On behalf of my Chadian authorities, I would like to thank Management and Staff for the continuous support provided to Chad in the face of an adverse environment brought about by the large decline in oil price, and the security and humanitarian shocks. The support of management was in evidence by the visit of Mr. Furusawa to Chad in February 2016, and for which my authorities are very appreciative. This visit enabled the Deputy Managing Director to appreciate directly the economic and social impact of the exogenous shocks in Chad as well as the efforts of my authorities to address them. My authorities are also thankful to bilateral partners and multilateral institutions for their financial and technical assistance.
Indeed, the massive oil price decline since 2014, and the deterioration of the security situation in the second half of 2015 further complicated an already difficult economic and financial situation. The country has also seen an inflow of refugees from neighboring countries due to the security situation, as Chad is seen as an island of stability in an unstable region. Public finances have therefore been under extreme pressure which increased the vulnerabilities of private and financial sectors. The authorities’ policy responses to the worsening environment have been mainly through large additional fiscal adjustment, absent the full realization of financial support pledges by the international community. Nevertheless, despite these unfavorable developments, the authorities’ Fund-supported program remained on track in 2015. Maintaining this performance in 2016, however, has proven particularly challenging.
The period ahead will be critical for Chad, as the absence of sufficient financial resources might force my authorities to resort to second-best financing options to finance the budget at the risk of jeopardizing debt sustainability and derailing the Fund-supported program. Therefore, my authorities are asking the international community to follow through on the financial support pledges as soon as possible.
I. Recent Developments
Economic activity slowed down significantly in 2015, due to a number of factors. These include the oil price shock, lower agricultural production due to bad weather conditions and contraction of other sectors, notably the construction sector, as a result of drastic reduction in public demand, the difficult economic situation in Nigeria and the weakened security situation. As a result, non-oil real growth turned negative at -2.9 percent. Nevertheless, total real growth remained positive at 1.9 percent in 2015 against 6.9 percent in 2014, as new oil fields came on stream.
Inflationary pressures emerged in 2015 due to supply shocks. Lower agricultural production and the security disruptions to the cross-border trade flows with Cameroon and Nigeria led to a surge in food prices and inflation reached 7.6 percent year-on-year in April 2015 before turning negative to -0.3 percent at end-December 2015. The disinflation continued in 2016 as consumer price index declined by 3.7 percent in March 2016.
The fiscal situation deteriorated significantly as economic activity slowed down. As indicated during the last meeting on Chad in December 2015, the 2015 budget was revised to take into account the changing economic conditions. However, despite this revision, only 60 percent of the projected total fiscal revenue has been realized owing to the lower than expected oil price toward the end of the year and to continued disruption of trade flows at the border with Nigeria and Cameroon. The authorities responded to the situation with a combination of lower public spending and additional borrowing. Capital spending, for example, has been reduced by more than 40 percent between 2014 and 2015 and no new projects has been started. However, social spending was preserved. There was also an accumulation of domestic arrears due to Treasury difficulties arising from the lower revenues. As a result, the fiscal deficit remained in line with the objective under the ECF-supported program. The deficit was financed through exceptional financing from the central bank in the form of higher ceiling for statutory advances, support from some external partners and placement of Treasury bills and bonds in the regional market.
As the DSA indicates, public debt ratios have increased with respect to GDP, revenues and exports figures, thereby further raising debt vulnerabilities in the short to medium-term.
Monetary sector developments have been characterized by a contraction in broad money and a deceleration of credit to the economy together with a significant drawdown in government deposits at the central bank. As already discussed in the Board meeting on the regional consultations with CEMAC, the regional monetary policy has been accommodative since late 2015 with the relaxation of the ceiling for statutory advances, and the halving of the required reserves at the central bank. In addition, the ceiling for refinancing at the central bank for the Chadian banks has been raised by 50 percent. This monetary easing has enabled the provision of needed liquidity to the government and the banking system.
Liquidity pressures in the public sector have increased vulnerabilities in the financial sector, as the recent accumulation of arrears in the second part of 2015 and in 2016, in a context of slow economic activity, translated in higher NPLs, thereby reflecting the strong macro-financial linkages in Chad, as well described in the first chapter of the Selected Issues Paper. Although the financial sector is overall healthy, the recent stress tests conducted by the regional banking commission indicate increasing risks to financial stability stemming from a bleaker economic outlook.
