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Chad: Staff Report for the 2016 Article IV Consultation

Author(s):
International Monetary Fund. African Dept.
Published Date:
August 2016
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Background

1. Human development indicators are improving slowly in Chad, but challenges to long-term development remain. The onset of oil production in 2003 helped increase spending in various socio-economic areas and accelerated economic growth. Real GDP per capita increased by around 20 percent between 2007 and 2014. But because of rapid population growth and domestic armed conflicts that plagued Chad up to 2009, the absolute number of the poor still increased and per capita consumption for the poorest rural households declined. The arrival in 2010 of internal political stability paved the way for improved economic management and Chad achieved the HIPC Completion Point in April 2015. Still, despite the progress, Chad’s human development indicators remain among the lowest in the region (Text Fig. 1). A recent deterioration in external (economic and security) conditions poses challenges to the achievement of the country’s socio-economic development goals.

Text Figure 1.Chad: Human Development Indicators – Regional comparison

Sources: World Bank Indicators, UNDP

CAR-Central African Republic; TCD-Chad; COG-Republic of Congo; CAM-Cameroon; EQG-Equatorial Guinea; GAB-Gabon

SSA: Sub-Saharan Africa (average)

2. In Presidential elections in April 2016, President Déby comfortably won a fifth term in office. Mr. Déby, who is in office since 1990, received nearly 62 percent of the votes while running against 12 opposition candidates. Legislative elections are also due for 2016 but no date has been set yet.

3. The massive and persistent decline in oil prices since mid-2014 combined with elevated regional insecurity pose huge challenges for Chad. From 2013 to 2015, Chad has experienced an 80 percent reduction in fiscal oil revenue. This is mainly the result of the drop in oil prices, but also the repayment of the 2016 installments on the oil sales’ advances which funded the government’s acquisition in 2013 of a large oil asset. Meanwhile, the deterioration in regional security is disrupting economic activity, especially cross-border trade. N’Djamena was the target of terrorist attacks by Boko Haram in June and July 2015. Chad plays a key role in the regional military counteroffensive against Boko Haram, and continues to assist the Mali government, bearing the associated fiscal costs. In addition, Chad hosts some 750,000 refugees and displaced people, with significant direct and indirect economic costs.

4. The authorities’ response to those shocks over 2014-15 included a large fiscal adjustment (with a 30 percent reduction in domestically-financed spending) and the mobilization of additional financing. Financing flows included advances from the regional central bank (BEAC), securities’ issuances in the regional market, an agreement on a new repayment schedule of the oil sales’ advances, and budget support from the World Bank, the European Union, the African Development Bank, and Saudi Arabia, complemented by disbursements from the Fund and debt relief under the HIPC Initiative. Still, domestic payment arrears accumulated with knock-on effects on economic activity and the health of the banking system.1

5. Traction of previous policy advice has been broadly satisfactory as attested by the approval of an ECF-supported program in 2014 and completion of two reviews by December 2015 (Box 1). The advice of the 2013 Article IV fed into the ECF approved in August 2014 and is being followed up in the context of its reviews. However, the policy dialogue and advice have had to adapt to the impacts of the sharp and sustained fall in oil prices and the deterioration of the security situation.

Box 1.Chad: Implementation of Key Recommendations from the 2013 Article IV Consultation (completed March 2014)

Key recommendations: Fiscal policy should remain anchored on a sustained reduction of the non-oil primary deficit, supported by public management reforms and sizable increases in non-oil revenue collection to offset the projected exhaustion of oil revenue. A more diversified and competitive economy over the medium- and long-terms will require increased efforts to improve the business environment for the private sector, promote agricultural activities, and expand access to basic and financial services.

Implementation: A three-year arrangement under an ECF approved in August 2014 planned a smooth decline in the non-oil primary deficit (NOPD) in the context of a doubling of oil export volumes and a gradual decline in international oil prices. The focus of the government’s structural reform agenda under the program was on strengthening public financial management (PFM) and on improving governance and the business climate.

Given the sharp decline in oil prices, preserving fiscal and debt sustainability required a much more rapid reduction in the NOPD than planned. A large expenditure compression took place in 2014-2015 combined with the mobilization of more domestic and external (concessional) financing to smooth the adjustment and limit adverse effects on non–oil economic activity.

Implementation of structural reforms was framed within the 2013-15 National Development Plan. The use of emergency spending procedures (Dépenses avant Ordonnancement, DAOs) was curtailed, most CEMAC PFM directives were transposed into domestic legislation, quarterly budget execution reports were published, and inter-ministerial debt and oil revenue coordination units were established. However, actual progress has been slow and uneven due to limits to institutional capacity including the capacity to absorb technical assistance.

Recent Economic Developments

Macroeconomic outcomes have weakened in the face of the persistent oil price shock and regional security problems. Acute liquidity problems in the first half of 2016 have forced the government to severely limit spending and to continue to accrue domestic arrears with adverse impacts on private sector activity and the banking system.

6. Economic activity has slowed sharply. GDP growth is estimated to have decelerated significantly to 1.8 percent in 2015 from 6.9 percent in 2014 (Text Figure 2b). This sharp slowdown was largely due to a 2.9 percent contraction in the non–oil sector (compared to a 7.1 percent expansion in 2014). Erratic rainfall hit food crops, while livestock and fishing activities were affected by the weakened security situation and a difficult economic situation in Nigeria. Both the secondary and tertiary sectors contracted significantly due to the sharp adjustment to fiscal spending and to disruptions caused by the deterioration of security conditions.

7. Disruptions to cross–border trade flows with Cameroon and Nigeria have led to increased volatility of domestic prices. Due in particular to food items (46 percent of the consumer price index), inflation reached 7.6 percent year-on-year in August 2015, then turned negative at end-2015 (-0.3 percent year-on-year), and going further negative in 2016, reaching -3.4 percent in March. The annual average for 2015 was 3.7 percent, slightly above the CEMAC target of 3 percent.

8. Despite a large fiscal adjustment, the overall fiscal deficit remained high in 2015 and domestic arrears accrued. Total fiscal revenue fell 40 percent short of the 2015 revised budget target. In particular, customs revenue disappointed: it fell by 16 percent relative to 2014 on account of security disruptions to cross-border trade and a slowdown in demand from Nigeria (Text Figure 2a). Oil revenues were only one third of the amount originally projected. Even though expenditure commitments were held 1.6 percent of non-oil GDP below the revised budget, the overall fiscal deficit on a commitment basis still amounted to 6.6 percent of non-oil GDP. Despite substantial statutory and exceptional advances from the BEAC (CFAF 232 billion or 4.5 percent of non-oil GDP), CFAF 148 billion in domestic arrears were accumulated, raising its end-2015 stock to 3.9 percent of non-oil GDP (CFAF 200 billion). A successful expansion in the placement of Treasury bills and bonds in the regional market (a net issuance of CFAF 188 billion) was mostly used to swap non-tradable public debt and pay some claims that were under litigation.2 External budget support amounted to CFAF 90 billion.3 After a temporary increase in September on account of the statutory and exceptional advances, government deposits at the BEAC declined to CFAF 93.4 billion at the end of 2015, against CFAF 119.3 billion one year before.

Text Figure 2a.Chad: Evolution of non-oil revenue

Source: Ministry of Finance and Budget, IMF staff calculation

9. The sharp decline in oil revenue in early 2016 has seriously complicated fiscal management. Oil revenues (net of oil sales advances’ repayments and cash calls contributions) were only 0.4 percent of non-oil GDP in the first quarter, while non-oil revenue also lagged due to an apparent deceleration of economic activity. The government paid salaries and debt service with difficulty (even accruing some small external arrears with multilateral creditors for a few days) and appeared to be forced to drastically restrict spending on goods and services, transfers, and investment even in the run-up to the presidential elections. Apart from an increase in the stock of arrears to CFAF 280 billion at end-March, available data do not allow to ascertain the success of those restrictions in containing spending commitments.

10. Money supply contracted and credit to the private sector slowed significantly in 2015. Broad money fell by 4.7 percent while credit to the private sector (equivalent to 10.5 percent of non-oil GDP) decelerated sharply during the year and increased by only 0.7 percent on an annual average basis. The health of the banking system has been impacted by the difficult economic situation and the accumulation of arrears by the government. Non-performing loans (NPLs) rose from 11.7 to 16.5 percent of total loans over the twelve months up to December 2015 and their provisioning was limited to 56.1 percent against 68.3 percent one year before. This could negatively affect banks’ capacity and willingness to lend.

11. The external accounts weakened in 2015. The external current account deficit widened from 9 percent of GDP in 2014 to an estimated 12.4 percent of GDP in 2015 on account of the further decline in oil prices and a corresponding fall in exports. The current account deficit was partially financed by foreign direct investment, concentrated in the oil sector. The remainder was financed with a rundown in the level of pooled international reserves imputed to Chad from US$1.19 billion at end-2014 to US$390 million at end- 2015 (approximately 1 month of imports).

Text Figure 2b.Chad: Recent Economic Developments, 2009-15

Source: Chadian authorities, IMF staff calculations

Outlook and Risks

The short and medium-term outlooks are challenging in the context of permanent external shocks.

