January 28, 2009
1. We are thankful to Management and the staff for the fruitful policy dialogue they have maintained with the Chadian authorities. Against the backdrop of declining oil production over the past few years, the Chadian authorities have been able to make progress toward achievement of their policy objectives. The overall fiscal surplus in percent of non-oil GDP is estimated to have increased threefold between 2007 and 2008, as oil revenue augmented and the increase in total expenditures in percent of non-oil GDP were maintained significantly below that of total revenue. The authorities also increased the level of priority expenditures, notably on education and health. International reserves remain at healthy levels although they have been affected by the decline in oil prices. Between 2006 and 2008, gross official reserves are estimated to have doubled, reaching about 10 ½ months of imports of non-oil goods and services.
2. However, the difficult security situation which prevailed early last year has had a big toll on recent economic performance and non-oil primary balance. As a result of its adverse impact on non-oil GDP and the decline in oil production, real GDP growth has remained low. The non-oil primary deficit increased, partly reflecting higher priority spending. Inflation picked up sharply at the onset of the recent food price shock. This shock prompted the authorities to take a number of temporary measures aimed at mitigating the adverse impact, ranging from tax relief to temporary export suspension and assistance to low-income public sector workers. In order to mitigate inflationary pressures, the regional central bank, BEAC, adopted a tighter monetary stance notably through the imposition of higher reserve requirements and policy rates.
3. The authorities continue to attach high value to compliance with the convergence criteria set forth by the CEMAC. All primary criteria but the one related to annual inflation were met. It is noteworthy that in the absence of shocks, inflation is forecast to return to a level consistent with the CEMAC criterion over the medium-term.
Economic Outlook and Policy and Reform Agenda
4. Non-oil GDP growth is expected to rebound starting from 2009, fueled by construction, service, and manufacturing. As a result of lower production, oil GDP is expected to continue to decline this year—albeit at a much slower pace. As noted above, inflation is forecasted to drop sharply this year and to be subdued going forward, barring unexpected shocks.
5. As stressed in the second PRSP, the authorities remain committed to preserving fiscal sustainability, improving public financial management, and making effective use of oil revenue while laying the foundations for sustained growth. The 2009 budget mirrors the authorities’ determination to preserve fiscal sustainability, notably by programming a reduction in the non-oil primary deficit of about 7 percentage points of non-oil GDP. The authorities will be closely monitoring budget execution and are prepared to take corrective actions that may be warranted. In particular, they intend to revise the budget around mid-2009 in the event oil prices remain out of line with their projections.
6. Going forward, the authorities remain determined to implement sound fiscal policy. In support of their efforts to boost non-oil revenues, the authorities will benefit from Fund technical assistance in the areas of tax and customs administration. We thus call on Management to approve the request they have formulated in this regard. With regard to oil revenues, the authorities remain committed to their effective use, notably with the aim at diversifying the economy. They plan to carry out a comprehensive review of the oil fiscal regime and work is underway to enhance monitoring of oil revenue collection.
7. The authorities will continue to strengthen public financial management, building on recent improvements in the budget framework aimed notably at preventing extrabudgetary spending and at better monitoring capital expenditures. In this endeavor, my Chadian authorities request donor assistance in support of their action plan to modernize public financial management (PAMFIP).
8. Chad’s economy has not yet been affected by the current global financial turmoil and economic slowdown. However, this could change should the financial crisis affect indirectly domestic banks, and oil prices continue to decline and remain low for a sustained period of time. At this current juncture, most financial sector soundness indicators in Chad remain strong. In particular, the banking system continues to perform well, with highly profitable banks, improving asset quality ratios of nonperforming loans to banking loans, and adequate liquidity. Nevertheless, in recognition of the ample scope for further developing Chad’s financial system, the authorities are determined to take steps to strengthen the system and improve credit access. In particular, the new microfinance strategy is meant to serve these purposes.
9. On the structural front, the authorities will pursue their reform agenda for large state-owned enterprises such as the cotton company, Cottontchad, and the water and electricity company, STEE, which aims, in particular, to improve the efficiency of their operations and reduce their fiscal costs. They have launched a financial and technical audit of Cottontchad which will help determine the restructuring needs of the company and the roadmap for the reform of the cotton sector. A restructuring of STEE is also envisaged that entails notably the breakup of the company into two distinct water and electricity entities.
10. The authorities will continue to exercise prudence in managing public debt. They are determined to safeguard public debt sustainability and make progress toward HIPC completion point. With regard to domestic debt, the authorities have resumed last year clearance of domestic arrears and are intent on continuing to make further progress on this front.
11. In conclusion, it is noteworthy that weak capacities and a fragile security situation have been among the key sources of the policy challenges facing the Chadian authorities over the past years, particularly on the fiscal front. In addressing these challenges, the authorities will welcome donor assistance and Fund advice in particular. Fund assistance to members under similar circumstances is proven to have added significant value. In this connection, it is our view that the authorities will benefit greatly from close collaboration with the Fund, especially in a program context. The authorities continue to express their interest in an SMP with a view to facilitating access to a new PRGF arrangement. We thus call on Management and staff to consider favorably the authorities’ request for an SMP and to lay the foundations for a quick start of the implementation of such a program.