Gabon
Background Paper

This paper provides background material to the IMF staff report for the 1995 Article IV Consultation with Gabon. It provides an overview of Gabon’s economic and financial performance since independence, highlighting the five distinct phases and the economic strategies pursued by the authorities. The paper presents an overview of developments in the oil sector, and analyzes the structure of the balance of payments. The paper also reviews the public enterprise sector and its financial performance.

Abstract

This paper provides background material to the IMF staff report for the 1995 Article IV Consultation with Gabon. It provides an overview of Gabon’s economic and financial performance since independence, highlighting the five distinct phases and the economic strategies pursued by the authorities. The paper presents an overview of developments in the oil sector, and analyzes the structure of the balance of payments. The paper also reviews the public enterprise sector and its financial performance.

I. Introduction

Gabon, located on the equator on the west coast of Africa, covers an area of 267,667 square kilometers and shares borders with Equatorial Guinea and Cameroon in the north and the Congo in the east and south. With a population estimated at 1.04 million in 1994, which is increasing at a rate of 2.5 percent a year, Gabon’s population density (3.8 inhabitants per square kilometer) is one of the smallest in the world. More than half of the population is urbanized and lives in the three main cities of the country: Libreville (the capital city), Port-Gentil (the principal petroleum producing center), and Franceville (the mining center). Gabon is a member of the CFA franc zone and its currency, the Franc de la Communauté Finançière de l’Afrique Centrale (CFAF), issued by the regional central bank Banque des Etats de l’Afrique Centrale (BEAC), is pegged to the French franc at the rate of CFAF 1 = F 0.01. 1/ Gabon is also a member of the Economic and Monetary Community of Central Africa (CEMAC) and the Customs Union of Central African States (UDEAC), as well as several other regional organizations; it is also a member of the Organization of Petroleum Exporting Countries (OPEC).

After gaining independence from France on August 17, 1960, Gabon opted for a single-party system of government, which prevailed through 1993. However, opposition to the one-party rule started in the early 1980s with the formation of the Mouvement de Redressement National (Morena), the major opposition party, grew in importance throughout the decade, and culminated in the legalization of all political parties in early 1990. The first multiparty presidential elections, held in December 1993, were won by President Bongo, who has been in power since November 1967. The election result was disputed by the opposition parties, however, prompting demonstrations and civil unrest. In response, negotiations involving all political parties were held in Paris in September 1994 to chart a new political direction for the country. The resulting agreement (Accords de Paris) provided for the formation of a broad-based transitional coalition government, with the participation of members of the opposition, and for amendments to the national constitution. The coalition government was to organize a series of elections: municipal elections in October 1995 and parliamentary elections in 1996, followed by presidential elections in 1998. As agreed under the Accords de Paris, a new constitution was put to a vote and was approved by an overwhelming majority in a national referendum held on July 23, 1995.

Gabon is well endowed with natural resources, including timber, manganese, uranium, and oil; Gabon is the third largest oil producer in sub-Saharan Africa, after Nigeria and Angola. Since the mid-1970s, the oil sector became the mainstay of the economy and accounted for up to 44 percent of GDP, 80 percent of export earnings, and 60 percent of government revenue by 1994. The manufacturing sector, heavily protected from foreign competition, has been geared mainly to satisfying domestic needs and accounted for only 12 percent of GDP in 1994. Agriculture has been on a downward trend since independence, declining from about 15 percent of GDP in the 1960s to 4 percent in 1994. The development of agriculture has been constrained by the effects of a massive rural exodus, a deteriorating communications network, and the lack of a strong agricultural tradition. Thus, Gabon has become quite dependent on imported food, both from neighboring countries and from overseas.

Notwithstanding its natural resources endowment--which, combined with the very small size of its population, has placed Gabon at the top of the per capita income bracket in sub-Saharan Africa (US$3,770 in 1994)--the country is confronted with deep-rooted financial and structural imbalances and is still striving to promote a sustainable economic and social development, as well as to diversify its productive base. Like many other countries, Gabon has succumbed to the Dutch disease whereby an export boom of a particular natural resource leads to the crowding out of other industries in the tradable goods sector. In Gabon’s case, the “oil syndrome” contributed in the mid-1970s and early 1980s to acute shortages of skilled labor, wage increases in the private and public enterprise sectors that exceeded by far the productivity gains, and a migration from rural to urban areas, as well as immigration from neighboring countries.