12. Real GDP growth is expected to continue to slow as the non-oil sector lags. Including a contraction of 1.1 percent in 2016, GDP growth is projected to average about 2 percent per year over 2016–18, compared to almost 5 percent over 2013-15. Sizable planned production increases in certain fields have been delayed until oil prices improve sufficiently. A gradual recovery of non-oil GDP growth is expected over 2016-2018, reaching 4 percent per year over the medium term. This would be largely driven by agriculture, commerce, and transportation and as fiscal constraints ease with a rebound of fiscal oil revenues. In contrast, contracting bank credit to the private sector during this period would slow the recovery of non-oil tertiary activities.

Text Table 1.Chad: Medium-Term Projections(In percent of non-oil GDP, unless otherwise indicated)
2013-20152016201720182019
AverageProg.Proj.Prog.Proj.Prog.Proj.Prog.Proj.
GDP growth (percent per year)4.82.5−1.15.21.75.85.26.08.2
Non-oil GDP growth (percent per year)4.11.9−0.33.12.73.83.84.24.3
Current account balance (percent of GDP)−10.2−7.8−8.7−8.0−7.8−4.1−7.3−1.3−5.7
Government revenue22.017.115.419.416.722.817.626.520.4
Overall fiscal balance (commitment basis)−5.5−6.3−4.6−2.8−2.2−1.7−2.10.5−0.2
Non-oil primary fiscal balance (commitment basis)−14.8−10.1−7.0−7.1−5.0−8.0−5.0−10.1−5.9
Chadian crude oil price (US$ per barrel)81.846.633.851.945.256.048.558.150.8
Sources: Country authorities; and Staff projections.
Sources: Country authorities; and Staff projections.

13. The external position is projected to remain weak, with only a gradual improvement in the trade balance starting in 2017. Foreign direct investment in the oil sector will remain a key source of external financing. Imputed international reserves will remain low.

14. Risks are mostly tilted to the downside (Annex 1, Risk Assessment Matrix), reflecting internal and external vulnerabilities. Internally, a potential deterioration in food security is a key risk that could lead to social and political tensions in an already fragile environment and jeopardize the government’s fiscal position as authorities respond to a crisis. Externally, a deterioration of regional security and low (and volatile) international oil prices pose significant fiscal risks and could further dampen economic growth prospects. The pick-up in oil production levels now envisaged for 2018-19 could be delayed further if oil prices do not recover as currently projected. Budgetary pressures in Chad could spill over to other CEMAC countries through a deterioration in regional security conditions if Chad’s military efforts weakened, or through pressures on the currency union, if Chad presses the regional central bank for additional monetary financing.

Policy Discussions

In addition to the outlook and risks, discussions focused on the fiscal adjustment to permanently lower oil prices while addressing development needs, the implications of macro-financial linkages for financial sector stability, options for diversifying the economy, and the effectiveness and transparency of government operations.

A. Living with Low Oil Prices: Adjusting the Fiscal Stance for Long-Term Debt Sustainability while Addressing Development Needs

15. Chad’s fiscal strategy needs to include a sizable permanent adjustment. Prospects for the short-term are more difficult on account of lower oil prices and export volumes and the repayment of oil sales’ advances. While liquidity constraints are expected to be gradually loosened over the medium-term, government spending would have to be adjusted significantly relative to the pre-2015 levels. This adjustment is also needed to bring Chad into compliance with the regional convergence framework over the medium-term.4

16. Lower oil prices are negatively affecting oil production prospects and increasing the share of revenue devoted to debt repayments. Fiscal oil revenue is expected to be significantly lower in the medium-term than in previous staff estimates mostly because oil companies scaled back their plans for increasing production given the environment of lower oil prices (Text Fig. 3). While oil revenues would still progressively increase between 2016 and 2022, from 2.7 to 10.2 percent of non-oil GDP, cumulative revenue is now estimated to be about 40 percent lower than estimated at the time of the ECF arrangement’s 2nd review. The outlook for non-oil revenue remains subdued due to the deterioration in economic conditions and in regional security aggravated by a proliferation of VAT exemptions and numerous specific tax agreements that have seriously eroded the tax base. A recent FAD technical assistance mission estimated the VAT gap at 3 percent of GDP and the overall non-oil tax gap at 5.2 percent of GDP.

Text Figure 3.Chad: Change in Fiscal Oil Revenue Forecasts

Source: Chadian authorities; and IMF staff calculations.

17. Reflecting the weaker than expected revenue performance in early 2016, the government has submitted to parliament a revised budget for 2016 with further expenditure adjustment. With lower revenue, and the decision to pay down CFAF 65 billion in domestic arrears (Box 3), the 2016 budget that was approved in December 2015 is estimated to have a financing gap of at least 3.9 percent of non-oil GDP (CFAF 204 billion). The revised budget submitted to the National Assembly in late May addresses this with further spending cuts of 2 percent of non-oil GDP, mostly in domestically-financed investment. It includes a slight expansion of the wage bill to accommodate recruitment of youngsters, and protects poverty-reducing social spending. For covering the remaining financing gap, the revised budget counts on continued borrowing from the regional market, financing under the ECF-supported program (Box 2), and budget support from other international partners (AfDB, E.U., and World Bank) of approximately 1.4 percent of non-oil GDP (CFAF 70 billion).

Box 2.Chad: Status of the ECF-Supported Program

On August 1st, 2014, a three-year ECF arrangement was approved in support of the authorities’ medium-term economic program aimed at reinforcing economic growth and making it more inclusive, while maintaining macroeconomic stability and fiscal sustainability. The government’s structural reform agenda focused on strengthening public financial management (PFM) and on improving governance and the business climate. The approval of the arrangement and the completion of the first review on April 27, 2015 together with an augmentation of access, then the second review on December 14, 2015, enabled total disbursements of SDR 53.93 million (about US$75 million).

Despite an extremely difficult economic and financial environment, performance under the ECF-supported program was broadly satisfactory at end-2015. All but one performance criteria (PCs) for end-December 2015 were met and progress on the structural agenda was in line with program objectives. While the non-oil primary deficit target was met thanks to lower than programmed public investment, the ceiling on the non-accumulation of domestic arrears was missed by a large margin on account of a further drop in oil and non-oil revenue and domestic financing shortfalls. Key structural reforms implemented in 2015 included: incorporating more detailed oil revenue information in budget execution reports, limiting expenditures executed through extraordinary procedures, and updating and expansion of the taxpayers’ database were met. However, progress in implementing the structural agenda has slowed in recent months.

Discussions with staff are continuing on policies that would allow completion of the third review. In particular, there is a need to ensure that adequate financing assurances are in place for the implementation of the 2016 budget (¶18). In addition, in the face of consecutive breaches to the PCs on the accumulation of domestic arrears, staff and authorities have discussed a comprehensive strategy targeting both the clearance of existing arrears and strengthening control over expenditure commitments to avoid a reoccurrence of this problem.

18. Uncertainty over the timing and magnitude of revenues from the planned sale of an oil asset in 2016, raises concerns on the ability of the authorities to implement the revised budget. Both the initial and revised 2016 budgets include CFAF 300 billion (5.8 percent of non-oil GDP) from the sale of Chad’s 10 percent share in oil fields operated by the China National Petroleum Company International (CNPCI). However, this operation has not yet materialized and negotiations are still ongoing. In this context, staff recommended that the authorities elaborate a contingency plan including: a further cut in investment spending, to be informed by a rigorous evaluation of the status of projects under execution; slowing additional hiring; and possibly sale of other assets.. Staff advised to align further arrears clearance operations with assurances about the required financing from asset sales, to avoid accumulation of new arrears. In this context, staff 2016 projections assume that the CFA 300 billion gap is covered, in broadly equal proportions, with further spending cuts, proceeds from an asset sale, and financing sources yet to be identified.

19. A strict cash-based budget execution for the remainder of 2016 would help limit commitments to available financing. The liquidity situation remains precarious: net oil revenues are small and hard to predict in part due to complex schemes to set repayments of oil sales advances; most budget support is projected for the end of the year; and the timing and size of any oil asset sale are uncertain. In that context, to avoid the accumulation of arrears and the breakdown of the expenditure chain, staff recommends that spending units in sectoral ministries not be allowed to commit to spending unless notified of the availability of resources by the Treasury. One option would be to prepare a revise budget based on very prudent resource availability assumptions and with pre-defined spending prioritization criteria. Over the medium term the government will have to address the accumulated arrears, through the elaboration of a comprehensive arrears clearance strategy with claims identified and validated by an independent audit (Box 3).

Authorities’ views

The authorities consider producing a fully-financed 2016 budget a matter of urgency and continue to pursue the sale of their oil asset at the projected price later this year, possibly through an international tender. Nonetheless, they are also considering further limits in budgetary appropriations and bridge financing options on a concessional basis. In the meantime, they have prepared a quarterly cash flow plan to calibrate spending and domestic financing in line with available liquidity while protecting social spending as much as possible. The costs of the hiring of additional youth were partly offset by the plan not to replace retirees. While favoring a speedier repayment of domestic arrears, the authorities agreed it would have to be consistent with available resources. They were optimistic that their domestic financing could be realized, considering the relatively low volume of debt maturing in 2016 and the comfortable level of liquidity in the region’s banks following the recent reduction in reserve requirements by the BEAC.

