.4−4.419.7−49.3−194.5
Commercial banks6.7−2.3−2.3−2.3−2.3−2.3−2.3
CCP0.60.60.61.62.63.64.6
Fund position33.724.820.516.613.110.79.4
Other nontreasury−48.8−18.912.611.610.69.68.6
Credit to the economy136.5120.5133.1144.3156.3168.6181.9
Other items (net)−48.2−39.4−133.8−186.8−317.9−399.7−482.0
Money and quasi money377.3397.8441.8478.9518.8559.7604.0
Currency outside banks217.2240.3239.7255.0271.1286.8303.5
Demand deposits140.4132.8162.1178.1195.6213.8233.7
Time and savings deposits19.724.640.045.852.259.166.8
Memorandum items:
Broad money (annual percentage change)51.95.411.18.48.37.97.9
Velocity (total GDP)4.74.64.64.64.64.64.6
Sources: Chadian authorities; and IMF staff estimates.
Sources: Chadian authorities; and IMF staff estimates.
Table 5.Chad: Balance of Payments, 2006-12(Billions of CFA francs)
2006200720082009201020112012
Proj.Proj.Proj.Proj.Proj.
Current account, incl. official current transfers−294.9−353.6−360.4−553.9−264.3−275.0−248.2
Current account, excl. official current transfers−389.3−436.3−431.0−646.2−362.3−374.0−373.1
Current account, excl. oil, incl official current transfers−241.9−352.6−477.2−363.1−356.1−405.6−435.0
Trade balance, incl. oil sector1,079.21,022.31,182.0320.8541.2621.6615.9
Trade balance, excl. oil sector−165.2−224.4−318.8−227.6−200.0−230.3−244.1
Exports, f.o.b. of which:1,781.91,760.82,016.01,089.31,312.91,457.41,478.3
Cotton exports44.136.242.444.945.446.948.4
Cattle exports119.6121.4128.5136.1144.1152.6161.9
Oil and oil product exports1,552.61,532.01,766.8822.31,028.71,153.81,153.5
Imports, f.o.b.−702.7−738.5−833.9−768.5−771.7−835.8−862.5
Net Services−916.3−935.0−913.7−790.9−836.9−879.5−862.6
Net Services, excl oil−139.0−193.2−222.2−226.4−241.7−257.3−272.6
Net Factor Income−603.1−574.2−746.8−249.1−132.4−176.2−184.0
Net Factor Income, excl oil11.414.416.317.919.821.924.0
Current transfers (net)145.3133.3118.1165.3163.9159.1182.5
Official (net)94.482.770.692.398.199.0124.9
Private (net)50.950.647.573.065.860.157.6
Financial and capital account491.3477.5645.0347.0401.9449.7504.0
Capital transfers55.049.456.441.468.573.779.0
FDI342.9338.7533.6310.8349.9391.9411.1
Other medium & long term investment18.4102.655.0−5.2−16.4−15.913.9
Public Sector21.521.3−36.9−5.2−16.4−15.913.9
Private Sector−3.181.391.90.00.00.00.0
Short-term capital and errors and omissions74.9−13.20.00.00.00.00.0
Overall balance196.4123.9284.7−207.0137.7174.7255.8
Financing−196.4−123.9−284.7207.0−137.7−174.7−255.8
Change in net reserves−196.4−123.9−284.7207.0−137.7−174.7−255.8
Residual Financing Need0.00.00.00.00.00.00.0
Memorandum item:
Gross official reserves (in months of imports (excl. oil sector))5.25.910.67.48.710.412.9
CEMAC’s gross official reserves (in months of imports)4.64.85.8n.a.n.a.n.a.n.a.
Sources: Chadian authorities; and IMF staff estimates and projections.
Sources: Chadian authorities; and IMF staff estimates and projections.
Table 6.Chad: Millennium Development Goals, 1990-20071
19901995200020072007 SSA
Goal 1: Eradicate extreme poverty and hunger
Employment to population ratio, 15+, total (%)66.066.066.065.066.0