This paper provides background material to the staff report for the 1995 Article IV consultation with Gabon (EBS/95/131). Section II provides an overview of Gabon’s economic and financial performance since independence, highlighting the five distinct phases and the economic strategies pursued by the authorities. Section III presents an overview of developments in the oil sector. Section IV analyzes the structure of the balance of payments, and Section V reviews the public enterprise sector and its financial performance. The appendices summarize Gabon’s tax, and exchange and trade systems, and provide a set of statistical tables.

II. Overview of Economic Developments Since Independence

Gabon’s economic and financial performance since independence has gone through five distinct phases, reflecting to a large extent the different cycles in world oil markets and domestic oil output and changes in the stance of macroeconomic policies.

  • During the first phase, which corresponds to the period 1960 to 1972, economic performance was characterized by relatively stable growth, supported by sound and prudent macroeconomic policies. This period also saw a progressive transformation of an economy dominated by forestry and agriculture into one dominated by mining and oil.

  • In the second phase, covering the period 1973 to 1976, oil assumed a dominant role in the economy as the engine of growth. Gabon recorded an economic boom, fueled by the expansion in oil production at a time when oil prices skyrocketed following the first oil shock, and the accompanying strong expansion in public expenditures.

  • The third phase (1977-85) was, for the most past, a period of adjustment in response to the collapse of the boom in 1977-78. Gabon embarked upon a multiyear adjustment program supported by a precautionary extended arrangement from the Fund, following the successful completion of a 12-month stand-by arrangement in 1978/79. During this period, however, oil markets experienced a second shock, with prices soaring in 1979/80, which led the Gabonese authorities to relax their adjustment efforts. The easing of the world oil prices in U.S. dollar terms during 1980-85 was more than compensated by the sharp strengthening of the dollar against other major currencies; as a result, oil prices in CFA franc terms rose steeply during this period.

  • The fourth phase, extending from 1986 to 1993, was marked by the adoption of a strategy focused on internal adjustment in the context of a series of programs supported by the Fund and the World Bank. Although some positive results were achieved under these programs, the internal adjustment strategy proved inadequate to correct the internal and external financial imbalances confronting the Gabonese economy and to put it back on a sustained growth path.

  • The fifth phase began in 1994 with the adoption of a comprehensive adjustment program, which was underpinned by the devaluation of the CFA franc, after its peg to the French franc had been maintained for almost a half century. Indeed, recognizing the limits of the internal adjustment strategy pursued over the past several years, the Gabonese authorities decided, in close collaboration with the other partners of the CFA franc zone, to devalue the CFA franc by 50 percent against the French franc, effective January 12, 1994. Following a satisfactory performance in 1994, Gabon has broadened its adjustment strategy in a medium-term framework.

1. Economic and financial performance through 1972

Gabon inherited at independence a modest economy with a narrow productive base that was dominated by the exploitation of forestry products and extractive activities. During the pre-oil, era spanning the years 1960 to 1972, 1/ economic performance was relatively stable and macroeconomic policies were broadly sound. Real GDP growth averaged 7.2 percent a year (Table 1). 2/ Inflation, as measured by the consumer price index for African households, remained moderate throughout the period, at less than 5 percent with the exception of 1963 and 1964, when it reached 7.7 percent and 5.9 percent, respectively. Political stability and the economic system of “planned liberalism” adopted by the Government provided an environment conducive to private investment, which amounted to 36 percent of GDP by 1972. Fiscal policy was, for most of this period, prudent, notwithstanding a virtual doubling of government expenditure as a ratio to GDP to 31 percent by 1972; this expansion was financed in part by higher government revenue. The government overall budget balance recorded a surplus of 2.8 percent of GDP in 1960 and remained in surplus until the mid-1960s, and then shifted to a deficit during the second half of the decade. This deficit increased gradually, reaching 4.4 percent of GDP by 1972. Monetary developments were characterized by a buildup of government deposits with the banking system, while broad money grew steadily, in line with the growth in nominal GDP. The external current account balance was in surplus during most of this period. External public debt remained modest in relation to GDP until 1969, at less than 7 percent, but rose steeply to 42 percent by 1972.

Table 1.

Gabon: Selected Economic and Financial Indicators, 1960–72

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Source: Direction Generale de l’Economie, 25 ans d’economie gabonaise, Libreville, December 1986.