Box 3.Chad: Management and Prevention of Government Domestic Payments’ Arrears

Domestic arrears quadrupled in 2015. Domestic payment arrears are defined as expenditures committed, with goods and services delivered, and approved for payment by the Treasury but which have not been paid within 90 days after issuance of the payment order. From the relatively low level of 1 percent of non-oil GDP at end-2014, these arrears increased to CFAF 200 billion (3.9 percent of non-oil GDP) in 2015.

Lower oil revenue and domestic financing were the main causes. Arrears accrued on account of lower-than-expected oil fiscal revenue and a shortfall in net domestic financing (aside from BEAC financing) as a large part of the placements of public securities in the regional market were used to swap non-tradable public debt. In addition, the authorities unexpectedly repaid a claim of 0.9 percent of non-oil GDP that was under litigation and hitherto unrecorded in the domestic arrears stock.

Government strategy for clearing domestic arrears. The authorities planned in 2016 to repay CFAF 65 billion in existing arrears, funded by securities issued in late-March 2016. The proceeds were transferred to a local commercial bank which was tasked with the repayment of specific arrears identified by a government commission.

These arrears were selected based on size and longevity, the business sector, the size of the creditor, and the impact settlement would have on employment. They were separately validated by the Inspector General at the Presidency. Creditors who chose to avail themselves of this facility would be repaid 93 percent of their claims, with the 7 percent discount a benefit of the bank managing the operation.

Next steps. Based on international best practices, the following principles should guide the Chadian authorities’ arrears clearance strategy going forward:

- The repayment of arrears has to be consistent with the availability of resources under the short- and medium-term fiscal projections.

- An audit needs to identify and validate comprehensively all domestic payment arrears and spending commitments which may not have been entered into the expenditure chain but have legal merit.

- A strategy needs to be developed to address the root causes. In particular, commitment controls need to be strengthened to prevent spending (particularly investment) for which there is no budget allocation.

20. The Debt Sustainability Analysis (DSA) concludes that preserving fiscal and debt sustainability will require targeting NOPDs of about 5 percent of non-oil GDP in 2017-18 and 6-7 percent over the medium-term.5 This could be achieved by limiting the wage bill growth, strictly prioritizing investments, and rationalizing transfers further, while protecting priority social spending as much as possible. In addition, fiscal space will need to be created by expanding the non-oil tax base through a rationalization of exemptions.

21. The DSA update indicates that Chad remains at a high risk of debt distress, with vulnerabilities concentrated in the short term. With oil prices lower than in the previous DSA, some external debt ratios have deteriorated. The high risk of debt distress is further explained by large debt service payments falling due in the short- to medium-term linked to the non-concessional oil sales’ advances from Glencore. The DSA also identifies vulnerabilities related to domestic debt given the accumulation of domestic arrears and the increased issuances of debt securities in the regional market. Moreover, a small amount of arrears has been recently accrued to the WB and the AfDB. The substantial fiscal adjustment assumed in the baseline scenario would keep debt indicators below their indicative thresholds in the medium- to long-term.

Authorities’ views

The authorities agreed on the need to target prudent NOPDs to preserve fiscal and debt sustainability. They stressed that the composition of expenditure adjustments would need to be synchronized with the national development plan for 2016-20. They were strongly committed to raise non-oil revenue mobilization with reforms drawn from the recent technical assistance recommendations. They broadly agreed with the results of the DSA exercise, in particular that a moderate stock of debt in terms of GDP nonetheless posed risks given the vulnerability to the oil price shocks and the heavy short-term burden of the recent oil sales advances. The authorities have resolved the arrears to multilateral creditors that have been recently accumulated due to liquidity shortages.

B. Enhancing Financial Sector Stability and Development6

22. While the financial system is small, the latest available indicators suggest some deterioration in banking sector soundness as the macroeconomic environment has weakened (Table 7). Financial system assets represented just 16 percent of GDP as of December 2015, or only 7 percent of CEMAC banks’ assets (versus a 15 percent share of CEMAC’s total GDP). It is dominated by a handful of commercial banks, with three banks holding close to two thirds of total assets. The ratio of NPLs to gross bank loans rose to 16.5 percent as of end-2015, a 5 percentage point increase from 2014. Returns on assets and on equity have also declined for two consecutive years. The capital adequacy ratio remained moderate at 14.6 percent as of end-2015 but well below the peak of 22 percent in 2013, while liquidity ratios remained favorable, with for instance liquid assets representing 26 percent of total assets. Going forward, with a dimmer domestic economic outlook there are significant risks to financial stability.

23. The link between declining oil prices and deteriorating banking soundness indicators is critically driven by banks’ exposure to government operations. While extractive industries accounted for only 3.9 percent of banks’ loans to the private sector in 2015, the banking system is highly exposed to the government and to companies dependent on government operations, making it vulnerable to the impact of the sharp fall in oil prices on public finances (Text Fig. 4). Exposures to government are increasing: commercial banks’ credit to the public sector reached 28 percent of total credit in 2015, up from 21 percent in 2014; and public sector deposits constituted about 21 percent of total deposit in 2015, down from 26 percent in 2014. With government spending accounting for a large portion of economic activity in Chad (more than 30 percent of non-oil GDP over 2009-2014), recent cuts in public spending and accumulation of domestic payment arrears can drag private sector contractors and borrowers into financial distress, elevating risks of NPLs.

Text Figure 4.Chad: Key Macro-Financial Linkages

Sources: Chadian authorities, BEAC, COBAC, and Staff calculations. All figure at end-2015, in CFAF.

24. Changes in the composition of assets and liabilities have added to banks’ vulnerabilities. High liquidity and largely deposit-based funding are traditionally key strengths of Chadian commercial banks. Sight deposits account for 85 percent of total deposits (the highest ratio among CEMAC members). With liquid assets representing 142 percent of short-term liabilities at end-2015, the banking system is highly liquid. The deposit intermediation level remains prudent with a deposits-to-loans ratio of 94 percent at end- 2015, however it is on a trend decline (Text Fig. 5). The following developments have tilted risks up for Chad’s banking system:

Text Figure 5.Chad: Customer deposits to total loans

Sources: COBAC; and IMF staff calculations.

  • Many decentralized public entities (e.g., universities, hospitals) have been forced to withdraw deposits (and have in some cases resorted to bank overdrafts) to maintain their operations in the face of a reduction in government transfers.

  • The successful introduction of government Treasury bonds—with an average maturity of 3 years—absent a liquid secondary market increases the risk of maturity mismatches between short-term deposits and banks’ assets.

  • The placement of (medium-term) government securities (¶17 and Box 3) to pay domestic arrears can lead to increased direct exposure to the government and a reduction in short-term credit to private companies with negative trickle-down effects on economic activity.

25. Further increases in NPLs or declines in deposits could affect some banks’ ability to comply with regulatory ratios, which calls for a close monitoring of the banking sector. According to stress tests carried out in early 2016, if NPLs were to reach 20 percent of total loans, some banks would no longer meet the capital adequacy ratio, especially banks with capital originating in CEMAC countries. In the same vein, a further 25 percent decline in total deposits (e.g., through a 50 percent decline in government deposits plus a 20 percent decline in deposits from non-financial enterprises) would bring most banks below the regulatory liquidity ratio. In the staff’s view, this calls for enhanced monitoring of banks. Also, in line with earlier FSAP recommendations, the COBAC (Commission Bancaire de l'Afrique Centrale) should be given the means to implement the powers it received in April 2014 to deal with stressed banks, and the role of the BEAC as a lender of last resort should be clarified.

26. While recent BEAC decisions have boosted bank liquidity, the government’s needs for additional domestic financing could crowd-out credit to the private sector. In March and April 2016, BEAC raised the ceiling for bank refinancing and halved required reserves. Those measures should ease the liquidity of banks in Chad. Still, public sector financing needs could again reach the point of crowding-out bank credit to the private sector, as it did already in 2015.

Text Figure 6.Chad: Households’ Financial Access

Source: Financial Survey Access, IMF

27. Financial inclusion in Chad has improved but access to financial services remains limited. The use of financial services by households has improved along with the geographic expansion of banks over the last decade. Key measures such as the coverage of ATMs and commercial banks’ branches have increased remarkably. However, Chad still lags behind its peers in CEMAC, LICs and Sub-Saharan Africa (Text Fig.6). Low penetration of financial services is prevalent across demographic groups but particularly severe for women.

28. While micro-financial institutions (MFI) are growing, their impact on financial inclusion remains limited. The number of beneficiaries served by MFIs has continued to increase, along with the amount of outstanding savings, loans, and transfers. However, the share of MFIs in the financial market is still limited (1.6 and 2.3 percent of total deposits and total loans by the financial sector, respectively). Their weaknesses include poor management and the fact that they concentrate in regions where they compete with banks instead of covering areas without bank network. Staff recommended that the regulatory/supervisory framework for the microfinance sector be improved as COBAC’s resources permit.