Employment to population ratio, ages 15-24, total (%)44.046.047.045.052.0
Income share held by lowest 20%
Malnutrition prevalence, weight for age (% of children under 5)34.329.426.8
Poverty headcount ratio at national poverty line (% of population)64.0
Prevalence of undernourishment (% of population)58.049.0
Vulnerable employment, total (% of total employment)94.0
Goal 2: Achieve universal primary education
Literacy rate, youth female (% of females ages 15-24)23.064.0
Literacy rate, youth male (% of males ages 15-24)56.076.0
Persistence to last grade of primary, total (% of cohort)46.0
Primary completion rate, total (% of relevant age group)17.015.022.031.060.0
Total enrollment, primary (% net)53.071.0
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliament (%)17.02.07.017.0
Ratio of female to male enrollments in tertiary education18.014.068.0
Ratio of female to male primary enrollment45.061.068.089.0
Ratio of female to male secondary enrollment20.028.033.080.0
Ratio of young literate females to males (% ages 15-24)42.085.0
Share of women employed in the nonagricultural sector (% of total nonagricultural employment3.8
Goal 4: Reduce child mortality
Immunization, measles (% of children ages 12-23 months)32.026.028.023.072.0
Mortality rate, infant (per 1,000 live births)120.0121.0122.0124.094.0
Mortality rate, under-5 (per 1,000)201.0202.0205.0209.0157.0
Goal 5: Improve maternal health
Adolescent fertility rate (births per 1,000 women ages 15-19)193.0191.0169.0121.0
Births attended by skilled health staff (% of total)15.016.045.0
Contraceptive prevalence (% of women ages 15-49)4.08.022.0
Maternal mortality ratio (modeled estimate, per 100,000 live births)1,500.0900.0
Pregnant women receiving prenatal care (%)23.042.072.0
Unmet need for contraception (% of married women ages 15-49)10.024.0
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Children with fever receiving antimalarial drugs (% of children under age 5 with fever)32.0 …35.0
Condom use, population ages 15-24, female (% of females ages 15-24)
Condom use, population ages 15-24, male (% of males ages 15-24)
Incidence of tuberculosis (per 100,000 people)119.0179.0259.0299.0368.0
Prevalence of HIV, female (% ages 15-24)2.8
Prevalence of HIV, total (% of population ages 15-49)3.43.55.2
Tuberculosis cases detected under DOTS (%)35.034.019.046.0
Goal 7: Ensure environmental sustainability
Annual freshwater withdrawals, total (% of internal resources)1.5
CO2 emissions (kg per PPP $ of GDP)0.00.00.0
CO2 emissions (metric tons per capita)0.00.00.0
Forest area (% of land area)10.010.09.026.0
Improved sanitation facilities (% of population with access)5.06.07.09.031.0
Improved water source (% of population with access)24.034.048.058.0
Marine protected areas, (% of surface area)
Nationally protected areas (% of total land area)
Goal 8: Develop a global partnership for development
Internet users (per 100 people)0.00.00.64.4
Mobile phone subscribers (per 100 people)0.18.522.8
Telephone mainlines (per 100 people)0.10.10.10.11.8
Source: World Bank, World Development Indicators (2008).

