A. Background

Fluctuating oil revenues and pro-cyclical fiscal policy increased government borrowing, resulting in a high debt burden. Since Gabon is a member of the CFA monetary zone, government fiscal deficits had no lasting impact on inflation, interest rates and the exchange rate, because of the fixed exchange rate of the CFA franc to the French franc and the cointegration of prices in CFA countries and prices in France (Odedokun, 1997 and Nuven, 1994). However, the initial appreciation of the real exchange that followed the discovery of oil four decades ago raised the economy’s cost structure, which was detrimental to the development of non-oil exports. At the same time, oil rents inflated the size of an inefficient public sector in the economy; and an increased oil dependency gave rise to large variations in fiscal balances and high levels of government borrowing necessary to maintain expenditure initiated during boom years.⁶ The external debt burden, which represented only about 23 percent of government revenue in the years 1980-86, rose to 56 percent during 1987-95. Gabon had to resort to six debt reschedulings from Paris Club creditors between 1987 and 2000. Because these reschedulings were nonconcessional, the external debt service burden has remained high, reducing the resources available for the development of basic economic and social infrastructure, which are necessary for long-term development (Gerson, 1998, Loko and others, 2003).

A typical phenomenon in Gabon has been that during oil boom years large expenditure programs were initiated, but during subsequent periods of lower oil prices and lower government revenue, these programs were maintained even though they should have been cut back or postponed. The fiscal deficits recorded in the early 1970s, most of the 1980s, and the early 1990s were financed by recourse to external and domestic borrowing. The debt-to-GDP ratio increased from about 30 percent in the early 1970s to about 100 percent during 1998–99. Reflecting mainly stepped-up net repayments, the debt ratio has since then been on a declining trend and stood at about 76 percent of GDP at end-2002. While external debt has represented the bulk of public debt, domestic debt became important during the 1990s, averaging 20 percent of GDP in the second half of that decade. However, with the improvement in the government’s fiscal position, domestic debt was reduced to about 14 percent of GDP at end-2002. Foreign borrowing was arranged essentially at unfavorable commercial conditions, including high interest rates and short maturities.⁷ As a result, external debt service has become a heavy burden for Gabon’s development, representing over 10 percent of GDP and over 40 percent of government revenue during the period 1999-2002. Despite the large primary fiscal surpluses (averaging over 11 percent of GDP over this period), external payment arrears reached 8 percent of GDP at end-2002, requiring further debt rescheduling. Domestic borrowing included bank financing and the accumulation of payments arrears.^{8, 9}

B. Traditional Framework for Debt and Fiscal Sustainability

The analysis of fiscal sustainability determines whether the government can pursue indefinitely a given set of fiscal policies without future policy reversals (Zee, 1998; and Horne, 1991). In practice, fiscal policy has been deemed sustainable if it stabilizes the debt-to-GDP ratio.¹⁰ The current analysis uses indicators of fiscal sustainability developed by Blanchard and others (1990) in the context of member countries of the Organization of Economic Cooperation and Development (OECD) and builds on the debt dynamics developed by Buiter (1997):

where ΔD_t is the change in government debt (D_t - D_t-1), I_t the interest payments, B_t the primary balance, and r the nominal interest rate (assumed constant). The budgetary primary balance is the difference between government revenue and noninterest spending. Equation (1) indicates that the overall fiscal deficit (interest payments plus the budgetary primary balance, on the right-hand side) is financed by an increase in the stock of public debt (the left-hand side).

Equation (1) indicates that government fiscal deficits are financed by the contracting of new debt; the stock of debt is reduced when primary surpluses exceed interest payments. By dividing both sides of the equation by GDP (Y_t = (1+g)Y_t-1), where g is the nominal GDP growth rate (assumed constant), and after rearranging the variables, equation (1) leads to the following dynamic equation (lower cases are ratios to GDP):

where d and b are the debt and primary balance in terms of GDP.

Solving forward this first-difference equation leads to the intertemporal budget constraint that the stock of debt has to be equal to or less than the present discounted value of future primary fiscal balances (also known as the solvency condition):

Failure to meet this constraint will result either in an abrupt change in fiscal policy or a debt repudiation, high inflation, and real exchange rate depreciation, therefore suggesting that the current fiscal policies are not sustainable.

One indicator of fiscal sustainability is provided by the comparison of the actual primary balance with a “steady-state primary balance” (b^*) that would stabilize the ratio of debt to GDP at d_t-1, or Δd_t=0:

Equation (4) shows that, when growth is higher than the interest rate (implausible over the long run), the stock of debt could be stabilized while incurring primary fiscal deficits. Otherwise, primary fiscal surpluses would be needed to stabilize the debt-to-GDP ratio at the current level (d_t-1). Equation (5) gives the magnitude of the fiscal adjustment that would be required to stabilize the debt-to-GDP ratio. If this is not achieved, the country’s debt-to-GDP ratio would continue to increase above the current level at a rate equal to b^* - b_t = Δd_t; accordingly, the underlying fiscal policy would not be deemed sustainable.

A positive primary balance gap indicates the fiscal effort needed to stabilize the debt stock. A negative value indicates a budgetary margin. It should be noted that stabilizing the debt-to-GDP ratio at the existing level does not imply that the current level is desirable (see Section D below).