Authorities’ views

The authorities agreed on the significant macro-financial implications of the fiscal policy responses to the sharp fall in oil prices. They stressed the importance of plans to clear accumulated domestic arrears as quickly as possible as well as the BEAC’s measures to inject liquidity into the banking system. The latter reinforced their confidence in achieving ambitious targets for the placement of securities. They noted the criticality of MFIs for economic development and stressed that the microfinance sector was a priority in their national development plan, including through a dedicated strategy.

C. Fostering Inclusive Economic Growth and Enhanced Effectiveness and Transparency of Government Operations

29. A challenging economic environment reinforces Chad’s need for more inclusive growth. Poverty levels are high—particularly in rural areas—, the population is young (45 percent is under 15 years) and expanding by 3 percent per year, and the government is the main source of formal sector employment in urban areas. Chad needs to foster its private sector and job creation, particularly for the young and women. The authorities’ development strategy is inspired by the over-arching Vision 2030 which aims at bringing Chad’s development indicators to the level of emerging markets. The strategy will be implemented through detailed 5-year plans. The new national development plan for 2016-20 is expected to be finalized by September 2016, and will focus on strategic axes: (i) diversification, with a focus on agriculture and cattle; (ii) human capital; (iii) governance; and (iv) social protection.

30. The external stability assessment shows that Chad faces both difficult price and structural competitiveness challenges (Annex 2: External Sector Assessment). On price competitiveness, results of two alternative estimation methods suggest that the real effective exchange rate remains overvalued by 16-20 percent. On structural competitiveness, various business environment and competitiveness indicators (e.g. Global Competitiveness and Doing Business indicators) rank Chad among the worst performers in the world. Improving the business climate is therefore a promising route to export diversification and to attracting foreign investment beyond the oil sector. Given Chad’s fixed peg, bold structural reforms to tackle impediments to private sector development are the principal means for strengthening the country’s competitiveness and external position.

31. The current economic downturn has created a consensus on the need to diversify the economy and improve the business climate. It is believed that the agricultural sector has an enormous growth potential. The government views the promotion of agribusinesses as a credible strategy to shield the economy from the high dependence on oil. It is also keen in fostering small and medium-sized companies through cost reduction and simplification of business procedures. Those companies should join the formal sector to gain access to greater financial resources. The government also intends to focus on judiciary reform over the next 5 years to improve the business climate and its predictability. Private business associations are urging investment in sectors with high value-added to create wealth and absorb labor.

Authorities’ views

The authorities acknowledge the need to further improve the business environment to help diversify the economy, reduce the high dependence on oil, and promote more inclusive growth. They noted that the new five-year plan 2016-2020 will include some initiatives proposed by the private sector to improve the business climate and they intend to implement them in coordination with the private sector.

32. Fiscal structural reforms should continue to focus on spending control and efficiency of spending.

  • Tighter and unpredictable resource envelopes make it even more critical to implement strict budget execution procedures (including for emergency spending, DAOs) and to enhance cash management (including through the preparation of monthly/quarterly Treasury plans).

  • The public investment management process needs to be strengthened substantially. Indeed, while the impact of public investment plans financed by the 2003-14 oil windfall has been significant—especially in terms of improvements in economic and social infrastructure, their management framework is relatively weak.7 In particular, the expenditure chain (commitment, validation, authorization, payment) needs to be streamlined as its current complexity undermines budget execution controls from the ministry of finance and leads to a sub-optimal allocation of resources. In addition, there is a need to align the allocations for goods and services and transfers with the resources needed to ensure the proper operation and maintenance of public investments.

  • Institutional reforms in debt management need to be consolidated to maintain debt sustainability in the context of low oil prices.

33. Enhanced transparency and integrity arrangements have the potential of improving oil revenue collection and utilization. Chad’s oil sector has increased in complexity over the past decade—with more producers, a new fiscal regime, a refinery, a state oil company, in kind revenue, greater state participation, and oil collateralized debt.8 The management and regulatory challenges to the government have increased commensurately. With very little government reporting on the oil sector, more transparency will inform a broader public debate.9 Accurate oil revenue projections are critical, as are proper audits of oil company tax declarations. Information from the companies collected by the Ministry of Petroleum should flow freely to the Ministry of Finance and other agencies. The much enhanced role of the state oil company (Société d’Hydrocarbures du Tchad-SHT)—marketing the government’s oil, purchasing and managing government oil assets, and contracting debt guaranteed by the state—should be accompanied by accountability mechanisms, with the production and publication of independently audited international standard financial reports a first priority. Information on all oil revenues should be centralized in the Ministry of Budget and Finance.

Authorities’ views

The authorities highlighted the recent adoption of a new regulatory framework to implement the PFM law compliant with CEMAC directives, the adoption of a new public procurement code, the publication of quarterly budget execution reports, and the establishment of an audit court (“Cour des Comptes”) operational since January 2015. Debt management reports and medium-term external borrowing plans should start to be produced this year. The authorities noted that improving the flow of oil sector information within the administration was high on their agenda. They are committed to invigorate the inter-ministerial structure created last year for consolidating and reporting all oil revenue information and to put in place proper oversight procedures for SHT. The authorities appreciated the EITI and indicated their intent to facilitate the compilation of the 2014 report during 2016. To enhance revenue collection, all oil companies plus the refinery were being audited by an international audit firm.

Other Issues

34. While some progress has been achieved in recent years, there is still scope to improve the quality, coverage and timeless of statistics. Chad has been a participant in the IMF’s GDDS since September 24, 2002, and the World Bank’s Statistical Capacity Indicator, ranks Chad as better than the average of SSA countries.10 Statistics from all sectors (national accounts, Consumer Price Index, government finance, monetary and balance of payments) are broadly adequate for surveillance, though some shortcomings are identified (see details in the Informational Annex).

35. In line with the authorities’ reform strategy, capacity development priorities will focus on strengthening public financial management and statistical capacity. In public financial management, priority areas will be the development of a comprehensive domestic arrears clearance strategy and the strengthening of the public investment process. Support priorities in statistics will continue to be in the areas of national accounts and balance of payments with the aim of facilitating macroeconomic surveillance.

36. Weak institutional capacity and high turnover of government officials and their technical teams are obstacles for technical assistance absorption. While technical assistance missions to improve the statistical capacity in various areas and fiscal management have intensified in the recent past (see Informational Annex), staff stressed the importance of enhancing institutional stability to maximize the impact of those activities.

37. Staff noted progress in the implementation of the BEAC’s safeguards recommendations. The implementation of safeguards recommendations is currently reviewed annually and is a pre-condition for granting new IMF financial support to, and reviewing existing IMF financial arrangements with CEMAC countries. The 2016 safeguards monitoring visit found that two priority recommendations remain outstanding. However, in early May 2016, the BEAC Board mandated the institution to initiate work on improving governance and transitioning to International Financial Reporting Standards (IFRS). This is an important initial step toward successful completion of safeguards reform. The authorities should maintain the momentum on the implementation of the reforms to restore credibility on the BEAC’s ability to safeguard IMF financial resources.

Authorities’ views

The authorities appreciated the capacity development support from the Fund in various areas. In terms of statistics, they noted recent progress in national accounts and balance of payments data with help from AFRITAC Central, and the production of a new CPI with broader product and geographical coverage. At the same time, they requested increased financial support to computerize key government institutions (like the national statistical office) and processes. They expressed interest in receiving assistance from the Fund’s Topical Trust Fund on Managing Natural Resource Wealth given the country’s high dependence on oil exports. The authorities agreed that the high turnover of civil service staff not only delays the production of consistent data but also weakens the effectiveness of training and capacity development.

Staff Appraisal

38. Chad continues to suffer from the consequences of the massive and persistent decline in oil prices and the elevated regional security threats. Consequently, macroeconomic outcomes have been weaker than envisaged, and acute liquidity problems have forced the government to severely limit spending and domestic payments arrears have been accrued. In addition, risks are tilted to the downside, reflecting internal and external vulnerabilities.

39. Much fiscal adjustment has already been implemented but more efforts are needed. While resource constraints are expected to gradually loosen over the medium-term, a sizable permanent adjustment is needed now. The government is reformulating its 2016 budget, including additional cuts in investment spending, while protecting poverty-reducing social spending as much as possible. But uncertainty regarding the planned sale of a large oil asset highlights the need to elaborate a contingency plan to guide budget execution in the event that receipts do not materialize as envisaged. Even so, liquidity constraints are likely to remain severe and government spending should be executed with the utmost caution, including by introducing cash-based commitment controls to help reduce the risk of further accumulation of arrears, both domestic and external.

40. A comprehensive strategy is needed to clear the large volume of accumulated domestic arrears. It should be based on the findings of an independent audit to verify claims. Repayments should be consistent with the availability of resources under realistic medium-term fiscal projections.

41. Further progress in fiscal reform, in particular PFM, is essential in ensuring budget predictability, efficiency, and transparency. The authorities have made significant progress but much remains to be done to implement strict budget execution procedures, including on investment planning and execution, and to enhance cash management. Enhancing oil revenue transparency, including the flow of information within the administration, is crucial for better budget preparation and execution and for accountability.

