The Chadians authorities are thankful for the Fund’s valuable support over the past years. The constructive engagement with staff has been instrumental in helping Chad cope with the daunting policy challenges facing the country. Indeed, implementation of Chad’s ECF-supported program has been adversely affected by the oil and security shocks, which prompted dramatic spending cuts and other severe adjustment measures. This difficult situation and the associated social tensions contributed to delayed reviews and the occurrence of misreporting. In close consultation with Fund staff, the Chadian authorities have taken the corrective measures to address this incident. They look forward to continued Fund financial and technical support to restore macroeconomic stability and promote economic recovery.
Recent Developments and the 2014-17 Program
The Chadian economy is still suffering the impact of the drastic contraction in oil revenue between 2014 and 2016. The sharp reduction of government revenue paired with a heavy debt service burden have resulted in significant cuts in government spending. The government’s fiscal position was further worsened by the security situation and Chad’s contribution to the fight against terrorism in the region, while also facing a humanitarian crisis for hosting more than 700,000 refugees, displaced persons and returnees. The combination of these adverse developments has caused social tensions and a sharp contraction in economic activity in 2016.
Real oil GDP and real non-oil GDP contracted by 8.4 percent and 6 percent respectively in 2016. After contracting for a second year in a row – real non-oil GDP was reduced by 2.9 percent in 2015, the slowdown resulted in massive layoffs in oil companies, accumulation of domestic arrears and a virtual halt in construction activities, one of the most important economic sectors. In addition to a weak domestic demand, challenges posed by security issues to trade with neighboring countries led to about 1 percent deflation in 2016 on average. The developments in the first quarter of 2017 show no major improvement. The vicious cycle of contraction in non-oil economic activity, non-oil revenue, and government spending has resulted in domestic and external payment arrears and adversely impacted banks. Furthermore, the low oil receipts have impacted the external position.
The Chadian authorities have demonstrated a strong commitment to the 2014-17 ECF arrangement despite the challenging context of exogenous shocks. They have taken the adjustment measures in constant collaboration with staff. Most quantitative performance criteria and structural benchmarks were met through June 2016. The deepening of the crisis and the dire economic situation affected program implementation. Furthermore, the accumulation of external payments arrears caused by the fall in government revenue and the weak coordination between cash and debt management services facilitated the occurrence of the case of misreporting during the combined third and fourth reviews.
The Chadian authorities acknowledge that the information they reported on external payments arrears during the third and fourth reviews was incorrect; and they have since reported the correct amount due to the World bank, the African Development Bank and to other creditors. To prevent the accumulation of new arrears and cases of misreporting in the future, the authorities have taken the following correctives measures: i) improving interagency coordination to better track and report external debt payments; ii) strengthening the cash flow monitoring system; iii) updating the debt management database; and iv) implementing an external arrear clearance plan.
The authorities are confident that the new framework agreed upon with staff will pave the way for a smooth implementation of their medium-term policies. They are committed to pursuing prudent fiscal management, enhancing public financial management, strengthening public debt management and further structural reforms to revive the economy and bolster its resilience to shocks.
Outlook and Policies Under the New ECF Arrangement
The outlook is expected to improve gradually on the back of a combination of decisive structural reforms and the enhancement of the fiscal position. In particular, non-oil activity should recover starting in late 2017, supported by the authorities’ planned actions to repay domestic arrears, help improve the health of the banking sector, diversify the economy, and by an expected pickup in foreign financed investment. As a result, real GDP is projected to grow from 0.6 percent in 2017 to 2.4 percent next year and keep pace over the medium-term. Inflation should pick up from negative territories and reach 0.2 percent in 2017 on the path to the 3 percent CEMAC-wide target in 2020.
The Chadian authorities have formulated a new economic program in the face of the protracted shocks and subsequent balance of payments needs. While striking a balance between domestic adjustment efforts and external financing, the new program is centered on a strategy whose building blocks include: (i) avoiding unnecessary spending cuts while maintaining fiscal prudence and allocating resources for domestic arrears clearance; (ii) reestablishing debt sustainability by restructuring external commercial debt; (iii) focusing on non-oil revenue mobilization to support gradual medium term adjustment; and (iv) reducing reliance on domestic financing and liquidity pressure on banks.
Fiscal policy and public financial management reforms
Enhancing fiscal policy and public financial management is at the core of the authorities’ agenda. They are committed to preserving the gains of past adjustment efforts consented during the past two years while bringing investment and social spending gradually to required levels. In that regard, efforts will be made in gradually reducing the wage bill by controlling new hiring, freezing wage increases and reducing bonuses of civil servants. As well, transfers and subsidies will be further streamlined and domestic arrears cleared gradually.
Fiscal policy for the rest of the 2017 focuses on tax and customs reforms, while medium-term efforts will target the broadening of the tax base. The authorities have prepared a revised budget for 2017 - taking account of the adverse developments since mid-. It targets a widening of non-oil primary fiscal deficit to 4.6 percent of non-oil GDP in 2017 before improving gradually over the medium-term. Adjustment efforts will hinge on the revenue side while the spending envelope will remain tight throughout the medium-term. Revenue enhancing measures will include widening the tax base primarily through limiting exemptions, improving customs and tax administration, and simplifying taxes. The early yields from the new tax on oil and the 18 percent excise tax on communications are promising and should contribute to boost tax revenue by 0.3 percent of non-oil GDP in 2017. Oil revenue is also projected to improve, reflecting the planned restructuring of the Glencore debt.