Figures in italics refer to periods other than those specified.

Source: World Bank, World Development Indicators (2008).

Figures in italics refer to periods other than those specified.

Table 7.Chad: Social and Demographic Indicators
Latest Single YearSame Region or Income Group
1970-751980-851996-2007Sub-Saharan AfricaLow-Income Country
Population
Total population, mid-year (millions)4.05.110.5702.62,310.3
Growth rate (in percent, annual average for period)2.02.72.82.11.8
Urban population (in percent of population)15.619.925.036.130.3
Total fertility rate (births per woman)6.37.26.25.13.7
Poverty (percent of population)
National headcount index64.0
Urban headcount index63.0
Rural headcount index67.0
Income
Gross National Income per capita (in U.S. dollars)230210250490450
Consumer price index (1995=100)77149
Food price index (1995=100)11015
Income/Consumption distribution
Share of income or consumption
Gini index
Lowest quintile (in percent of income or consumption)
Highest quintile (in percent of income or consumption)
Social indicators
Public expenditure (in percent of GDP)
Health2.02.51.2
Education2.53.42.7
Social security and welfare
Net primary school enrollment rate (in percent of age group)
Total5878
Male7084
Female4772
Access to an improved water source (in percent of population)
Total275875
Urban318390
Rural264569
Immunization rate (in percent, under 12 months)
Measles7555864
DPT3405464
Child malnutrition (in percent, under 5 years)3528044
Life expectancy at birth (in years)
Total4044484658
Male3943474557
Female4246504759
Mortality (per 1,000 live births)
Infant14912412410382
Under 5225200174126
Adult mortality (15-59, per 1,000 population)
Male554556449519319
Female492449361461268
Maternal (modeled, per 100,000 live births)1,100
Births attended by skilled health staff (in percent)16038
Sources: World Bank, World Development Indicators Online, 2006; United Nations, Millenniun Indicators, 2004.
Sources: World Bank, World Development Indicators Online, 2006; United Nations, Millenniun Indicators, 2004.

Box 2.Chad: Real Effective Exchange Rate Assessment

An assessment under the CGER methodologies shows that the REER has appreciated moderately in recent years. There is no robust evidence of inconsistency with fundamentals but data limitations are significant. This is in line with the CEMAC assessment during the 2008 Article IV consultation, which concluded that even though there is evidence of moderate overvaluation, the zone’s REER remains consistent with external stability.

  • Equilibrium Real Exchange Rate Approach. Regressions on the fundamentals with different specifications failed to show a significant relation between the REER and fundamentals.

  • Macroeconomic Balance Approach. The underlying current account is estimated at -8¾ percent of total GDP and the current account norm (using CGER coefficients) at -5¾ percent of total GDP. Estimations under this approach show a slight overvaluation of the REER of about 3½ percent.

  • External Sustainability Approach. A benchmark level of the net foreign asset (NFA) position is estimated taking into account the profile of FDI, and the size of the REER adjustment calculated required to close the gap between the NFA stabilizing current account and the underlying current account. Estimation over 2010-28 shows this gap to be 2 percent of total GDP, implying the REER is overvalued by about 2¼ percent.

22. Chad’s risk of debt distress is moderate and its overall public sector debt dynamics appear sustainable (see Supplement 2). A preliminary version of the Debt Sustainability Analysis (DSA) was discussed with the authorities. The oil windfall of recent years has improved Chad’s debt ratios, with timely debt servicing and limited new borrowing.1415 The debt outlook is favorable but risks include the possibility that oil revenue spending does not produce the desired non-oil growth and fails to raise non-oil revenues. The authorities intend to continue their prudent approach to debt management. The mission urged them to limit debt-financed state participation in various oil ventures. It commended them for resisting offers of non-concessional financing since that would compromise Chad’s progress to HIPC and MDRI debt relief, in which there remains a strong interest.

G. Improving Growth Prospects

23. Beyond resolution of the conflict, strong growth will depend on sound macroeconomic management and higher factor productivity. The authorities agreed that Chad’s growth prospects depend critically on the effective use of its oil receipts to improve its productive capacity. While an environment conducive to further exploration and extraction might augment oil resources, the focus should be on enhancing opportunities for non-oil private sector growth. This requires good governance and a stable investment climate, areas where Chad languishes even relative to other low-income countries.16 Staff supported the authorities’ major efforts to improve basic infrastructure in health, education, roads, electricity, water, telecommunications, all critical to growth. Going forward the choice of investments should observe sectoral absorption limitations and maximize poverty reduction. Because of its poverty impact, the authorities are considering stepping up investment in infrastructure supporting agricultural and livestock growth.