The rapid expansion in extractive activities and the discovery and coming on stream of new oil fields led to a progressive transformation of a rural economy into one dominated by mining and oil activities. Oil production increased from 0.8 tons in 1960 to 6.3 tons in 1972. The share of agriculture and forestry in GDP declined from 28 percent in 1960 to 13 percent by 1972, while the share of the mining and oil sector doubled from 16 percent of GDP to 32 percent of GDP over the same period.

2. Economic and financial performance during the oil shocks, 1973-85

The Gabonese economy recorded a rapid growth during most of this period, driven by a rapid expansion of the oil sector and the accompanying strong increase in both government current and investment expenditure. However, domestic output became more vulnerable to external shocks, which caused the economy to fluctuate significantly on a year-to-year basis, alternating economic booms and recessions.

a. The economic boom, 1973-76

The Gabonese economy expanded rapidly during this period, spurred by growing activities in the oil sector, which benefitted from the effects of the first oil price shock, and by the ensuing substantial increase in government expenditure. Oil production increased from 7.6 tons in 1973 to 11.3 tons in 1976 (Table 2). At the same time, world oil prices quadrupled from US$3.1 per barrel in 1973 to US$11.8 per barrel in 1976 (Charts 1 and 2). As a result, annual real GDP growth accelerated from 7.2 percent during the period 1960-72 to 23.3 percent during 1973-76. Non-oil GDP grew by 14.2 percent a year, compared with an annual average growth of 5.1 percent in the preceding period, reflecting the impact of major public investment projects, which fueled activities in the construction and infrastructure sectors. The contribution of the oil sector to GDP rose from less than 25 percent of GDP in 1973 to 30 percent in 1976.

Table 2.

Gabon: Selected Economic and Financial Indicators, 1973–85

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Source: Direction Generate de l’Economie, 25 ans d’economie gabonaise, Libreville, December 1986.
CHART 1
CHART 1

GABON OIL PRODUCTION AND PRICES

Citation: IMF Staff Country Reports 1995, 129; 10.5089/9781451813845.002.A001

Source: Data provided by the Gabonese authorities.
CHART 2
CHART 2

GABON OIL EXPORT PRICES

Citation: IMF Staff Country Reports 1995, 129; 10.5089/9781451813845.002.A001

Source: Data provided by the Gabonese authorities.

Developments in the fiscal sector paralleled developments in oil production. On the revenue side, the share of oil revenue grew from 18 percent of total government revenue before the first oil shock to 56 percent by 1977, contributing to an increase in total government revenue of 11 percentage points, from 22 percent of GDP in 1972 to 33 percent in 1977. On the expenditure side, government consumption also rose sharply, notably on account of higher wage and benefit payments to a rapidly expanding civil service. Total expenditure surged from 31 percent of GDP in 1972 to 55 percent in 1977, exceeding substantially the expansion in government revenue, driven by a steep rise in capital outlays; public investment rose from less than 4 percent of GDP in 1972 to 23 percent in 1977. Within the public investment programs, top priority was given to the construction of the Trans-Gabon railway, which was intended to enhance the exploitation of the country’s vast forestry resources by making unexploited areas reachable. As a result, the overall budget deficit widened markedly from 4.4 percent of GDP in 1972 to 22 percent of GDP by 1977. To finance the expansionary budgetary policies, the Government turned increasingly to the banking system, shifting from a net creditor position equivalent to 29.4 percent of the beginning-of-period broad money in 1973, to a net debtor position equivalent to 32.2 percent of the beginning-of-period broad money in 1977. Broad money growth accelerated to an annual average of 71 percent, above the annual nominal GDP growth of 65 percent, contributing to an acceleration in inflation from 7.5 percent in 1973 to 16.3 percent in 1977. However, with the boom in oil exports, the external current account position shifted from a deficit of 4 percent of GDP in 1972 to a surplus of 0.4 percent of GDP in 1977.