C. Assessing Gabon’s Fiscal Performance from 1991 to 2002

The above framework is applied to Gabon for the 1991-2002 period. Simulation results suggest that Gabon has made progress towards fiscal sustainability since 1994 (Table 1 and Figure 1). Primary balance gaps, which were positive from 1991 to 1993, became negative during most of the period since 1994 when the country embarked on a comprehensive adjustment program following the devaluation of the CFA franc. However, the reemergence of positive gaps in 1998 and to a lesser extent in 2001 is indicative of the fragility of Gabon’s fiscal adjustment. To dampen cyclical effects and estimate the fiscal adjustment required over the medium term, medium-term gaps (b^*-b₃) were constructed using three-year forward averages for the primary balance (b₃), based on the primary balances for the current year and the following two years. This indicator broadly confirms the finding reached using annual primary gaps.

Gabon: Estimated Primary Balance Gaps, 1991–2002

(In percent of GDP)

Citation: IMF Working Papers 2004, 030; 10.5089/9781451844948.001.A001

Sources: Gabonese authorities; and staff estimates.

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Gabon: Estimated Primary Balance Gaps, 1991–2002

(In percent of GDP)

Citation: IMF Working Papers 2004, 030; 10.5089/9781451844948.001.A001

Sources: Gabonese authorities; and staff estimates.

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Gabon: Estimated Primary Balance Gaps, 1991–2002

(In percent of GDP)

Citation: IMF Working Papers 2004, 030; 10.5089/9781451844948.001.A001

Sources: Gabonese authorities; and staff estimates.

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Table 1.

Gabon: Analysis of Fiscal and Debt Sustainability, 1991–2002

(In percent of GDP, unless otherwise indicated)

Sources: Gabonese authorities; and staff estimates and projections.

^1/Interest payments due in t divided by stock of debt at the end of t-1.

^2/b^* is the sustainable primary balance (allowing the stabilization of the debt ratio at d_t-1); (b^*-b) and (b^*-b₃) the short- and medium-term primary gaps.

Table 1.

Gabon: Analysis of Fiscal and Debt Sustainability, 1991–2002

(In percent of GDP, unless otherwise indicated)

	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002
Debt-to-GDP ratio at the end of t-1 (dt−1)	60	67	67	80	124	112	89	86	102	101	73	76
Primary balance (b)	4	1	1	5	11	9	8	-6	8	18	12	8
Primary balance, three-year average ahead (b3)	2	2	6	8	9	3	3	6	13	12	10	9
Interest rate (r) in percent 1/	9	9	11	13	7	7	7	8	7	7	12	6
Nominal GDP growth (g), in percent	-6	-3	3	52	6	18	7	-15	9	26	-5	0
Estimated primary balance gaps 2/
b*	10	8	5	-21	1	-11	1	23	-1	-15	12	4
b*-b	6	7	4	-25	-10	-19	-7	29	-9	-33	0	-4
b*-b3	8	6	-1	-29	-8	-14	-3	16	-14	-27	3	-5

Sources: Gabonese authorities; and staff estimates and projections.

^1/Interest payments due in t divided by stock of debt at the end of t-1.

^2/b^* is the sustainable primary balance (allowing the stabilization of the debt ratio at d_t-1); (b^*-b) and (b^*-b₃) the short- and medium-term primary gaps.

View Table

Table 1.

Gabon: Analysis of Fiscal and Debt Sustainability, 1991–2002

(In percent of GDP, unless otherwise indicated)

	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002
Debt-to-GDP ratio at the end of t-1 (dt−1)	60	67	67	80	124	112	89	86	102	101	73	76
Primary balance (b)	4	1	1	5	11	9	8	-6	8	18	12	8
Primary balance, three-year average ahead (b3)	2	2	6	8	9	3	3	6	13	12	10	9
Interest rate (r) in percent 1/	9	9	11	13	7	7	7	8	7	7	12	6
Nominal GDP growth (g), in percent	-6	-3	3	52	6	18	7	-15	9	26	-5	0
Estimated primary balance gaps 2/
b*	10	8	5	-21	1	-11	1	23	-1	-15	12	4
b*-b	6	7	4	-25	-10	-19	-7	29	-9	-33	0	-4
b*-b3	8	6	-1	-29	-8	-14	-3	16	-14	-27	3	-5

Sources: Gabonese authorities; and staff estimates and projections.

^1/Interest payments due in t divided by stock of debt at the end of t-1.

^2/b^* is the sustainable primary balance (allowing the stabilization of the debt ratio at d_t-1); (b^*-b) and (b^*-b₃) the short- and medium-term primary gaps.

Table 2.

Primary Balance Needed to Achieve and Maintain A Normative Debt-to-GDP Ratio (d_n)

(In percent of GDP, to be achieved in three years, from an initial level of 70 percent of GDP)

Source: Staff estimates and projections.

Table 2.

Primary Balance Needed to Achieve and Maintain A Normative Debt-to-GDP Ratio (d_n)

(In percent of GDP, to be achieved in three years, from an initial level of 70 percent of GDP)

		70	60	50	40	30	20
Interest rate=6 percent; nominal GDP growth=8 percent
	Annual primary balance needed to achieve dn ($\underset{¯}{b}$)	-1.3	2.1	5.5	8.9	12.3	15.7
	Annual primary balance needed to maintain dn (bn*)	-1.3	-1.1	-0.9	-0.7	-0.6	-0.4
Interest rate=6 percent; nominal GDP growth=5 percent
	Annual primary balance needed to achieve dn ($\underset{¯}{b}$)	0.7	4.0	7.3	10.5	13.9	17.2
	Annual primary balance needed to maintain dn (bn*)	0.7	0.6	0.5	0.4	0.3	0.2

Source: Staff estimates and projections.

View Table

Table 2.