The authorities are determined to initiate deep reforms in the tax and customs administrations to enhance non-oil revenue mobilization, which remains weak compared to peers. The authorities will issue a decree imposing a moratorium on new exemptions, while identifying exemptions that could be removed. They will also step up efforts to improve and modernize the customs administration, including establishing a single customs window at Ngueli, and modernize the excise goods management system for tobacco, beer, alcoholic beverages and soft drinks. The overall adjustment and reforms effort, including the repayment of domestic arrears, is expected to have a positive impact on economic activity.
Over the medium-term, the authorities will further broaden the tax base, implement an effective VAT refund system, simplify the personal income tax system and enhance property tax revenue collection.
In the area of public financial management, reforms aim at improving fiscal controls and avoiding the accumulation of domestic arrears, including by strengthening the expenditure chain and cash management. In this vein, the use of the computerized system will be enhanced to improve control, monitoring and transparency. At the same time, spending executed through emergency procedures will be significantly reduced going forward.
Furthermore, an audit of unverified expenditure payment arrears expected to be conducted before the end of the year, will inform a comprehensive repayment strategy to be developed by the authorities. The strategy will include less-costly modalities such as securitization and repayment will be prioritized based on its economic social and financial impact. The authorities are also taking steps to further enhance transparency in the oil sector. In this vein, while remaining in compliance with the EITI, they will prepare and publish a quarterly oil sector note that includes information on financial flows that affect budget projections of oil revenue.
Staff DSA concludes that Chad is currently in debt distress and that debt is unsustainable without external commercial debt restructuring. The authorities concur with staff assessment and are cognizant of the heavy toll that the debt burden is taking on public finances and on the overall economy. The authorities are committed to achieving a deep restructuring of public debt. The restructuring aims at reducing the service burden, especially over the next four years, as well as its overall burden, with the view to achieving debt sustainability. The authorities have recruited debt advisors in this regard, and expect to reach agreement on a restructuring by September 2017. They are also improving the institutional framework and the debt management capacity, through reforms to strengthen interagency coordination, cash flow and debt management databases.
Going forward, the authorities would like to reaffirm their commitment to debt sustainability. The adverse shocks facing the economy have regrettably drained government revenue, prompted accumulation of payment arrears. The authorities are confident that their restructuring paired with efforts to revive economic activity and restore financial viability will contribute to bringing debt back to a sustainable level.
Monetary policy and financial sector reforms
The Chadian authorities’ adjustment efforts will be supported by monetary policy actions and financial sector reforms undertaken at the regional level. The combination of national and regional policies should help to restore macroeconomic stability and external sustainability. On their side, the Chadian authorities have reaffirmed their commitment to contribute to the improvement in the external position by gradually building-up government deposits at the BEAC. As for the financial sector, the priority is to address the liquidity pressures experienced by some domestic banks. In this respect, the authorities are working with the BEAC and regulators on a framework for liquidity assistance to Chadian banks, as reported in the staff report.
Other structural reforms
Bolstering structural reforms to advance economic diversification ranks high on the authorities’ agenda. Indeed, the current economic crisis has fostered a national consensus on the need to diversify the economy, and the authorities have subsequently made diversification one of the main pillars of the 2017–21 National Development Plan (NDP). For the period ahead, efforts will be made on the front of improving the business environment with the view to strengthen the private sector and make it the main source of job creation. In this regard, the institutional reforms will particularly address corruption and the inception of a special court will help curb economic and financial crimes.
We concur with staff recommendations on the need to deepen the financial sector and enhance financial sector inclusion to support the diversification agenda. In the short term, the authorities expect their actions in the fiscal area, notably the clearance of arrears, to have a positive impact on banks’ balance sheets and liquidity position. Going forward, measures will be taken to improve the regulatory framework. As well, financial inclusion will be enhanced, including through the development of mobile banking.
Efforts to promote economic diversification will be further stepped up with the implementation of the NDP, which is being finalized. It aims notably at lifting the structural impediments to growth and realizing the country’s potential in sectors such as agriculture and livestock, mining, and artisanal crafting. The authorities are expecting a large participation in the donor conference they are organizing in September 2017 to raise official financing and private sector investment.
Under the 2014-17 ECF-supported program, Chad has made important strides in macroeconomic reforms, thus achieving the HIPC completion point in April 2015. This positive momentum was severely compromised by a combination of oil price and security shocks, a refugee crisis and a heavy debt burden. The authorities have responded forcefully with difficult and successive adjustments, including drastic cuts in investment and social spending. They have also taken corrective measures to address the misreporting incident.
In the face of protracted adverse developments and the subsequent balance of payment needs, the authorities and staff have agreed on a reform and policy agenda that will help stabilize the economy and accelerate economic recovery over the medium-term. The authorities are committed to pursuing with their adjustments efforts with the view to reviving their economy and contribute to the overall regional stability.
In this endeavor, we would appreciate the Board support to the authorities’ request for a three-year arrangement under the Extended Credit Facility and cancellation of the current arrangement.