42. The banking sector is affected by the direct and indirect impacts of the deteriorating fiscal situation, calling for close monitoring. The sharp fiscal adjustment and the government’s growing financing are increasing bank vulnerabilities by changing the composition of assets and liabilities. These vulnerabilities may subsequently negatively affect economic conditions in certain economic sectors. A close monitoring of the banking system, in coordination with the regional regulator, is warranted. In addition, the COBAC should be given the means to implement the powers it received in April 2014 to deal with stressed banks, and the role of the BEAC as a lender of last resort should be clarified.

43. Data are broadly adequate for surveillance. There remains however scope to enhance the quality, coverage, and timeliness in most macroeconomic datasets as well as in the compilation of the international investment position that is not currently reported due to capacity constraints.

44. The oil price shock has highlighted the importance of economic diversification to economic resilience. The authorities are encouraged to rely on the priorities of the upcoming five-year plan 2016-2020, to improve the business environment and to strengthen financial inclusion, in order to promote inclusive growth and economic diversification, and ultimately create the conditions for exiting fragility.

45. It is proposed that the next Article IV consultation take place on a 24-month cycle.

Table 1.Chad: Selected Economic and Financial Indicators, 2013–20
20132014201520162017201820192020
Prel.Prog.1Prel.Prog.1Proj.Proj.
(Annual percentage change, unless otherwise indicated)
Real economy
GDP at constant prices5.76.93.81.82.5−1.11.75.28.23.4
Oil GDP−7.25.737.632.25.0−4.8−3.212.527.6−0.2
Non-oil GDP8.07.1−1.5−2.91.9−0.32.73.84.34.4
Consumer price index (annual average)0.21.74.63.73.30.04.23.03.03.0
Consumer price index (end of year)0.93.73.7−0.33.05.03.03.03.03.0
Oil prices
WEO (US$/barrel)2104.196.251.650.850.442.950.052.253.154.7
Chadian price (US$/barrel)3103.998.044.943.446.633.845.248.550.852.7
Oil production (millions of barrels)36.338.554.852.557.849.748.155.071.571.8
Exchange rate CFAF per US$ (period average)493.9493.6591.2
Money and credit4
Net foreign assets−2.6−1.8−23.8−40.36.3−10.21.0
Net domestic assets11.228.226.635.6−2.111.26.3
Of which: net claims on central government10.018.016.431.6−4.11.71.5
Of which: credit to private sector2.817.31.70.33.3−2.72.1
Broad money8.626.52.8−4.74.21.07.3
Income velocity (non-oil GDP/broad money)5.54.84.85.04.85.05.0
External sector (valued in CFA francs)
Exports of goods and services, f.o.b.−8.61.4−29.2−34.19.6−17.420.718.730.33.0
Imports of goods and services, f.o.b.−7.79.9−22.1−23.71.6−12.36.58.512.94.2
Export volume−13.75.633.027.611.3−7.96.714.616.0−1.3
Import volume−5.49.8−19.3−21.21.1−9.95.78.012.23.5
Overall balance of payments (percent of GDP)−0.2−1.2−3.4−6.40.3−2.6−1.0−0.6−0.3−0.5
Current account balance, including official transfers (percent of GDP)−9.2−9.0−11.0−12.4−7.8−8.7−7.8−7.3−5.7−6.2
Terms of trade8.5−4.1−44.9−46.6−2.0−7.912.23.211.73.6
External debt (percent of GDP)21.229.227.225.123.823.920.217.614.512.8
NPV of external debt (percent of exports of goods and services)33.562.989.185.073.691.868.952.536.331.9
(Percent of non-oil GDP, unless otherwise indicated)
Government finance
Revenue and grants27.823.316.714.817.115.516.817.720.520.5
Of which: non-oil9.39.58.08.38.68.58.89.19.49.6
Expenditure31.429.622.521.423.420.118.919.720.620.8
Current17.716.713.714.113.714.312.512.912.712.2
Capital13.712.98.87.39.75.86.46.88.08.6
Non-oil primary balance (commitment basis, excl. grants)5−18.2−16.3−9.7−9.8−10.1−7.0−5.0−5.0−5.8−5.9
Overall fiscal balance (incl. grants, commitments basis)−3.6−6.3−5.7−6.6−6.3−4.6−2.1−2.0−0.1−0.3
Overall fiscal balance (incl. grants, cash basis)−6.6−4.5−7.2−5.2−6.3−5.8−3.0−2.7−0.9−0.9
Total debt (in percent of GDP)630.339.240.242.638.445.039.335.629.626.1
Of which: domestic debt9.110.013.017.514.621.119.118.015.113.3
Memorandum items:
Nominal GDP (billions of CFA francs)6,3976,8856,6426,4447,0036,1596,8267,2948,2428,756
Of which: non-oil GDP4,6615,1525,2645,1535,4865,1445,5625,7886,2626,724
Sources: Chadian authorities; and IMF staff estimates and projections.

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351)

WEO, latest Crude Oil Price Baseline

Chadian oil price is Brent price minus quality discount.

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

Total revenue excluding grants and oil revenue, minus total expenditure excluding net interest payments and foreign-financed investment.

Central government, including government-guaranteed debt.

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

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351)

WEO, latest Crude Oil Price Baseline

Chadian oil price is Brent price minus quality discount.

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

Total revenue excluding grants and oil revenue, minus total expenditure excluding net interest payments and foreign-financed investment.

Central government, including government-guaranteed debt.

Table 2.Chad: Real GDP per sector, 2013–20(In Annual percentage change, unless otherwise indicated)
20132014201520162017201820192020
Weight1Prel.Prog.2Prel.Prog.2Proj.Proj.
Primary sector44−2.16.415.110.13.4−1.61.37.713.62.7
Agriculture122.27.94.9−3.34.01.13.93.93.93.9
Food crops110.98.04.5−4.04.01.04.04.04.04.0
Industrial crops127.97.112.08.03.62.03.03.03.03.0
Livestock, Forestry and Fishing113.43.00.50.52.02.04.05.05.05.0
Mining and Quarrying34.510.35.25.2−6.5−6.53.04.04.54.5
Oil and Gas Extraction19−11.96.042.336.35.5−5.1−3.314.330.00.5
Secondary sector1220.98.1−4.2−4.32.8−1.61.53.53.82.9
Manufacturing (non petroleum)126.713.2−2.5−2.51.01.03.06.05.05.0
Handicrafts524.811.52.02.02.51.03.54.04.55.0
Utilities016.14.63.53.53.53.04.04.54.54.5
Construction615.04.0−12.5−12.53.5−6.0−1.52.53.0−0.4
Of which: oil related275.54.51.01.4−4.8−1.6−3.0−7.9−0.5−19.1
Tertiary sector419.17.1−3.3−3.31.4−0.52.13.24.24.4
Commerce, transport, and communication228.04.9−3.8−3.81.1−0.82.23.14.54.5
Commerce207.14.5−4.5−4.51.0−1.02.03.04.54.5
Transport and communication315.08.01.01.02.00.53.54.04.54.5
General government76.84.2−12.5−12.51.0−4.00.53.03.53.3
Other1212.012.01.01.02.01.02.53.54.04.5
Duties and taxes on imports24.74.7−5.7−5.71.0−1.51.02.03.03.0
Total GDP (market prices)1005.76.93.81.82.5−1.11.75.28.23.4
Oil GDP (including investment)20−7.25.737.632.25.0−4.8−3.112.527.6−0.2
Non-oil GDP808.07.1−1.5−2.91.9−0.32.73.84.34.4
Sources: Chadian authorities; and IMF staff estimates and projections.

Average share of 2005–10 GDP.

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351)

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

Average share of 2005–10 GDP.

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351)

Table 3.Chad: Fiscal Operations of the Central Government, 2013–20(In Billions of CFAF, unless otherwise indicated)
20132014201520162017201820192020
Prel.Prog.1Prel.Prog.1LFR2Proj.Proj.
Total revenue and grants1,2941,2028817639387937969331,0241,2831,376
Revenue1,1821,0946915617205865767248081,0531,132
Oil3749607270133250116141237281467486
Non-oil433487420428470470435487527586646
Tax420464400407435435410456486539592
Non-tax1323202235352531414754
Grants113107190202219207220210216230244
Budget support50539040708345454545
Project grants108107137112179137137165171185199
Expenditure1,4641,5251,1821,1011,2831,1551,0331,0521,1411,2921,397
Current823861720725749753733697746792818
Wages and salaries333341370369376391391410425438444
Goods and services1361476793707070838794101
Transfers and subsidies320327239240264253233161168200215
Interest3446442339393942676058
Domestic1024211320202022232626
External2422231019191920443531
Investment641664462377533401299355395500579
Domestically financed491510255231313204102110135220280
Foreign financed149154207146220197197245260280299
Overall balance (incl. grants, commitment)−169−323−302−338−344−362−237−119−117−9−20
Non-oil primary balance (excl. grants, commitment)4−848−838−511−504−553−448−361−278−287−366−394
Float from previous year5−231−135−181−181−105−103−103−105−106−117−118
Float at end of year5135181105103105105105106117118125
Var. of Arrears−101201480−65−65−50−50−50−50
Overall balance (incl. grants, cash)−310−230−378−268−344−425−300−167−156−58−64
Financing3102303782633444241901411304040
Domestic financing803633992653574181847153−43−47
Bank financing55118279289422618−6−68−59
Central Bank (BEAC)59113219292262618−6−68−59
Deposits60104−47260000−20−10
Advances (net)00233232000−6−48−48
IMF−19343426261800−1
Commercial banks (deposits)−35−31600000
Other financing (net)24−3280−48155954592512
Privatization and other exceptional receipts6027740243003301000000
Foreign financing230−133−21−2−136669768387
Loans (net)198−133−41−22−43−24−2438485561
Disbursements7338467834416060808995100
Financing gap0050011027271724
Memorandum items:
Non-oil GDP4,6615,1525,2645,1535,4865,1445,1445,5625,7886,2626,724
Poverty-reducing social spending335309243260246
Bank deposits (mostly BEAC)2141191579315793939393113123
(In months of domestically-financed spending)2.01.01.91.21.81.21.31.41.31.31.3
BEAC statutory advances8223223416455416455455455449401354
Sources: Chadian authorities; and IMF staff estimates and projections.