The development of extractive activities in the oil and mining sectors affected the structure of the economy in several ways. First, it gave rise to the development of a substantial service sector and a massive rural exodus. Second, the redistribution of oil rents favored a narrow urban formal sector at the expense of rural areas, thus widening the gap in the standards of living and stimulating the migration to urban areas. Third, it increased the vulnerability of the economy to external shocks and subjected the economy to large fluctuations in output and prices. Fourth, and more important, it brought about a sharp hike in oil revenues that enabled the Government to embark upon an ambitious investment program, expand the public sector, and implement a generous incomes policy for civil servants and other public employees. The substantial growth in public spending was financed not only by the oil windfalls, but also by heavy domestic and external borrowing on nonconcessional terms.

b. The collapse of the economic boom and adjustment efforts, 1977-85

The economic boom gave way to a protracted recession, which started in 1977 and deepened in 1978--with the economic activity contracting by 21 percent in 1977 and 28 percent in 1978, owing to a sharp drop in public and private investment--before bottoming-out in 1979 with the advent of the second oil price shock. Oil production dropped from 11.3 tons in 1976 to 7.7 tons by 1981, because of the depletion of some older fields. However, the economy recovered from the recession, helped by the second oil price shock, recording an annual average growth of 3.3 percent during the period 1980-85, a rate substantially below that recorded during the period 1973-76.

To address the deteriorating economic and financial situation, the authorities adopted during the period 1978-82 stabilization programs supported by Fund resources. The broad objectives of the programs were to achieve: (i) an orderly, sustainable, and noninflationary growth; (ii) a gradual diversification of the productive base; and (iii) a reversal of financial and external imbalances. These programs were underpinned by restrictive fiscal, incomes, and credit policies, and by public enterprise reforms. Implementation of the 1978/79 program was facilitated by the windfalls of the second oil price shock, resulting in a turnaround in the overall fiscal balance, which recorded a surplus of almost 7 percent in 1980. Taking advantage of the improved budgetary position, the Government gradually reduced its external debt as well as its indebtedness vis-à-vis the domestic banking system. As a result, the outstanding external public debt stock fell from 55 percent in 1978 to 21 percent in 1984, before rising to 34 percent in 1985.

To consolidate the progress made under this program, the authorities adopted an Interim Plan for 1980-82, again with support from the Fund. However, with world oil prices continuing to rise in CFA franc terms, financial discipline was relaxed. Consequently, the fiscal situation deteriorated rapidly, moving in 1983 to deficits that widened to 4.5 percent of GDP by 1985. These deficits were financed again by public external borrowing and, to a lesser extent, by domestic bank credit; as a result, external public debt rose sharply to 34 percent of GDP by 1985.

c. Macroeconomic policies during 1973-85

Macroeconomic policy during this period shifted from the earlier prudence to an expansionary stance, while state involvement in the economy became pervasive. With the rise in world oil prices and the increase in fiscal revenues that ensued, the Government embarked on an ambitious public investment program, focusing mainly on infrastructure projects. The Government’s aim under its development strategy was to accelerate economic growth through a modernization and diversification of the economy. To this end, oil revenue was redistributed through a rapidly growing public sector and a loose public expenditure stance by the Central Government. Based on the expectation that oil prices and extraction rates would keep rising, the Government supplemented oil revenue with external borrowing for financing its ambitious spending plans. Overall, the Government invested more than CFAF 2,500 billion between 1973 and 1985, to promote a more balanced structure of production, enhance efficiency, and stimulate future production in the non-oil sector; yet these objectives were not met, owing largely to serious weaknesses in both the design and the implementation of investment projects. In addition, political considerations influenced the choice of location of many investment projects, with insufficient attention to economic rationale. For instance, large agro-industrial parastatals-- the linchpins of the diversification strategy--were situated in remote locations where labor was in short supply and transportation costs from urban centers were exorbitant, resulting in negative returns on investment.

In line with its strategy to promote domestic industries and state participation in the economy, the Government introduced complex regulations, encompassing import protection, price controls, export taxation, and investment incentives. These regulations resulted in high and dispersed rates of effective protection for local producers and distorted the allocation of factors of production. Furthermore, the Government enacted restrictive labor laws, which reduced factor mobility and created barriers to entry.

