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Chad: Request for Disbursement Under the Rapid Credit Facility and Cancellation of the Extended Credit Facility Arrangement—Debt Sustainability Analysis

Author(s):
International Monetary Fund. African Dept.
Published Date:
August 2020
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Chad Joint Bank-Fund Debt Sustainability Analysis1
Risk of external debt distressHigh2
Overall risk of debt distressHigh
Granularity in the risk ratingSustainable
Application of judgementNo
Macroeconomic projectionsThe previous DSA in April 2020 reflected reduced growth and significant deterioration in fiscal and external balances. The current DSA reflects a further downward revision to growth of 0.7 percentage point in 2020, with a deterioration of 2.3 percentage points in fiscal and 0.9 percentage points in external balances. The shock is still expected to be temporary and a gradual recovery is forecast in 2021.
Financing strategySince the last DSA, Chad has identified significant donor support for 2020 and oil revenue has surprised on the upside. The authorities are expected to request a successor IMF arrangement later this year.
Realism tools flaggedLarge unexpected increase in public debt in the last 5 years.
Mechanical risk rating under the external DSAHigh
Mechanical risk rating under the public DSAHigh

The debt coverage has expanded since the last DSA (April 2020) to include domestic arrears in the domestic debt stock (5.8 percent of GDP). Previously domestic arrears only appeared in the contingent risk analysis. Accordingly, “other elements of general government” in the contingent liability tailored test has been reduced to zero

With a score of 2.47, Chad’s composite indicator, which is based on the October 2019 WEO and the 2018 CPIA, signals a weak debt-carrying capacity.

The debt coverage has expanded since the last DSA (April 2020) to include domestic arrears in the domestic debt stock (5.8 percent of GDP). Previously domestic arrears only appeared in the contingent risk analysis. Accordingly, “other elements of general government” in the contingent liability tailored test has been reduced to zero

With a score of 2.47, Chad’s composite indicator, which is based on the October 2019 WEO and the 2018 CPIA, signals a weak debt-carrying capacity.

This debt sustainability analysis (DSA) updates the joint World Bank-IMF analysis of April 2020 to reflect the most recent outlook. Debt remains sustainable under the baseline forecast, but uncertainty remains high. For instance, the outlook includes large unfinanced fiscal and external financing gaps for several years. Historically the authorities have been able to service debt at baseline forecast levels, and program performance under the ECF suggests a strong commitment to obligations. In sum, the debt sustainability picture has not appreciably changed since April. Chad’s risks of external and overall debt distress remain high.

The macroeconomic outlook has deteriorated with the pandemic’s more pronounced presence in Chad. In 2020, growth is modestly weaker, but Q1 oil revenues—which are based on 2019 oil exports—have surprised to the upside and donor support has crystalized. In particular, the World Bank i) disbursed (US$ 16.95 million) to prevent, detect, and respond to health threat posed by COVID-19; ii) is preparing a COVID-19 education project; and iii) is preparing a Development Policy Operation in response to the short and long term challenges faced by the country. In the medium term, oil price forecasts have changed very little since the last DSA. The debt sustainability analysis is based on projected continued fiscal prudence and an increase in non-oil revenues after the pandemic crisis abates The RCF request comprises the only substantial change on the external debt side.

Chad requested treatment under the Debt Service Suspension Initiative (DSSI) from all creditors, public and private, and intends to adhere to the commitments noted in the LOI. The DSA assumes all official bilateral creditors from the G-20 and Paris Club, plus Kuwait and the UAE, will provide debt reprofiling in 2020, totaling CFAF 7.5 billion. The authorities have begun clearing arrears in accordance with the government clearance strategy adopted in January. Clearance in 2020 may be financed through a CFAF 85 billion, 8-year loan arrangement with banks and (ii) a series of 3- to 5-year treasury bonds amounting to CFAF 25 billion. Thereafter the DSA assumes cash payment of arrears. Finally, this assessment assumes debt relief from the IMF of CFAF 8.2 billion across 2020 and 2021 under the Catastrophe Containment window of the CCRT through April 2022 (subject to the availability of CCRT resources for the next 18 months).