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351).

Loi de Finances Rectificative (Revised Budget Law).

Net of debt service on oil sales advances.

Total revenue, less grants and oil revenue, minus total expenditures, less net interest payments and foreign financed investment.

Difference between committed and cash expenditure.

Extraordinary receipts linked to a settlement of a dispute with an oil company are included in 2014. CFAF300 billion from an oil asset sale are included in the 2016 LFR. Given uncertainties, only CFAF100 billion are projected under the baseline scenario.

The oil sales advance with Glencore Energy in 2013 in an amount of US$600 million (about CFAF 296 billion) was recorded as budget borrowings.

Includes exceptional advance in 2015

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

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351).

Loi de Finances Rectificative (Revised Budget Law).

Net of debt service on oil sales advances.

Total revenue, less grants and oil revenue, minus total expenditures, less net interest payments and foreign financed investment.

Difference between committed and cash expenditure.

Extraordinary receipts linked to a settlement of a dispute with an oil company are included in 2014. CFAF300 billion from an oil asset sale are included in the 2016 LFR. Given uncertainties, only CFAF100 billion are projected under the baseline scenario.

The oil sales advance with Glencore Energy in 2013 in an amount of US$600 million (about CFAF 296 billion) was recorded as budget borrowings.

Includes exceptional advance in 2015

Table 4.Chad: Fiscal Operations of the Central Government, 2013–20(In Percent of non-oil GDP, unless otherwise indicated)
20132014201520162017201820192020
Prel.Prog.1Prel.Prog.1LFR2Proj.Proj.
Total revenue and grants27.823.316.714.817.115.415.516.817.720.520.5
Revenue25.421.213.110.913.111.411.213.014.016.816.8
Oil316.111.85.12.64.52.22.74.34.97.57.2
Non-oil9.39.58.08.38.69.18.58.89.19.49.6
Tax9.09.07.67.97.98.58.08.28.48.68.8
Non-tax0.30.50.40.40.60.70.50.60.70.80.8
Grants2.42.13.63.94.34.04.33.83.73.73.9
Budget support0.10.01.01.80.81.41.60.80.80.70.7
Project grants2.32.12.62.23.52.72.73.03.03.03.2
Expenditure31.429.622.521.423.422.420.118.919.720.620.8
Current17.716.713.714.113.714.614.312.512.912.712.2
Wages and salaries7.16.67.07.26.97.67.67.47.37.06.6
Goods and services2.92.81.31.81.31.41.41.51.51.51.5
Transfers and subsidies6.96.34.54.74.84.94.52.92.93.23.2
Interest0.70.90.80.50.70.80.80.81.21.00.9
Domestic0.20.50.40.20.40.40.40.40.40.40.4
External0.50.40.40.20.30.40.40.40.80.60.5
Investment13.712.98.87.39.77.85.86.46.88.08.6
Domestically financed10.59.94.94.55.74.02.02.02.33.54.2
Foreign financed3.23.03.92.84.03.83.84.44.54.54.4
Overall balance (incl. grants, commitment)−3.6−6.3−5.7−6.6−6.3−7.0−4.6−2.1−2.0−0.1−0.3
Non-oil primary balance (excl. grants, commitment)4−18.2−16.3−9.7−9.8−10.1−8.7−7.0−5.0−5.0−5.8−5.9
Float from previous year5−5.0−2.6−3.4−3.5−1.9−2.0−2.0−1.9−1.8−1.9−1.8
Float at end of year52.93.52.02.01.92.02.01.92.01.91.9
Var of Arrears−0.00.202.02.90.0−1.3−1.3−0.9−0.9−0.8−0.7
Overall balance (incl. grants, cash)−6.6−4.5−7.2−5.2−6.3−8.3−5.8−3.0−2.7−0.9−0.9
Financing6.64.57.25.16.38.23.72.52.20.60.6
Domestic financing1.77.07.65.16.58.13.61.30.9−0.7−0.7
Bank financing1.22.35.35.60.80.50.3−0.1−1.1−0.9
Central Bank (BEAC)1.32.24.25.70.50.50.3−0.1−1.1−0.9
Deposits1.32.0−0.90.50.00.00.00.0−0.3−0.1
Advances (net)0.00.04.44.50.00.00.0−0.1−0.8−0.7
IMF0.00.20.60.70.50.50.30.00.00.0
Commercial banks (deposits)−0.10.11.1−0.10.30.00.00.00.00.0
Other financing (net)0.5−0.61.5−0.90.31.11.01.00.40.2
Privatization and other exceptional receipts60.05.40.80.55.56.41.90.00.00.00.0
Foreign financing4.9−2.6−0.40.0−0.20.10.11.21.31.31.3
Loans (net)4.2−2.6−0.8−0.4−0.8−0.5−0.50.70.80.90.9
Disbursements77.30.91.50.70.81.21.21.41.51.51.5
Financing gap0.00.00.10.00.02.10.50.50.30.4
Memorandum items:
Non-oil GDP4,6615,1525,2645,1535,4865,1445,1445,5625,7886,2626,724
Poverty-reducing social spending7.26.04.65.04.5
Bank deposits (mostly BEAC)4.62.33.01.82.91.81.81.71.61.81.8
(In months of domestically-financed spending)2.01.01.91.21.81.21.31.41.31.31.3
BEAC statutory advances84.84.37.98.87.68.88.88.27.86.45.3
Sources: Chadian authorities; and IMF staff estimates and projections.

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351).

Loi de Finances Rectificative (Revised Budget Law).

Net of debt service on oil sales advances.

Total revenue, less grants and oil revenue, minus total expenditures, less net interest payments and foreign financed investment.

Difference between committed and cash expenditure.

Extraordinary receipts linked to a settlement of a dispute with an oil company are included in 2014. CFAF300 billion from an oil asset sale are included in the 2016 LFR. Given uncertainties, only CFAF100 billion are projected under the baseline scenario.

The oil sales advance with Glencore Energy in 2013 in an amount of US$600 million (about CFAF 296 billion) was recorded as budget borrowings.

Includes exceptional advance in 2015.

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

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351).

Loi de Finances Rectificative (Revised Budget Law).

Net of debt service on oil sales advances.

Total revenue, less grants and oil revenue, minus total expenditures, less net interest payments and foreign financed investment.

Difference between committed and cash expenditure.

Extraordinary receipts linked to a settlement of a dispute with an oil company are included in 2014. CFAF300 billion from an oil asset sale are included in the 2016 LFR. Given uncertainties, only CFAF100 billion are projected under the baseline scenario.

The oil sales advance with Glencore Energy in 2013 in an amount of US$600 million (about CFAF 296 billion) was recorded as budget borrowings.

Includes exceptional advance in 2015.

Table 5.Chad: Balance of Payments, 2013–20(In Billions of CFA francs, unless otherwise indicated)
20132014201520162017201820192020
Prel.Prel.Prog.3Prel.Prog.3Proj.Proj.
Current account, incl. official transfers−591−621−732−800−546−535−529−533−467−544
Trade balance4201945331181−3198391835804
Exports, f.o.b.1,9191,9401,6511,5511,8071,2571,5381,8442,4262,473
Of which: oil1,5931,5921,2911,1911,4298841,1361,4111,9571,967
Imports, f.o.b.−1,499−1,746−1,598−1,520−1,626−1,260−1,339−1,453−1,591−1,670
Services (net)−1,043−1,060−1,043−1,092−1,036−1,015−1,082−1,172−1,361−1,380
Income (net)−294−298−163−196−1204−98−224−420−457
Transfers (net)326544420458430479452472479489
Official (net)198303161196157196159166166161
Private (net)228240260262272283292305314328
Financial and capital account582627508387566374460489440504
Capital transfers104104133108175133161168182195
Foreign direct investment2257−334355331611332316368325328
Other medium and long term investment187547−30−331−5126344046
Public sector198558−19−2210−3938485561
Private sector−10−11−11−11−12−12−13−14−15−15
Short-term capital3431050−19−218−40−42−81−107−66
Errors and omissions0000000000
Overall balance−96−224−41220−161−69−44−28−41
Financing9−6171359−133106−6−11−17−10
Change in official reserves (decrease +)9−6171359−133106−6−11−17−10
IMF (net)09
Financing gap00−53−53−113−56−75−55−45−50
Financing gap (percent of GDP)00−0.8−0.8−1.6−0.9−1.1−0.8−0.5−0.6
Exceptional Financing5454565648282827
IMF ECF3434262618001
Debt relief (HIPC)2020303031282826
Remaining gap00−570−27−27−17−23
Memorandum items:
Current account (percent of GDP)−9.2−9.0−11.0−12.4−7.8−8.7−7.8−7.3−5.7−6.2
Exports (percent of GDP)30282524262023252928
Of which: oil25231918201417192422
Imports (percent of GDP)−23−25−24−24−23−20−20−20−19−19
FDI (percent of GDP)4.0−4.95.35.18.75.44.65.03.93.7
Gross official reserves (billions of USD)1.21.20.60.40.80.20.20.20.30.3
(In months of imports of goods and services)2.52.11.51.01.80.60.60.60.60.6
(Idem, excluding oil sector imports)3.02.51.81.22.40.70.70.70.70.7
Sources: Chadian authorities; and IMF staff estimates and projections.