Primary Balance Needed to Achieve and Maintain A Normative Debt-to-GDP Ratio (d_n)

(In percent of GDP, to be achieved in three years, from an initial level of 70 percent of GDP)

		70	60	50	40	30	20
Interest rate=6 percent; nominal GDP growth=8 percent
	Annual primary balance needed to achieve dn ($\underset{¯}{b}$)	-1.3	2.1	5.5	8.9	12.3	15.7
	Annual primary balance needed to maintain dn (bn*)	-1.3	-1.1	-0.9	-0.7	-0.6	-0.4
Interest rate=6 percent; nominal GDP growth=5 percent
	Annual primary balance needed to achieve dn ($\underset{¯}{b}$)	0.7	4.0	7.3	10.5	13.9	17.2
	Annual primary balance needed to maintain dn (bn*)	0.7	0.6	0.5	0.4	0.3	0.2

Source: Staff estimates and projections.

D. Achieving a Normative Debt-to-GDP Ratio

The analysis of fiscal sustainability based on the stabilization of the existing debt-to-GDP ratio is limited by the fact that it does not necessarily imply that the debt-to-GDP ratio would be stabilized at an optimal or desirable level.¹¹ A lower debt-to-GDP ratio may be justified by the need to improve the government’s credibility relative to the private sector (including successful access to capital markets), or to reduce the debt-service burden, so as to provide room for maneuvering for fiscal policy in its macroeconomic stabilization role. In particular, the prospects for oil revenue exhaustion in the case of Gabon would call for a reduction in the debt-to-GDP ratio to a level consistent with the expectations for non-oil revenue.

To reduce the debt-to-GDP ratio to a desirable level in year n (d_n), significant incremental primary surpluses will have to be generated each year until year n. Only when the desirable debt-to-GDP ratio has been reached, can the analysis developed above be applied. Expanding equation (2) to get d_n = γⁿd_o−b (1+ γ + γ²+…+ γ^n-1), where d_o is the initial debt-to-GDP ratio, one obtains the primary surplus ($\underset{¯}{b}$) required every year to reduce the debt-to-GDP ratio from d_o to d_n after n years:

where the first term in (6b) is the primary balance required to stabilize the debt-to-GDP ratio at the desirable level d_n and the second term in (6b) is the incremental fiscal effort required to reduce the debt-to-GDP ratio from d_o to d_n in n years.¹² When r=g (or γ=1), GDP growth eliminates the debt dynamics due to the interest rates so that $\underset{¯}{b}=(d_o-d_n)/n$ and b^* = 0.

The table below shows (i) the primary surpluses required to reduce the debt-to-GDP ratio from 70 percent to various desired levels in three years; and (ii) the primary balance needed to stabilize the debt-to-GDP ratio once the desirable level has been reached. For example, with an interest rate of 6 percent and a GDP growth rate of 5 percent, a primary surplus of some 17 percent of GDP would be required every year to reduce the debt-to-GDP ratio from 70 percent to 20 percent over a three-year period. Maintaining this level thereafter would require a primary surplus of some 0.2 percent of GDP every year.

A. Introduction

The traditional sustainability analysis has an additional limitation when the government revenue base is not permanent. For countries like Gabon, where the government budget is dominated by oil revenue, there is a need to have a forward-looking approach by considering the expected stream of oil revenue over time. In this regard, it is essential not to consider the income derived from oil as the accrual of revenue, but rather as a reduction in wealth associated with an exhaustible resource.¹³ This is particularly important for Gabon for which oil production is projected to be reduced by almost one-half over the next five years.¹⁴ The intertemporal government budget constraint given by equation (3) and the sustainable primary balance of equation (4) may be misleading in such a case, since the underlying levels of “sustainable” fiscal primary balance is underestimated (Alier and Kaufman, 1999). In fact, such a framework assumes that revenue, including oil revenue, would be collected indefinitely. Given the finite horizon for the exploitation of oil resources, this would require effective revenue diversification or enormous expenditure cuts, which would clearly be an unrealistic undertaking.¹⁵

Fiscal policy should aim at the replacement of oil resources by financial assets (including the public debt) and ensure intergenerational equity in the distribution of oil wealth. There are two ways to safeguard oil wealth, either by not exploiting the resource or by investing the value of oil production and consuming only all or part of the associated investment income. The decision would depend on future oil prices and the interest rates on the investment of oil resources.¹⁶ A forward-looking approach is needed to ensure that the government is not forced to revise its policies at the expense of future generations, when the oil wealth comes to exhaustion.¹⁷ Fiscal policy should aim at intergenerational equity, by setting aside part of oil revenue in earlier years to be shared with future generations when oil resources are much lower or exhausted. Spreading the spending of foreign exchange earnings from oil over time would also lead to a smoother path for the real exchange rate, since the depreciation eventually required when oil reserves are exhausted would start early on as financial reserves in foreign exchange are built.¹⁸ The problem at hand is, therefore, to find a sustainable path for the non-oil fiscal balance where deficits in later years can be financed by part of the oil revenue set aside in early years.¹⁹

It can be argued that investment in infrastructure, health, and education in the context of a growth and poverty reduction strategy help generate higher growth in the non-oil sector and adequate non-oil revenue for future generations.²⁰ A delicate balance will therefore have to be struck between the current investment needs and the constitution of savings for future generations. This balance will depend on a number of variables, including the time preference of the current generation,²¹ the information on the stock of oil reserves, and the period remaining until depletion, the return on financial investments versus the cost of borrowing, and the return on investment that depends on the country’s absorptive capacity and the ability of the current generation to use effectively oil resources.