Progress has been made in the implementation of reforms since January 2015, notably in the context of the Fund-supported program. Particularly noteworthy are the adoption of a new regulatory framework to implement the PFM law compliant with CEMAC directives, the adoption of a new procurement code, the publication of quarterly budget execution reports, and the establishment of an audit court.
II. Policies for 2016 and beyond
Near-term economic prospects are bleak as economic activity is expected to contract further by 1.1 percent in 2016, essentially due to a decline in oil production as many planned investments in the oil sector have been shelved. Non-oil GDP growth will also remain negative. However, over the medium-term growth outlook is brighter as a gradual recovery in the non-oil sector is projected, driven by agriculture, commerce and transportation, together with an easing of budgetary pressures with a rebound in oil revenues. It is indeed assumed that investment in the oil sector would resume as oil prices recover, and both developments would positively impact Chad’s external position. The medium-term outlook is subject to significant downside risks, including a potential deterioration of regional security, a persistent low level of oil prices and delays in the resumption of petroleum investment.
In that difficult context, my authorities remain committed to pursue the adjustment to the new oil price environment. To this end, they will pursue fiscal adjustment efforts to preserve fiscal and debt sustainability, while addressing the emerging vulnerabilities in the financial sector and advancing the structural reforms needed to diversify the economy and improve the business environment, consistent with the national development plan for 2016-2020 which is being finalized. The five-year plan will focus on strategic axes including economic diversification with an emphasis on agriculture and cattle, human capital, governance, and social protection.
Fiscal adjustment will continue in 2016, as reflected in the recently adopted revised budget for 2016, which is based on very prudent assumptions and includes pre-defined spending prioritization criteria. The revised budget envisages a further reduction in public expenditures but will preserve social spending. A contingency plan has been prepared in case the envisaged receipts from oil assets sale in the budget do not materialize in 2016.
The Chadian authorities will pursue actively the discussions with potential buyers, including through an international tender if the ongoing discussions are unsuccessful. The repayment of domestic arrears will be consistent with resource availability. The authorities will also tap the regional market to finance budget. They are 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. A quarterly cash flow has been prepared to calibrate spending and domestic financing in line with available liquidity. Over the medium-term, my authorities will intensify domestic revenue mobilization with reforms drawn from the recent technical assistance recommendations.
My authorities intend to press ahead with the fiscal reforms initiated over the past year. In particular, they will continue to improve the flow of oil sector information within the administration through a revitalization of the inter-ministerial committee established in that regard. They will also pursue the publication of reports on oil revenues in the context of the EITI. They will start producing debt management reports and medium-term borrowing plans during this year.
My authorities are determined to preserve financial stability and pursue the development of the financial sector. They recognize the central place of the government in the economy and the significant macro-financial implications of the successive fiscal policy responses to the oil price changes as well as the increasing risks to financial stability stemming from a bleaker economic outlook, as evidenced by the recent stressed tests conducted by the regional banking commission. Going forward, the Chadian authorities, in coordination with the regional banking commission, will monitor banks closely. Recognizing the importance of microfinance in increasing financial access and support individual empowerment, the national development plan for 2016–2020 gives a particular importance to the development of the microfinance sector through a dedicated strategy.
Fostering inclusive growth
My authorities will pursue reforms to improve the business climate to foster economic diversification and promote a more inclusive growth. Specifically, policies will focus on removing impediments to private sector development in order to increase the competitiveness and attractiveness of the country, in coordination with the private sector which has already identified possible actions in that regard. As already indicated, a special emphasis will be placed on the agriculture sector which my authorities believe presents enormous potential for the development of agribusinesses. In the same vein, the government will proceed with the reform of the judicial system over the next five years.
Chad is going through a very difficult period brought about by the massive oil price decline and security shocks. Policy responses to these shocks have been exceptional with notably a strong fiscal adjustment. Going forward, given the significant downside risks to an already bleak economic outlook and the need to pursue efforts to preserve security in the region, there remains very limited space for additional fiscal adjustment. The country is in desperate need of external support from all its partners to meet the additional obligations at a time of declining revenue. In this regard the Fund’s enhanced support will be crucial, given its catalytic role. The country also needs support in its efforts to strengthen stability in the region, which in their view is a top priority. Regional security is a public good that Chad cannot afford bearing alone. The authorities strongly believe that Chad deserves more assistance than it has received so far. Absent this assistance, the country will certainly not have the means to continue its efforts to fight terrorism and keep its economic and financial program on track. In this regard, the authorities expect further external assistance, including an increase in access to Fund resources as well as more flexibility as regards program design.