A payment linked to a settlement of a dispute with an oil company has been transferred to the government in 2014

FDI are negative in 2014 due to the disinvestment by Chevron in Chad’s biggest oil consortium.

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351).

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

A payment linked to a settlement of a dispute with an oil company has been transferred to the government in 2014

FDI are negative in 2014 due to the disinvestment by Chevron in Chad’s biggest oil consortium.

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351).

Table 6.Chad: Monetary Survey, 2013–17(In Billions of CFA francs)
20132014201520162017
Prel.Prog.1Prel.Prog.1Proj.Proj.
Net foreign assets537.7522.7266.188.6336.3−16.3−6.4
Central bank527.9534.5308.1145.4376.348.753.6
Commercial banks9.8−11.9−42.0−56.8−40.0−65.0−60.0
Net domestic assets314.4555.0842.0938.5818.51053.51118.7
Domestic credit465.4760.4980.01123.3997.51138.51193.7
Claims on the government (net)50.4204.2380.9544.6335.8562.0578.0
Treasury (net)35.7165.6342.3484.8297.2512.0533.0
Banking sector35.7165.6342.3484.8297.2512.0533.0
Central bank96.9228.7351.3492.2281.2500.0505.0
Claims on general government260.3268.2440.8530.0405.8530.0530.0
Liabilities to general government−163.5−39.5−89.5−37.7−124.6−30.0−25.0
Commercial banks−61.2−63.2−9.0−7.416.012.028.0
Claims on general government66.686.2112.0141.7124.0156.0170.0
Liabilities to general government−127.7−149.3−121.0−149.1−108.0−144.0−142.0
Fund position0.910.641.241.265.165.181.2
Other non-treasury14.738.638.659.838.650.045.0
Credit to the economy389.6537.0555.4540.7592.2512.7534.5
Capital Accounts−113.9−102.8−100.0−118.9−127.0−130.0−120.0
Other items (net)−27.5−23.4−38.045.1−52.045.045.0
Money and quasi money852.11077.71108.11027.01154.91037.21112.4
Currency outside banks448.3539.2554.4482.4577.8487.1522.4
Demand deposits336.3460.5473.5453.9493.4458.4491.6
Time and savings deposits67.578.080.290.883.691.798.4
Memorandum items:
Broad money (annual percentage change)8.626.52.8−4.74.21.07.3
Credit to the economy (annual percentage change)6.137.83.40.76.6−5.24.2
Credit to the economy (percent of GDP)6.17.88.48.48.58.37.8
Credit to the economy (percent of non-oil GDP)8.410.410.610.510.810.09.6
Velocity (non-oil GDP)5.54.84.85.04.85.05.0
Velocity (total GDP)7.56.46.06.36.15.96.1
Sources: Chadian authorities; and IMF staff estimates and projections.

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351).

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

IMF, Chad-Second Review under the ECF Arrangement (EBS/15/351).

Table 7.Chad: Financial Soundness Indicators, 2010–15
201020112012201320142015
Capital Adequacy
Regulatory capital / Risk-weighted assets12.520.018.122.013.414.6
Asset Quality
Gross nonperforming loans/Gross banking loans9.97.67.49.811.716.5
Provisions / Nonperforming loans81.189.064.565.368.356.1
Net nonperforming loans/Gross banking loans1.90.82.63.43.77.3
Profitability
Return on assets3.22.12.02.31.81.6
Return on equity32.019.215.521.119.413.1
Liquidity
Liquid assets / Total assets29.424.328.124.025.726.0
Liquid assets / Short term liabilities148.3149.3146.6139.3152.9142.1
Source: COBAC.
Source: COBAC.
Annex I. Risk Assessment Matrix1
Source of RisksRelative LikelihoodImpact and Policy Response
Persistent decline in global oil pricesHighImpact: High. Permanently low oil prices, aggravated by weak global growth, would result in depressed fiscal oil revenues and larger current account deficits. The associated fiscal contraction could delay several public investment projects, notably in agriculture and infrastructure, negatively affecting long-term growth.

Policy responses: Smooth public expenditure over the medium-term and strengthen non-oil revenue mobilization.
A deterioration of the security situation, including through regional spillovers (CAR, Mali, Nigeria)MediumImpact: High. It could cause: (1) political instability; (2) increased displacement of population and increased need for humanitarian assistance; (3) increased security-related government expenditures that could crowd out other priority spending such as social or investment; (4) disruptions in intra-region trade flows.

Policy response: Rebuild fiscal buffers; budget sufficient resources for emergency security-related spending
A deepening of the food security crisis within Chad and across the Sahel regionMediumImpact: Medium. It could affect Chad’s most vulnerable population through a combination of high food prices, and increased malnutrition; could lead to social and political tensions in an already fragile environment; and could jeopardize government’s fiscal position as authorities respond to the crisis.

Policy response. Continue coordination with development partners to strengthen Chad’s resilience to weather shocks; promote policies for economic diversification and higher labor productivity, particularly in agriculture; strengthen social safety net programs, targeted at protecting the poor and vulnerable segments of the society.
Lapses in the implementation of fiscal policyMediumImpact. High. A higher than anticipated non-oil primary deficit (NOPD) would lead to a buildup of arrears and increased borrowing from the securities market, with adverse implications on the ECF arrangement, donor support, and fiscal and debt sustainability.

Policy response. Continue close monitoring of budget execution, including implementation of commitments under the ECF
Annex II. External Sector Assessment

In 2014 an analysis of exchange rate and competitiveness suggested that the external position was weaker than the level consistent with medium-term fundamentals. Since then, the current account deficit has not improved, mainly as a result of lower oil exports. Foreign direct investment in the oil sector remains a key source of external financing. Two model-based approaches indicate that the current account balance is below the current account norm and the real effective exchange rate is overvalued. Overall, Chad’s external position is projected to remain weak in 2016. Structural reforms to improve competitiveness and attract foreign investment are necessary to strengthen the external sector.

A. Balance of Payments and Exchange Rate Developments

1. Chad has recorded large current account deficits since 2009. The external current account deficit averaged 9 percent of GDP between 2009 and 2015, and is projected to remain at a similar level in 2016. These deficits have been consistently larger than in the CEMAC as a whole, although the regional current account balance has worsened at a fast pace in recent years (Figure 1a). The evolution of the current account in Chad was mainly driven by the goods and services balance, which has deteriorated from -7 percent of GDP in 2011 to -17 percent of GDP in 2015, partially as a result of the drop in oil exports (Figure 1b). The net income account also made a negative contribution to the current account through payments on foreign investment in the oil sector. Conversely, net current transfers positively contributed to the current account. In 2014, these transfers include proceedings from a $400 million fine paid by China National Petroleum Corporation for violations of environmental standards.

Text Figure 1.Chad: Current Account Balance and Components, 2009–16

(Percent of GDP)

Sources: Country Authorities, BEAC, and staff estimates

2. The continuous decline in exports in recent years is explained by the fall in oil sales. Oil exports, which constitute the bulk of total exports, have reduced from 32 percent of GDP in 2011 to 19 of GDP in 2015, owing to a decline in oil production around 2012-2013 and the international oil price slump since 2014 (Text Figure 2). The continued reduction in oil prices in 2016 explains the projection of even lower oil exports for this year. Non-oil exports remain concentrated in a few products (especially cotton and livestock) and their contribution to total exports was stable at 5 percent of GDP between 2009 and 2015. This evidence suggests that Chad is affected by the economic dysfunction known as the “oil curse”.

Text Figure 2.Chad: Oil and Non-Oil Exports, 2009-2016

(Percent of GDP)

Source: Country authorities, BEAC, and staff estimates.

3. Foreign direct investment (FDI) in the oil sector has been an important source of external financing. The current account deficits have been partially financed by FDI, which concentrates in the oil sector and averaged 3 percent of GDP in the period 2009-2015 (Text Figure 3). The large negative value of FDI in 2014 is associated with the debt-financed government’s purchase of Chevron’s shares in Chad’s largest oil consortium. Although investment from oil companies is envisaged to decline in 2016, FDI is expected to be above 5 percent of GDP in 2016 due to exceptional receipts (estimated at CFAF 100 billion) from the government’s sale of a 10 percent equity stake in oil sector fields. In recent years, capital transfers in the form of debt relief and investment grants also helped to finance the current account deficit.