B. A Framework for Fiscal Sustainability and Intergenerational Equity

Fiscal sustainability should be considered in the context of a comprehensive approach that aims at a progressive reconstitution of the government’s net wealth following the exhaustion of oil reserves. As in Barnett and Ossowski (2002), this section shows that optimal fiscal policy critically hinges on a careful targeting of the non-oil budgetary primary balance and a conversion of oil revenue into financial assets, so as to ensure a replacement of the oil wealth by financial assets. However, unlike in Barnett and Ossowski (2002) and Baunsgaard (2003), this paper does not assume the maintenance of the current net wealth. In view of the uncertainty associated with the estimation of the net wealth, the paper proposes a gradual fiscal adjustment of the non-oil primary balance that allows a progressive replacement of oil resources by financial assets, without imposing any specific path for non-oil revenue or government expenditure.²² In fact, the permanent income hypothesis underlying the unchanged wealth model assumes a rate of the time preference that allows for consumption smoothing over time, in the sense that the ratio of government expenditure to non-oil GDP would be constant, with non-oil revenue growing at the same rate as non-oil GDP. Experience shows that government spending in Gabon has been subject to major waste and distortions, which are epitomized by low non-oil sector growth and the poor social indicators. A case could therefore be made that, with improved expenditure management and the greater focus on poverty reduction, in the short to medium term the government could set spending (essentially centered on economic infrastructure and human capital development) at a level higher than that required by the permanent income hypothesis (spending would, however, decline in relation to existing spending levels, reflecting improved efficiency). The associated higher non-oil GDP growth would help reconstitute government wealth over the long run. The paper also differs in the sense that it introduces a target for the debt-to-non-oil GDP ratio.

The framework below derives a path for oil and non-oil wealth and the associated non-oil primary balances, while attempting to illustrate the choices faced by the government in the management of declining oil resources and of its heavy non-oil debt:

where A is the public debt (A<0), F the non-oil primary balance, To the oil revenue, Yo the transfer of oil-based revenue (direct budgetary allocations of oil revenue or/and transfer from the oil savings fund, or Fund for Future Generations, FFG), ρ the return on FFG resources, and Vo the discounted future oil revenues, a measure of the oil wealth.²³

Oil wealth and oil revenue. To estimate oil wealth, it is assumed that annual oil production (O_t) changes at a constant rate (-1<e<0, i.e., a decline), the tax rate τ on oil resources is constant, and a parameter λ determines the annual rate of change in world oil prices (P_t).²⁴ Under these conditions, oil revenue and oil wealth in current year t and beyond are, respectively

where To_t = τP_tO_t is the oil revenue in period t.²⁵ From relations (8a) and (8b), oil revenue in period t+j equals to:

Transfers to the budget of oil-based income. These income transfers include direct budgetary oil revenue and transfers from the FFG. It is assumed that the oil wealth, Vo_t, is distributed equitably across generations through equal income transfers per capita (y^*): ²⁶

Equation (9d) indicates that (i) the higher the oil wealth the larger the oil-based transfer; (ii) the higher the difference between the interest rate and the population growth, the higher is the oil-based transfer; and (iii) the oil-based income transfer will increase at a rate equal to η, the population growth rate. In terms of non-oil GDP, the part of oil redistributed is equal to

When non-oil GDP grows at the same rate as the population (η=g), relation (9e) equals

and the oil-based income transfers will be constant in terms of non-oil GDP.

Fund for Future Generations. The FFG is funded by the net amount of oil revenue and transfers to the budget, in addition to earnings on the fund’s resources. Using equations (7c), (8c) and (9d), the path for FFG is as follows:

After a few rearrangements, it can be shown that, as a ratio of non-oil GDP, the position of the Fund for Future Generations evolves according to the following path: ²⁷

with Ω=(r-η)/(1+r); Θ=(1+ρ)/(1+η); Ψ=(1+λ)(1+e); Π=(1+ρ)/Ψ; Φ=1-Ψ/(1+r).

The first term of the right side of (10b) describes developments in production while the second term refers to intergenerational distribution. When r = ρ, expression (10b) reduces to

When r = η, the second term of the right side of (10b) equals zero, since there is no oil-based income redistribution. All oil resources are channeled to and remain in the Fund for Future Generations. Accordingly, ffg is determined essentially by developments in oil production and prices (Ψ) as well as the return on the resources of FFG (ρ). In that case, (10b) reduces to the following expression:

Considering that oil production is on a declining trend (-1<e<0) and given plausible values for λ and g, over the long run the second term of equation (10c) will tend to zero. Provided that the return on FFG resources (ρ) is higher than non-oil GDP growth (g), the investment impact could override the negative effect of production and, over the long run, the position of the FFG could tend to or even exceed v_ot, the ratio of oil wealth relative to non-oil GDP in the base year. This suggests that a proper accumulation of financial assets in the Fund for Future Generations could help reproduce the oil wealth, which would correspond to the perfect transformation of oil wealth into financial capital.

Non-oil debt. For the dynamics of the debt and the net financial position excluding oil-based wealth, we turn to the earlier fiscal sustainability analysis (equations 6a-b), replacing the primary balance $\underset{¯}{{b}}$ by the non-oil primary balance F_t plus the transfers of the oil-based income to the budget (Yo_t^*). A target for the debt-to-non-oil GDP ratio (a_t+n) to be reached in year t+n is also assumed, leading to a path for the debt in equation (11b):

with f_t and yo_t^* representing F_t and Yo_t^* expressed in terms of the non-oil GDP.

The first term in (11a) is the overall primary balance (including oil-based transfers, or direct oil revenue and transfers from the FFG) required to stabilize the debt-to-non-oil GDP ratio at the desirable level a_t+n, while the second term is the incremental fiscal effort to get to the desired level in n years.