Under the baseline, three of the external debt sustainability indicators stay below their respective thresholds, but the debt-to-revenue ratio breaches its threshold from 2021 through 2027. Under stress scenarios—in particular the customized oil price shock and the exports shock—indicators approach levels seen during Chad’s last episode of debt distress. Total public debt vulnerabilities are elevated, and under the baseline the pandemic pushes the present value (PV) of public debt-to-GDP ratio above its benchmark from 2020 to 2024.

Following the restructuring in 2018, the new Glencore debt contract contingencies have allowed lower debt service to cushion low oil prices and should provide additional cushion through 2023 under the baseline, with additional cushion capacity remaining.1 However, the contingency mechanisms could become exhausted in 2021 under the conditions of the customized oil price shock stress test, which would likely lead to a sharp rise in Chad’s debt service-to-revenue ratio, potentially pushing the country back in a situation of debt distress.

Chad: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2020–2030

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department. The tailored commodity price stress test presented here does not account for the contingency mechanisms in the Glencore debt as Text Figure 1 does.

Chad: Indicators of Public Debt Under Alternative Scenarios, 2020–2030

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

Chad: Drivers of Debt Dynamics—Baseline Scenario

1/ Difference between anticipated and actual contributions on debt ratios.

2/ Distribution across LICs for which LIC DSAs were produced.

3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.