24. The financial system is vulnerable and underdeveloped (Box 3), and as a consequence constrains non-oil growth. Weak financial institutions operate in a shallow system. Access to credit is problematic, with banking services virtually non-existent outside major urban centers. Financial depth (measured by broad money to GDP) was only 12 percent in 2007, compared with 30 percent on average in African low income countries. Low financial intermediation results from an unstable security situation, a poor legal and economic environment, and the lack of deposit insurance. In response, a new national microfinance strategy aims to boost such lending from the current equivalent of 3 percent of banking system lending. The government is also contemplating a housing finance scheme, funded from the budget, by donors and through a levy on salaries.

Box 3.Summary Assessment of Financial System Soundness

Chad’s banking system is subject to several vulnerabilities, stemming from its lack of depth, some undercapitalization, and insufficient on-site supervision (see the CEMAC FSAP (www.imf.org) for more details.) Asset quality has improved over recent years with gross non-performing loans lower than the CEMAC average, although provisioning levels were also lower than the community average. Some banks are capital deficient (on the basis of risk-weighted assets). Since 2004, several banks (3 of 7) have persistently exceeded the single borrower limit (15 percent of equity). The narrow credit market, comprising mainly government and a few large-size enterprises, raises portfolio risk. Significant government involvement in the banking sector—as shareholder (25 percent ownership overall) and customer—adds to those problems. However, because of limited competition, the sector remains profitable, fairly stable and growing. More frequent on-site inspections of banks are required. Supervision of microfinance institutions is virtually non-existent.

Chad: Financial Soundness Indicators, 2003-September 2008
20032004200520062007Sept. 08
Solvency
Capital-asset ratio (unweighted)9.411.08.38.39.79.7
Assets quality, profitability, and liquidity
Gross NPL/Gross banking loans17.415.512.912.411.68.7
Net NPL/Gross banking loans3.92.02.12.31.50.8
Asset return2.30.02.01.51.92.2
Equity return24.80.224.518.713.016.3
Liquid assets/total assets23.228.527.339.248.643.2
Liquid assets/demand deposits65.774.876.879.9112.189.3
Banks’ rating (in number of banks)
Solid or Good322464
Fragile234201
Critical000001
Number of banks777777
Sources: BEAC/COBAC.
Sources: BEAC/COBAC.

IV. Program Relations

25. The authorities are keen on an SMP but staff stressed this is conditional on progress in key areas. An SMP in 2009 would require a strong 2009 budget, agreement on a feasible medium-term fiscal framework, evidence of adherence to budget controls, and progress on the composition and quality of spending. The authorities would like an SMP to start promptly in order to pave the way to a new PRGF, and eventually to HIPC and MDRI debt relief.

V. Staff Appraisal

26. The paramount challenge for the authorities is how to seize the development opportunity offered by the next decade of oil revenues. The restoration of peace and political stability are clearly critical. Despite insecurity, progress has been made during the oil windfall years in priority sector spending, even though the development impact is still awaited. Macroeconomic management must be sound in order to build on these achievements. The effective use of oil revenues for poverty reduction and growth is even more pertinent in today’s environment of weaker global demand and lower oil prices. Fiscal policy must start urgently to follow a sustainable medium-term path, necessitating significant reductions in the non-oil primary deficit.

27. Fiscal policy should be tightened in 2009 and over the medium term. A lower more realistic oil price assumption should be adopted in the 2009 budget. And the tighter revenue outlook calls for more ambitious efforts to address non-security spending, such as on the wage bill and transfers to public enterprises, and in raising the low non-oil revenue take. These actions would avoid costly corrections later in the year.

28. Strengthening public expenditure management continues to be key for improving the growth and poverty impact of fiscal policy. Serious efforts must be made to re-establish budget control and improve the efficiency of public spending. Chad’s largely sound budget procedures need to be respected, with large extrabudgetary spending and the use of exceptional procedures curtailed. An appropriate balance between investment spending and the requisite recurrent inputs must be ensured. More competitive procurement will help raise the quality and development impact of public spending, and enhanced fiscal transparency—on military spending, financial statements of public enterprises, and in budget execution—will aid accountability. Recent efforts to begin clearance of domestic arrears are laudable, as is the government’s intention to continue eschewing non-concessional borrowing.