Text Figure 3.Chad: Foreign Direct Investment, 2009-2016

(Percent of GDP)

Source: Country authorities, BEAC, and staff estimates.

4. Despite some short-term volatility, the real effective exchange rate (REER) has remained fairly stable over the last five years. Following a period of depreciation after the global recession of 2008-09, the REER has fluctuated around a somewhat stable level since 2011 (Text Figure 4). In this way, the notable depreciation of the nominal effective exchange rate (NEER) in 2014 did not translate into important gains in price competitiveness. This relative lack of adjustment in the REER could be explained by structural competitiveness hurdles in the Chadian economy. The movements in the NEER closely track the evolution of the nominal effective exchange rate of the euro, to which Chad’s common currency is pegged. At the regional level, the observed appreciation of the average REER reflects in part relatively high inflation in countries such as the Central African Republic.

Text Figure 4.Chad: Nominal and Real Effective Exchange Rates, 2010-2015

(2010=100)

Source: Country authorities, BEAC, and staff estimates

5. Reserve adequacy and debt sustainability indicators tend to confirm the perceived weaknesses of Chad’s external position. Given the severe data limitations concerning Chad’s balance of payments, it is important to evaluate additional information to assess the external position.2 A recent analysis of reserve adequacy in the CEMAC (IMF Country Report No. 15/222, July 2015) concluded that although reserves were expected to decline in 2015, they remained broadly adequate according to relevant metrics. In 2015 the level of pooled reserves imputed to Chad fell to US$ 390 million, down from US$ 1.19 billion at end-2014. In the face of the persistent oil price shock, a further decline of reserves in 2016 is a risk that could materialize. The debt sustainability analysis (DSA) also suggests a weak external sector, as it concludes that Chad faces a high risk of debt distress, based on an assessment of public external debt.

6. On average, the current account deficit is expected to reduce to 7 percent in 2016-2021. The goods and services balance is expected to contribute to this result, by improving from a deficit of almost 17 percent of GDP in 2016 to a deficit of 7 percent of GDP in 2021. The current account deficit would be primarily financed by FDI.

B. Model-Based Real Exchange Rate Assessment

7. Two standard approaches were used to assess the potential misalignment of the current account and the REER. The Bems and Carvalho (2009) and the Araujo et al. (2013) methodologies rely on the application of the permanent income hypothesis and are well suited to estimate current account norms for resource-rich countries. The misalignment of the REER is then calculated by comparing the projected medium-term current account with the model-based norms, and by assuming a value for the elasticity of the current account with respect to the REER (Text Table 1).3 Both methodologies assume that Chad’s oil reserves will be depleted in 25 years.

Text Table 1.Chad: Current-Account Norms and Implied REER Adjustment1/
Year: 2020Implied Real Exchange Rate adjustment (%)
(Percent of GDP)CA Elasticity: -0.6
Underlying current account−6.4
CA norm (Araujo et al., 2013)3.416
CA norm (Constant real annuity -
Bems and Carvalho Filho, 2009)5.620
Source: IMF staff estimates.

The current account elasticity is based on the import and export elasticities reported in Tokarick (2010) (-1.4 and 0.25, respectively) and staff’s projections for Chad’s import and export values in 2020.

Source: IMF staff estimates.

The current account elasticity is based on the import and export elasticities reported in Tokarick (2010) (-1.4 and 0.25, respectively) and staff’s projections for Chad’s import and export values in 2020.

8. The Araujo et al. (2013) approach suggests a current account norm of 3.4 percent of GDP in 2020, corresponding to a REER overvaluation of 16 percent. This model takes into account external borrowing constraints as well as inefficiencies and absorptive capacity constraints in investment, which are realistic features of developing countries. In simulating the model for Chad, the values of the key parameters were the same as those reported in Araujo et al. (2013), who calibrated the model parameters to the CEMAC region.

9. The Bems and Carvalho’s (2009) constant real annuity approach suggests a current account norm of 5.6 percent of GDP in 2020, corresponding to a REER overvaluation of 20 percent. The finding of a higher current account norm than in the Araujo et al. (2013) approach is reasonable because the Bems and Carvalho (2009) model ignores the features of developing countries mentioned in ¶ 8 above. In particular, by ignoring external borrowing constraints, the optimal response to a natural resource windfall implies a larger current account surplus than otherwise.

C. Structural Competitiveness

11. Several indicators show that Chad faces difficult structural competitiveness issues. In recent years the authorities developed public investment plans in infrastructure and, with the help of technical assistance, focused on improving public financial management. However, as illustrated below, various business environment and competitiveness indicators rank Chad among the worst performers in the world. The limited progress in improving the business climate represents a key constraint to export diversification and to attracting foreign investment. Given Chad’s membership in a currency union, bold structural reform measures are necessary to strengthening the country’s competitiveness and external position.

12. In the 2014-15 World Economic Forum’s Global Competitiveness Index (GCI) report, Chad ranks 143th of 144 countries. In comparison to sub-Saharan Africa, Chad remains well behind in terms of institutions, that is, the legal and administrative framework within which individuals, firms, and governments interact to generate wealth (Figure 5, top panel). Despite the gradual improvement in its macroeconomic environment, the GCI report also shows that Chad significantly lags the SSA average in implementing structural reforms in the goods, labor, and financial markets.

13. In the Heritage Foundation’s 2015 Index of Economic Freedom ranking, Chad ranks 165th of 178 countries. With an overall score of 45.9, Chad is below the average of the West African Economic and Monetary Union (WAEMU, 117th rank), the SSA (120th rank), and the CEMAC (154th rank). Chad scores lower than the CEMAC average in four of the ten indicators of economic freedom (Text Figure 5, middle panel), including ‘freedom from corruption’ and ‘business freedom’ (which measures the efficiency of government regulation of business). Moreover, the poor performance in ‘trade freedom’ underscores the need for reducing the tariff- and non-tariff barriers to trade, which are bound by regional CEMAC agreements, and simplifying customs procedures.

14. In the World Bank’s Doing Business database, Chad scores lower than the SSA, the WAEMU, and the CEMAC averages in all of the available indicators. The Doing Business indicators show that Chad trails its peers in almost all dimensions, particularly in starting a business, enforcing contracts, paying taxes, and getting electricity (Text Figure 5, bottom panel).4 As it was also emphasized in the 2013 Article IV report (IMF Country Report No. 14/100, February 2014), the business climate and the coverage of basic infrastructure remain weak in Chad.

Text Figure 5.Chad: Structural Competitiveness Indicators, 2015

Sources: World Economic Forum, The Global Competitiveness Report, 2015; Doing Business Indicators, World Bank, 2015; The Heritage Foundation, 2015; and IMF staff calculations.

References

    AraujoJ.B.LiM.Poplawski-Ribeiro and L.F.Zanna2013Current Account Norms in Natural Resource Rich and Capital Scarce EconomiesIMF Working Paper 13/80 (Washington, DC: International Monetary Fund).

    BemsR. and I.Carvalho2009Exchange Rate Assessments: Methodologies for Oil Exporting CountriesIMF Working Paper 09/281 (Washington, DC: International Monetary Fund).

    TokarickS.2010A Method for Calculating Export Supply and Import Demand ElasticitiesIMF Working Paper 10/180 (Washington, DC: International Monetary Fund).

The oil sales’ advances were rescheduled, extending the repayment period from 4 to 6-7 years, but also now calling on other oil revenue beyond the income from the asset, for their repayment.

See Selected Issues Paper (SIP) on Chad’s first steps in the regional public securities market.

Including a budget grant of CFAF60 billion from Saudi Arabia. Part (CFAF25 billion) of the total of CFAF54 billion in budget support committed by the WB, the E.U., and the ADB for 2015 was received by the Treasury only in early 2016.

As elaborated in CEMAC--Staff Report on the Common Policies of member Countries (SM/16/99), in late 2015, the CEMAC Commission presented a revised regional convergence framework to enter into force on January 1, 2017. The new framework includes a new fiscal rule based on a three-year average overall budget balance excluding a share of oil revenues.

See attached joint International Monetary Fund – World Bank Debt Sustainability Analysis.

See the SIP on macro-financial linkages for a more detailed analysis.

See SIP on public investment efficiency.

See the SIP on Chad’s petroleum sector.

The Extractive Industries Transparency Initiative (EITI) produces informative annual reports on Chad, see http://itietchad.org/

The Statistical Capacity Indicator is a composite score assessing the capacity of a country’s statistical system. It is based on a diagnostic framework assessing the following areas: methodology; data sources; and periodicity and timeliness. Countries are scored against 25 criteria in these areas, using publicly available information and/or country input. http://datatopics.worldbank.org/statisticalcapacity/

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Chad’s official balance of payments data starting from 2011 are still provisional

The external stability assessment of CEMAC (IMF Country Report No. 15/222, July 2015) found that CEMAC’s REER was broadly consistent with equilibrium under current policies, although model-based approaches indicated some evidence of overvaluation.

These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and standardized assumptions on business constraints and information availability.

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