Non-oil primary balance. The non-oil primary balance (f_t, likely a deficit in early years) is determined residually once the political choices about sustainable and intergenerationally equitable oil transfers (yo_t^*) and the desirable debt-to-non-oil GDP ratio have been made. The non-oil primary balance is considered as an essential indicator of long-term fiscal policy sustainability and a key determinant of the total net wealth.²⁸ Fiscal sustainability should be analyzed by assessing whether the underlying fiscal policy in the non-oil sector is strong enough to sustain a viable fiscal position in the long run, especially after the depletion of oil reserves.

Equation (11a) indicates that $f_t=\underset{¯}{b}-{{\mathit{yo}}_t}^{*}$, namely that (i) the higher the targeted debt reduction the higher should be the non-oil primary balance; and (ii) the higher the oil wealth (thus the per capita constant oil-based income transfer), the lower the non-oil primary balance. In the case non-oil GDP and population grow at the same rate (η=g), f_t and yo_t^* will be constant ($f=\underset{¯}{b}-y{o}^{*}$ ). Without the objective to reduce the debt-to-non-oil GDP ratio ($\underset{¯}{b}=0$ ), the country could generate non-oil primary deficits equal to the oil-based income transfer (f_t = - yo_t^*). In this particular case, assessing fiscal sustainability would consist of ensuing that the actual non-oil primary deficit is less than or equal to the oil-based income transfer yo_t^*.²⁹ In the case where there is no reduction in the debt-to-non-oil GDP ratio ($\underset{¯}{b}=0$) and non-oil GDP and population grow at a same rate (g = η), the country could generate a constant non-oil primary deficit ratio equal to the oil-based income transfer ratio (f = - yo^*).

C. Application to Gabon

Fiscal prospects with no policy change. Gabon’s current non-oil financial position is negative and consists mainly of the domestic and external debt, representing about 132 percent of non-oil GDP at end-2002 (76½ percent of GDP).³⁰ During 2003-33, oil production is assumed to decline on average by 6 percent annually (e = -0.06), and existing oil reserves are assumed to be virtually depleted by 2032.³¹ Non-oil GDP nominal growth (g) is projected at 5 percent, based on deep structural reforms aimed at non-oil economic diversification.³² In the same period, the assumption is that oil prices remain unchanged in nominal terms (or λ=0) at the average world price for 2002 of US$25.2 per barrel, but still above the average price recorded during 1979–2002 (US$22.3 per barrel), and medium-term projections in the September 2003 WEO (US$21-25 per barrel).³³ Assuming a long-term market nominal interest rate (r) of 6 percent, the oil wealth Vo_t (or discounted oil revenue) is estimated at 268 percent of non-oil GDP (156 percent of GDP) at end-2002, and is projected to decline continuously in the future and to disappear practically after year 2032 following the virtual exhaustion of oil reserves. The total net wealth position at end-2002 is estimated at about 136 percent of non-oil GDP (Table 3).

Table 3.

Gabon: Analysis of Fiscal and Debt Sustainability, 2002–33

(In percent of non-oil GDP, unless otherwise indicated)

Source: Staff estimates and projections

^1/Each year, 10 percent of oil revenue is allocated to the FFG and invested at a rate of 6 percent.

Table 3.

Gabon: Analysis of Fiscal and Debt Sustainability, 2002–33

(In percent of non-oil GDP, unless otherwise indicated)

		2002	2005	2010	2015	2020	2025	2030	2033
Non-oil GDP in billions of CFA francs		2,005.9	2,322.1	2,963.6	3,782.4	4,827.5	6,161.2	7,863.4	9,102.9
Oil production, in millions of tons		12.6	10.4	7.7	5.6	4.1	3.0	2.2	1.8
Debt, with no policy change		-131.8	-112.7	-123.5	-169.1	-236.7	-319.8	-416.2	-477.6
Non-oil primary balance		-16.9	-16.9	-16.9	-16.9	-16.9	-16.9	-16.9	-16.9
Oil revenue		30.4	21.8	12.5	7.2	4.1	1.5	0.8	0.5
Overall primary balance		13.5	4.9	-4.4	-9.7	-12.8	-15.4	-16.1	-16.4
Market nominal interest rate (percent)		6.0
Non-oil GDP nominal growth (percent)		5.0
Number of years before oil reserve depletion		30.0	27.0	22.0	17.0	12.0	7.0	2.0	0.0
Oil price changes (percent)		0.0
Oil production growth (percent)		-6.0
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
Total asset (without policy change)		136.4	79.7	-12.8	-105.5	-200.1	-298.8	-404.1	-468.9
With the constitution of the FFG1/
Non-oil primary balance		-16.9	-16.9	-16.9	-16.9	-16.9	-16.9	-16.9	-16.9
Primary balance, excluding the FFG		13.5	2.7	-5.6	-10.4	-13.2	-15.6	-16.2	-16.4
Oil revenue		30.4	21.8	12.5	7.2	4.1	1.5	0.8	0.5
	Annual allocation to the budget	30.4	19.6	11.3	6.5	3.7	1.3	0.7	0.5
	Annual allocation to the FFG	0.0	2.2	1.3	0.7	0.4	0.1	0.1	0.1
FFG position		0.0	7.4	15.8	21.3	25.0	27.6	29.5	30.5
Debt		-131.8	-120.1	-139.3	-190.4	-261.6	-347.4	-445.7	-508.1
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
Total assets		136.4	79.7	-12.8	-105.5	-200.1	-298.8	-404.1	-468.9
Sensitivity to the FFG return
FFG return (percent)		2.0
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
FFG position		0.0	7.1	13.6	16.0	16.3	15.4	13.8	12.8
Debt		-131.8	-120.1	-139.3	-190.4	-261.6	-347.4	-445.7	-508.1
Total assets		136.4	79.4	-15.1	-110.7	-208.8	-311.0	-419.8	-486.6
FFG return (percent)		8.0
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
FFG position		0.0	7.6	17.1	24.6	31.1	37.3	43.5	47.5
Debt		-131.8	-120.1	-139.3	-190.4	-261.6	-347.4	-445.7	-508.1
Total assets		136.4	79.9	-11.5	-102.2	-194.0	-289.1	-390.1	-451.9
FFG return (percent)		10.0
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
FFG position		0.0	7.7	18.5	28.4	38.8	50.5	64.3	74.1
Debt		-131.8	-120.1	-139.3	-190.4	-261.6	-347.4	-445.7	-508.1
Total assets		136.4	80.0	-10.1	-98.3	-186.3	-275.9	-369.3	-425.3

