On July 22, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Chad.1
Macroeconomic outcomes continue to underperform potential, due to the major impact of two exogenous shocks: the lower oil prices and the elevated regional insecurity. Oil revenues have collapsed to a fraction of their previous level and are expected to only partially and gradually recover. The threat to security in the region remains serious, causing economic disruption, reprioritization of spending to defense, hosting of refugees and internally displaced persons, and exacerbating the difficult economic situation.
Economic activity has slowed sharply in 2015, with GDP growth estimated to have decelerated to 1.8 percent from 6.9 percent in 2014. Disruptions to cross–border trade flows with Cameroon and Nigeria have led to increased volatility of domestic prices, reaching 3.7 percent on average in 2015, slightly above the CEMAC target of 3 percent. Despite a large fiscal adjustment, the overall fiscal deficit remained high (6.6 percent of non-oil GDP) in 2015 and domestic arrears were accumulated to reach 3.9 percent of non-oil GDP (CFAF 200 billion) at the end of the year. Money supply contracted and credit to the private sector slowed significantly 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 short and medium term outlooks remain challenging. 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. 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. 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.
Executive Board Assessment2
Executive Directors welcomed the Chadian authorities’ policy efforts, with a substantial fiscal adjustment achieved, and progress on the structural front despite an adverse external environment. Nonetheless, the macroeconomic situation and the near-term outlook are being seriously affected by the collapse in oil revenue and the elevated regional insecurity, which have weakened economic activity and worsened the fiscal situation. Against this backdrop, Directors stressed that additional fiscal efforts and bolder structural reforms are needed to safeguard fiscal and financial stability and the recent progress in human development as well as to bolster the non-oil economy. Continued close engagement with the Fund and the international community is crucial to support the authorities’ efforts.
Directors welcomed the fiscal adjustment measures adopted, including in the revised 2016 budget. Noting the precarious liquidity situation and uncertainty regarding exceptional receipts from the sale of an oil sector asset, they urged the authorities to elaborate a contingency plan to guide spending should the risk of a significant shortfall in fiscal receipts materialize. Directors also recommended limiting spending commitments strictly to available resources to avoid a breakdown in the expenditure chain and further accumulation of arrears. They stressed that a comprehensive arrears clearance strategy, based on the validation process of an independent audit, is imperative.
Directors underscored the need for a medium-term fiscal strategy that incorporates a sizable permanent adjustment while protecting the more vulnerable segments of the population. Welcoming the authorities’ intention to mobilize more non-oil revenue, Directors noted the importance of expanding the non-oil revenue base, reducing tax exemptions, and strengthening tax and customs administrations.
Directors encouraged the authorities to continue their efforts to strengthen public financial management, with a focus on stricter spending controls and enhanced spending efficiency. They stressed that enhanced oil revenue transparency is crucial for better budget preparation and execution as well as for accountability.
Directors noted that, despite high liquidity levels, the banking sector is vulnerable to the fiscal deterioration and needs to be closely monitored in coordination with relevant regional bodies. They encouraged the authorities to be mindful of possible crowding out of credit to the private sector when placing government securities with commercial banks.
Directors stressed that the challenges posed by the difficult economic environment represent an opportunity to press ahead with bold structural reforms aimed at diversifying the economy, improving the business climate, fostering financial inclusion, and achieving more inclusive growth. They looked forward to the details of the authorities’ upcoming national development plan covering 2016–2020, particularly in the areas of agriculture, human capital, governance, judiciary reform, and social protection.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing ups can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.