Chad: Realism Tools

Table 1.Chad: External Debt Sustainability Framework, Baseline Scenario, 2009–2040(In percent of GDP, unless otherwise indicated)
Source;: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r- g -ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.3/ Includes exceptional financing (I.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Source;: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r- g -ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.3/ Includes exceptional financing (I.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.Chad: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–2040(In percent of GDP, unless otherwise indicated)
Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central, state, and local governments, central bant Definition of external debt is Currency-based.2/ The primary balance assumes debt relief under the CCRT as a capital grant (subject to availability of resources).3/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.4/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.5/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.6/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.7/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central, state, and local governments, central bant Definition of external debt is Currency-based.2/ The primary balance assumes debt relief under the CCRT as a capital grant (subject to availability of resources).3/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.4/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.5/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.6/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.7/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.Chad: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–2030(In percent)
Projections 1/
20202021202220232024202520262027202820292030
PV of debt-to GDP ratio
Baseline26.027.326.925.925.223.521.018.717.216.215.4
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019–2039 2/26.026.827.026.325.925.125.124.524.725.626.7
B. Bound Tests
B1. Real GDP growth26.031.134.233.032.129.926.823.821.920.719.7
B2. Primary balance26.027.928.126.525.022.619.717.115.414.213.2
B3. Exports26.034.044.743.242.139.836.834.031.829.327.2
B4. Other flows 3/26.030.633.031.931.029.126.524.122.320.719.5
B6. One-time 30 percent nominal depreciation26.034.329.728.727.825.822.819.918.217.316.6
B6. Combination of B1-B526.039.341.940.539.437.133.930.828.326.324.6
C. Tailored Tests
C1. Combined contingent liabilities26.026.925.723.822.219.817.014.412711.610.7
C2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price26.031.234.533.532.430.127.024.021.619.618.0
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Threshold3030303030303030303030
PV of debt-to-exports ratio
Baseline99.295.488.082.578.872663.457.153.350.850.0
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019–2039 2/99.293.788.483.680.977.775.674.976.480.286.5
B. Bound Tests
B1. Real GDP growth99.295.488.082.578.872663.457.153.350.850.0
B2. Primary balance99.297.591.984.478.169.859.452247.644.442.8
B3. Exports99.2166.7281.1264.2252.7237.0213.5200.1189.1176.6169.5
B4. Other flows 3/99.2106.8108.0101.396.990.180.073.668.965.063.1
B6. One-time 30 percent nominal depreciation99.295.477.572.669.363.554.748.544.743.142.8
B6. Combination of B1-B599.2154.4112.3168.7161.3150.3133.8123.5114.6107.9104.5
C. Tailored Tests
C1. Combined contingent liabilities99.293.984.375.769.361.151.244.039.436.434.6
C2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price99.2131.7130.5118.9109.898.283.575.168.763.159.7
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Threshold140140140140140140140140140140140
Debt service-to-exports ratio
Baseline6.07.17.77.77.56.87.88.25.74.44.3
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019–2039 2/6.07.68.69.09.28.610.511.67.85.75.6
B. Bound Tests
B1. Real GDP growth6.07.17.77.77.56.87.88.25.74.44.3
B2. Primary balance6.07.17.77.77.56.77.78.05.74.44.2
B3. Exports6.010.416.217.116.715.117.117.815.216.816.4
B4. Other flows 3/6.07.17.87.97.87.08.08.46.65.95.8
B6. One-time 30 percent nominal depreciation6.07.17.77.57.46.67.78.15.63.53.5
B6. Combination of B1-B56.09.212.812.812.511.312.913.512.09.99.7
C. Tailored Tests
C1. Combined contingent liabilities6.07.17.67.67.46.67.68.05.54.24.1
C2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price6.08.89.49.49.07.98.99.37.36.56.3
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Threshold1010101010101010101010
Debt service-to-revenue ratio
Baseline11.518.018.317.017.715.817.717.41208.37.7
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019–2039 2/11.519.220.519.921.620.123.724.716.211.010.1
B. Bound Tests
B1. Real GDP growth11.520.523.421.722.620.122.522.215.310.69.8
B2. Primary balance11.517.918.317.117.715.717.517.011.98.57.6
B3. Exports11.518.620.219.820.518.320.119.816.616.715.4
B4. Other flows 3/11.518.018.717.618.316.318.217.913.911.310.4
B6. One-time 30 percent nominal depreciation11.522.623.020.921.819.421.821.614.88.57.9
B6. Combination of B1-B511.520.523.421.722.520.122.322.019.214.513.4
C. Tailored Tests
C1. Combined contingent liabilities11.517.918.216.817.415.417.317.011.68.07.4
C2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price11.523.924.522.922.919.520.519.314.912.211.0
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Threshold1414141414141414141414
Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.Chad: Sensitivity Analysis for Key Indicators of Public Debt, 2020–2030
Projections 1/
20202021202220232024202520262027202820292030
PV of Debt-to-GDP Ratio
Baseline43.541.939.837.535.733.730.327.325.223.722.4
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019–2039 2/4343434445464646474951
B. Bound Tests
B1. Real GDP growth4384939291908886858585
B2. Primary balance4345454241393532302826
B3. Exports4347555250484441383533
B4. Other flows 3/4345464342393633302826
B6. One-time 30 percent nominal depreciation4387837976726763595654
B6. Combination of B1-B54344454343423936343331
C. Tailored Tests
C1. Combined contingent liabilities4357545249474239363432
C2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price4377818588898786858585
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a..
Public debt benchmark3535353535353535353535
PV of Debt-to-Revenue Ratio
Baseline235.8275.9243.1211.1209.0195.7169.2147.4140.8123.9114.5
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019–2039 2/236280259244257258247240252247251
B. Bound Tests
B1. Real GDP growth236532532489506498465441455427420
B2. Primary balance236295272238237224196172166146135
B3. Exports236312335293292276245219211183166
B4. Other flows 3/236297280245243229200176169148135
B6. One-time 30 percent nominal depreciation236587514453451426380343334298279
B6. Combination of B1-B5236291270240248240216193189169158
C. Tailored Tests
C1. Combined contingent liabilities236378332290288270236209200176162
C2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price236609579550568547496453466436428
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Debt Service-to-Revenue Ratio
Baseline56.559.755.855.564.063.367.466.162.454.752.1
A. Alternative Scenarios
A1. Key variables at their historical averages in 2019–2039 2/5661535671728287877878
B. Bound Tests
B1. Real GDP growth5665687081828889877876
B2. Primary balance5659595961596464615451
B3. Exports5660565765646867656158
B4. Other flows 3/5660565665646867645754
B6. One-time 30 percent nominal depreciation5658585465646867615249
B6. Combination of B1-B55660585867667070665856
C. Tailored Tests
C1. Combined contingent liabilities5659545259586364605351
C2. Natural disastern.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
C3. Commodity price5673697090899085827573
C4. Market Financingn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

Under the Glencore debt restructuring agreement, for the period 2021–2026 mandatory amortization could be deferred up to US$75 million mainly if (i) government oil export receipts are lower than Glencore debt service, and (ii) oil prices are lower than US$42 per barrel.

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