Source: Staff estimates and projections

^1/Each year, 10 percent of oil revenue is allocated to the FFG and invested at a rate of 6 percent.

View Table

Table 3.

Gabon: Analysis of Fiscal and Debt Sustainability, 2002–33

(In percent of non-oil GDP, unless otherwise indicated)

		2002	2005	2010	2015	2020	2025	2030	2033
Non-oil GDP in billions of CFA francs		2,005.9	2,322.1	2,963.6	3,782.4	4,827.5	6,161.2	7,863.4	9,102.9
Oil production, in millions of tons		12.6	10.4	7.7	5.6	4.1	3.0	2.2	1.8
Debt, with no policy change		-131.8	-112.7	-123.5	-169.1	-236.7	-319.8	-416.2	-477.6
Non-oil primary balance		-16.9	-16.9	-16.9	-16.9	-16.9	-16.9	-16.9	-16.9
Oil revenue		30.4	21.8	12.5	7.2	4.1	1.5	0.8	0.5
Overall primary balance		13.5	4.9	-4.4	-9.7	-12.8	-15.4	-16.1	-16.4
Market nominal interest rate (percent)		6.0
Non-oil GDP nominal growth (percent)		5.0
Number of years before oil reserve depletion		30.0	27.0	22.0	17.0	12.0	7.0	2.0	0.0
Oil price changes (percent)		0.0
Oil production growth (percent)		-6.0
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
Total asset (without policy change)		136.4	79.7	-12.8	-105.5	-200.1	-298.8	-404.1	-468.9
With the constitution of the FFG1/
Non-oil primary balance		-16.9	-16.9	-16.9	-16.9	-16.9	-16.9	-16.9	-16.9
Primary balance, excluding the FFG		13.5	2.7	-5.6	-10.4	-13.2	-15.6	-16.2	-16.4
Oil revenue		30.4	21.8	12.5	7.2	4.1	1.5	0.8	0.5
	Annual allocation to the budget	30.4	19.6	11.3	6.5	3.7	1.3	0.7	0.5
	Annual allocation to the FFG	0.0	2.2	1.3	0.7	0.4	0.1	0.1	0.1
FFG position		0.0	7.4	15.8	21.3	25.0	27.6	29.5	30.5
Debt		-131.8	-120.1	-139.3	-190.4	-261.6	-347.4	-445.7	-508.1
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
Total assets		136.4	79.7	-12.8	-105.5	-200.1	-298.8	-404.1	-468.9
Sensitivity to the FFG return
FFG return (percent)		2.0
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
FFG position		0.0	7.1	13.6	16.0	16.3	15.4	13.8	12.8
Debt		-131.8	-120.1	-139.3	-190.4	-261.6	-347.4	-445.7	-508.1
Total assets		136.4	79.4	-15.1	-110.7	-208.8	-311.0	-419.8	-486.6
FFG return (percent)		8.0
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
FFG position		0.0	7.6	17.1	24.6	31.1	37.3	43.5	47.5
Debt		-131.8	-120.1	-139.3	-190.4	-261.6	-347.4	-445.7	-508.1
Total assets		136.4	79.9	-11.5	-102.2	-194.0	-289.1	-390.1	-451.9
FFG return (percent)		10.0
Oil wealth (discounted oil revenue)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
FFG position		0.0	7.7	18.5	28.4	38.8	50.5	64.3	74.1
Debt		-131.8	-120.1	-139.3	-190.4	-261.6	-347.4	-445.7	-508.1
Total assets		136.4	80.0	-10.1	-98.3	-186.3	-275.9	-369.3	-425.3

Source: Staff estimates and projections

^1/Each year, 10 percent of oil revenue is allocated to the FFG and invested at a rate of 6 percent.

The baseline projections in Table 3 indicate that, even though fiscal policy has been strengthened in recent years so as to significantly reduce the non-oil primary deficit, the latter still represents almost 17 percent of non-oil GDP in 2002. If current policies were to continue—that is, maintaining the deficit in terms of non-oil GDP—the net wealth position of the government would become increasingly negative from year 2010 onward, reaching 469 percent of non-oil GDP by year 2033, corresponding to the debt ratio. A strong adjustment in the non-oil primary balance would be needed to avoid such a deterioration in the government’s net wealth position, indicating that current fiscal policy is unsustainable.

Fund for Future Generations under no policy change. The government could save part of its oil revenue so as to compensate for the future depletion of oil reserves. This could be achieved through Gabon’s Fund for Future Generations (FFG), legally created in 1998.³⁴ Its statutes state that 10 percent of the budgeted oil revenue is to be transferred to the FFG until a minimum capital of CFAF 500 billion (about 25 percent of the 2002 non-oil GDP) is attained. Such an arrangement would be an improvement (Table 3, second panel). However, the simulations at an interest rate of 6 percent show that the amounts to be set aside under the FFG statutes would not allow a replacement of oil revenue in later years. With the FFG attaining only 30½ percent of non-oil GDP by 2033, the stock of debt would continue to increase, and the net wealth position would reach −469 percent of non-oil GDP by year 2033, as under the baseline scenario. To avoid such a deterioration in net wealth, considerably larger fiscal adjustment would be needed.