29. The capacity for collecting oil revenue needs to improve with the complexity of the sector. Chad is to be commended for its effective and reasonably transparent oil revenue collection system but should prepare for a more complex future, with more producers and revenue streams. Rapid progress to becoming an EITI candidate country and publishing an EITI report would usefully complement these efforts, and should be relatively simple given the information already in the public domain.

30. Raising economic growth, productivity and strengthening competitiveness demand an acceleration of long overdue structural reforms. The current global crisis and dramatic turnaround in oil revenue highlights again the urgency of diversifying the economy, reform of key parastatals (electricity, water and cotton), and improving competitiveness through a more attractive business climate, developing basic infrastructure, deepening the financial sector, and improving governance.

31. Serious data shortcomings hamper surveillance (see Supplement 1). The highest priorities are the national accounts and balance of payments data. Sufficient resources should be allocated to the National Statistics Institute (INSEED) and BEAC for statistical collection and analysis.

32. Staff recommends that the next Article IV consultation be held on the 12-month cycle subject to the Board decision on consultation cycles (Decision No. 12794-(02/7) dated July 15, 2002, as amended).

A European Union peacekeeping force (EUFOR) in Eastern Chad protects refugees and the internally displaced. It is expected to be replaced by a UN military force at the expiration of its mandate in March 2009.

All ratios used in the report refer to non-oil GDP unless otherwise stated.

Approved in April 2008, the Stratégie Nationale de Réduction de la Pauvreté orSNRP II, was officially submitted to the Fund in November 2008. A JSAN will be prepared in the coming months.

In 2006 security spending exceeded the initial budget allocation by 6¼ percent of GDP, in 2007 by 5¾ percent and in 2008 by 8 percent. Over these three years, security spending turned out three times higher than initially budgeted (31¾ percent of GDP versus 11¼ percent).

Expenditures are not classified by function. Here priority sector spending is defined as the sum of spending by all ministries and agencies whose mandate, as agreed between the government and the staffs of the Bank and Fund, has a strong poverty orientation. It excludes security spending.

See accompanying Selected Issues Paper on Fiscal Sustainability.

Treasury balances outside the banking system had been overestimated because of unrecorded extrabudgetary spending, possibly on security outlays. The mission revised spending in 2007 and 2008 upward by ½ and 1 percent of GDP respectively, and the authorities promised revised and reconciled statements.

The drop is accentuated by the amendments to the concession agreed with the oil consortium in September 2008 which include a new income tax advance system that shifts receipts from 2009 to 2008, and a one-time payment in 2008 partially offset by lower taxes in 2009.

The oil consortium publishes detailed quarterly payment information (http://www.essochad.com/Chad-English/PA/TD_HomePage.asp).

An independent body with civil society participation responsible for approving the use of oil royalties and dividends.

The European Union and European Investment Bank are already in discussions with the authorities on a system for monitoring oil revenue collection, on which they have sought Fund staff collaboration.

SHT will manage all government participations in oil-related ventures, including the government’s 40 percent share in a joint venture with a Chinese company to build and operate a refinery and power plant at an estimated cost of $1 billion with a starting date now set for 2010.

Chad—Diagnostic Trade Integration Study, 2006 (see http://go.worldbank.org/99WGL1CJI0).

The problem of periodic, short-term arrears in payments to the Fund has been much reduced since the introduction of an automatic payment mechanism with the BEAC in 2007.

Chad could have an external arrear to a private creditor of around $7 million deriving from a claim dating back to 2002. This creditor prevailed in international arbitration and in a court case over its right to attach Chadian government assets in the U.K.

See Selected Issues Paper on Assessing the Real Exchange Rate and Competitiveness.

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