The results are sensitive to the assumptions on various parameters, notably on the return on the FFG resources.³⁵ For example, with a nominal return of 10 percent, the FFG position and the total net wealth would be about 44 percentage points of non-oil GDP higher than for a return of 6 percent by year 2033. Therefore, it is important to maximize the return on FFG resources, since it would not make much sense to keep poorly remunerated funds when the country continues to face challenging development needs and high interest rates on its debt. However, even with a high remuneration of the current fund, Table 3 shows that, with the serious deterioration in total net wealth, fiscal policy would continue to be unsustainable.

Possible scenario for a sustainable fiscal path. The following forward-looking scenario, based on the discussion above on fiscal sustainability and intergenerational equity, incorporates an equitable distribution of oil wealth across generations (namely, keeping the oil-based income transfers constant per capita across generations), as developed in equations (7-11).³⁶ Simulations of a sustainable path for the non-oil primary balance, the net transfers from the FFG, and the overall primary balance (and, hence, the change in the financial wealth) were conducted under the following assumptions: (i) a nominal growth rate of non-oil GDP of 5 percent; (ii) a population growth rate of 2.4 percent, equal to the growth rate of the oil-based income transfers; (iii) a nominal interest rate on public debt of 6 percent; (iv) a nominal return on FFG resources equal to nominal interest rate on public debt; and (v) a target for the debt-to-non-oil GDP ratio of 20 percent to be reached by year 2033.

Although the 20 percent target for the debt-to-non-oil GDP ratio is somewhat arbitrary, it is a reasonable indicator of Gabon’s long-term fiscal consolidation.³⁷ Sustainable debt levels are usually estimated by discounting future primary balances, as in equation (3a), based on the extrapolation of primary balances recorded in the past (IMF, 2003b). However, as discussed above, this method is not appropriate for countries dependent on exhaustible resources. In view of the projected decline in government revenue, the issue of debt intolerance stressed by Reinhart, Rogoff, and Savastano (2003) needs to be considered, including the possibility that the government could lose credibility and access to financing if the level of debt is perceived as too high by potential lenders. Past primary balances (when the entire oil revenue was transferred to the budget) are not a good measure of Gabon’s capacity to borrow in the post-oil era, given the projected decline of oil revenue. Accordingly, a measure for the “sustainable” primary balance b^* was constructed, based on the long-term oil revenue projected over the period 2000–33. The long-term oil revenue, which should have been transferred to the budget, represents only 42 percent of the oil revenue during the period 2000–02. On this basis, Gabon’s “sustainable” debt level d^* was estimated based on the average primary balance b^* (average non-oil primary balance, f, plus the assumed long-term oil revenue) during 2000–02, the average implicit interest rate on the existing debt, r, and the average growth for the non-oil GDP, g. ³⁸ The maximum debt limit that the country could sustain amounts to some 21 percent of non-oil GDP, which is close to the proposed target. ³⁹

According to equation (11a), the debt reduction objective would entail primary surpluses equivalent to 4.4 percent of non-oil GDP during the period 2003-33 (Table 4). The oil-based income transfer is calculated from equations (9d-e) above at about 8⅔ percent of non-oil GDP in 2003 (some US$200 per capita, about 30 percent of projected oil revenue in 2003). Given that non-oil GDP is assumed to grow faster than the population, the non-oil GDP ratio of oil-based transfers will decline gradually over time to some 4 percent by year 2033. As a result, the sustainable fiscal path implies that the non-oil primary deficit would have to decline gradually from about 4 percent of non-oil GDP in 2003 to around zero around year 2031. After 2033, the fiscal effort required to sustain a much lower non-oil GDP debt ratio (20 percent at end-2033) would be reduced (a primary surplus of 0.2 percent of non-oil GDP), and the country could run non-oil deficits financed by the oil-based income transfers.

Table 4.

Gabon: A Path for the Sustainable Replacement of Oil Resources, 2002-33 ^1/

Source: Staff estimates and projections.

^1/Assuming λ=0; e=-6%; r= 6%; ρ= 6%; g = 5%; a_t+n = 20%; and η = 2.4%.

Table 4.

Gabon: A Path for the Sustainable Replacement of Oil Resources, 2002-33 ^1/

		2002	2005	2010	2015	2020	2025	2030	2033
		Est.	Proj.
Policy variables		(In percent of non-oil GDP)
Oil revenue		30.4	21.8	12.5	7.2	4.1	2.4	1.4	1.0
Primary balance ($\underset{¯}{b}$ for at+n =20 %)		13.5	4.4	4.4	4.4	4.4	4.4	4.4	4.4
Oil transfers (yo*t from 2003)		30.4	8.4	7.5	6.6	5.8	5.1	4.5	4.2
	Direct budgetary allocations	30.4	8.4	7.5	6.6	0.0	0.0	0.0	0.0
	Transfers from the FFG	0.0	0.0	0.0	0.0	5.8	5.1	4.5	4.2
Non-oil primary balance (ft)		-16.9	-4.1	-3.1	-2.2	-1.4	-0.7	-0.1	0.2
Outcomes
Total debt (at)		-131.8	-122.3	-106.0	-88.9	-70.9	-52.1	-32.3	-20.0
FFG position (ffgt)		0.0	47.8	90.9	106.5	107.3	100.5	89.9	82.9
Oil wealth (vot)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
Total net wealth (wt)		136.4	117.9	95.6	81.3	73.0	69.4	69.7	71.6
		(In millions of U.S. dollars)
Total debt		-3,801	-4,085	-4,517	-4,833	-4,921	-4,612	-3,653	-2,618
FFG position		0	1,596	3,876	5,795	7,450	8,900	10,171	10,849
Oil wealth		7,736	6,425	4,716	3,461	2,540	1,864	1,368	1,136
Total net wealth		3,935	3,937	4,075	4,423	5,069	6,152	7,886	9,367

Source: Staff estimates and projections.

^1/Assuming λ=0; e=-6%; r= 6%; ρ= 6%; g = 5%; a_t+n = 20%; and η = 2.4%.

View Table

Table 4.

Gabon: A Path for the Sustainable Replacement of Oil Resources, 2002-33 ^1/

		2002	2005	2010	2015	2020	2025	2030	2033
		Est.	Proj.
Policy variables		(In percent of non-oil GDP)
Oil revenue		30.4	21.8	12.5	7.2	4.1	2.4	1.4	1.0
Primary balance ($\underset{¯}{b}$ for at+n =20 %)		13.5	4.4	4.4	4.4	4.4	4.4	4.4	4.4
Oil transfers (yo*t from 2003)		30.4	8.4	7.5	6.6	5.8	5.1	4.5	4.2
	Direct budgetary allocations	30.4	8.4	7.5	6.6	0.0	0.0	0.0	0.0
	Transfers from the FFG	0.0	0.0	0.0	0.0	5.8	5.1	4.5	4.2
Non-oil primary balance (ft)		-16.9	-4.1	-3.1	-2.2	-1.4	-0.7	-0.1	0.2
Outcomes
Total debt (at)		-131.8	-122.3	-106.0	-88.9	-70.9	-52.1	-32.3	-20.0
FFG position (ffgt)		0.0	47.8	90.9	106.5	107.3	100.5	89.9	82.9
Oil wealth (vot)		268.2	192.4	110.6	63.6	36.6	21.0	12.1	8.7
Total net wealth (wt)		136.4	117.9	95.6	81.3	73.0	69.4	69.7	71.6
		(In millions of U.S. dollars)
Total debt		-3,801	-4,085	-4,517	-4,833	-4,921	-4,612	-3,653	-2,618
FFG position		0	1,596	3,876	5,795	7,450	8,900	10,171	10,849
Oil wealth		7,736	6,425	4,716	3,461	2,540	1,864	1,368	1,136
Total net wealth		3,935	3,937	4,075	4,423	5,069	6,152	7,886	9,367

Source: Staff estimates and projections.

^1/Assuming λ=0; e=-6%; r= 6%; ρ= 6%; g = 5%; a_t+n = 20%; and η = 2.4%.

During the first five years of this scenario, transfers to the FFG would represent over half of oil revenue; from 2008 onward, the bulk of the decreasing oil revenue would be transferred to the budget to finance non-oil primary deficits. Initially, the projected non-oil primary deficits would be financed by oil revenue allocated directly to the budget and, from 2017 onward, by transfers from the FFG. As shown in Figure 2 and Table 4, such a strategy would allow a reduction in the debt-to-non-oil GDP ratio while helping in reconstituting the initial net wealth position.

Gabon: Possible Policy Options and Fiscal Sustainability, 2002–33

Citation: IMF Working Papers 2004, 030; 10.5089/9781451844948.001.A001

Source: Staff estimates and projections.

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Gabon: Possible Policy Options and Fiscal Sustainability, 2002–33

Citation: IMF Working Papers 2004, 030; 10.5089/9781451844948.001.A001

Source: Staff estimates and projections.

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Gabon: Possible Policy Options and Fiscal Sustainability, 2002–33

Citation: IMF Working Papers 2004, 030; 10.5089/9781451844948.001.A001

Source: Staff estimates and projections.

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The debt would be reduced from 132 percent of non-oil GDP at end-2002 to below 70 percent (one of the five CEMAC’s convergence criteria) by the year 2021, well before the projected depletion of oil reserves.⁴⁰ The FFG position would be at about US$9 billion by 2025 and reach almost US$11 billion in 2033 (or 83 percent of non-oil GDP).⁴¹ Total net wealth would increase to some US$ 6 billion by 2025 and to over US$ 9 billion by year 2033.

Sensitivity analysis. In view of the inherently uncertain nature of the model, in particular associated with the volatility of oil prices, stochastic simulations would better help policymakers judge the associated risks. Accordingly, the path for the non-oil primary balance proposed under the current framework should be seen as a minimum policy objective.⁴² Nevertheless, alternative scenarios based on less favorable developments in a number of key variables suggest that the findings under the baseline scenario would not be fundamentally altered. For instance, lower oil prices and production would necessitate a higher non-oil primary balance, while the position of the FFG and net wealth would be lower than projected. However, although the results are sensitive to the various assumptions (oil wealth is particularly sensitive to developments in oil production and prices), the thrust of the analysis is not altered significantly; with an annual decline of 1 percent in nominal oil prices, oil-based transfers would be reduced by about ½ of 1 percent of non-oil GDP, while the positions of the FFG (which would require an equivalent adjustment in the non-oil primary balance) and net wealth would be lower by 7–8 percentage points of non-oil GDP. Appendix I shows that less favorable conditions with regard to non-oil GDP growth and FFG return would not change fundamentally the thrust of the analysis. Appendix II also indicates that, under a scenario with a less ambitious debt-reduction target, the results would not fundamentally differ from those under the baseline scenario.