The public enterprise sector expanded rapidly, as the Government used oil revenue to control many sectors of the economy, mainly for the purpose of achieving economic and social objectives. The Government became the principal employer, and by 1985 one out every two salaried workers in the formal sector was employed by the Government or in the public enterprise sector. Performance of the public enterprise sector was generally poor during this period, owing to a variety of factors, including lack of financial discipline, excessive government interference, unqualified and/or surplus staff, along with a shortage of skilled staff at critical levels, undercapitalization, poor investment decisions, and inappropriate pricing and marketing policies. 1/ The lack of rigor and accountability in the management of public enterprises and the weak financial discipline gave rise to a complex web of cross-debt and payments arrears between the Central Government, public enterprises, and the private sector; this greatly impeded the efficiency of public enterprises. Sheltered behind high protective barriers, these enterprises were artificially kept afloat by government subsidies. The high costs of goods and services produced by the public enterprises has hampered Gabon’s competitiveness. At the same time, the high wage policy pursued in this sector contributed to wage inflation, with spillover effects on wages in the rest of the economy.

The expansionary policies pursued by the Government had led to major internal and external financial imbalances and rising inflationary pressures. When world oil prices started to decline in the mid-1980s, Gabon had fallen into a debt trap with a heavy external indebtedness, saddled with unproductive public investment projects and bloated and inefficient public enterprises.

3. The internal adjustment strategy, 1986-93

The internal adjustment strategy pursued by the authorities from 1986 to 1993 was developed against the backdrop of a sharp and abrupt drop in world oil prices in 1986 that brought to an end the period of relative economic prosperity and sent Gabon for the second time into a protracted economic crisis. World oil prices were halved, from US$27 per barrel in 1985 to US$13.8 per barrel in 1986. As a result, government oil revenue declined by almost a third compared with 1985, causing the budget deficit to widen from 4.5 percent of GDP in 1985 to 12.8 percent in 1986. The collapse of oil prices in 1986 and the ensuing contraction of activity in the oil sector contributed to a decline of the overall economic activity, with real GDP falling by 7 percent in that year and by a further 13 percent in 1987 (Table 3, and Charts 3 and 4). Exports declined by almost 60 percent and the external current account deficit soared to 27 percent of GDP. The suddenness and the extent of the crisis highlighted not only the vulnerability of the economy to exogenous shocks, but also brought to light the structural weaknesses and the lack of diversification of the economy; the large size of the public administration, with its unsustainable high wage policy; the inefficiency of public enterprises; and the high external indebtedness and the associated heavy debt service payments burden.

Table 3.

Gabon: Selected Economic and Financial Indicators, 1986–94

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Source: Data provided by the Gabonese authorities.
CHART 3
CHART 3

GABON DEVELOPMENTS IN OUTPUT AND EMPLOYMENT

Citation: IMF Staff Country Reports 1995, 129; 10.5089/9781451813845.002.A001

Source: Data provided by the Gabonese authorities.
CHART 4
CHART 4

GABON PRICE DEVELOPMENTS

(Annual percentage change)

Citation: IMF Staff Country Reports 1995, 129; 10.5089/9781451813845.002.A001

Source: Data provided by the Gabonese authorities.

a. Objectives and policies

Faced with a rapidly worsening financial situation, the Government adopted a number of economic reform programs during the period 1986-93, which were supported by Fund resources and by adjustment loans from the World Bank and the African Development Bank. 1/ Gabon had graduated from the World Bank in 1977, but became eligible again for IBRD borrowing, following the decline in per capita income and the severe economic and financial crisis triggered by the collapse in world oil prices in 1986. The main objectives of the reform efforts were to restore financial and external viability and to return to a more balanced and noninflationary growth path, while promoting the diversification of the economy over the medium term. To achieve these objectives, the programs called for restrictive demand management and supply-oriented measures, through a tightening of the fiscal, incomes, and credit policies, as well as the implementation of a range of structural reforms.

Fiscal adjustment was aimed at raising government savings and reducing the overall deficit through revenue-raising and expenditure-reducing measures, particularly cuts in capital spending, following the completion of the Trans-Gabon railway project. On the revenue side, the measures included a broadening of the tax base and a strengthening of the tax and customs administration, with a view to improving tax collection, in particular non-oil revenue. On the expenditure side, the programs called for a sharp reduction in the government wage bill, a phasing out of subsidies to targeted public enterprises, a reduction in other current expenditure, and a cut in public investment. Emphasis was also placed on a prudent external debt management and the pursuit of restrictive monetary and credit policies, directed at improving the net foreign assets position of the central bank, containing net bank credit to the Government, and reducing the rate of inflation.

On the structural side, Gabon’s economic strategy aimed at: (a) initiating a program for the rehabilitation and rationalization of public enterprises; (b) strengthening public sector resource management; (c) liberalizing the regulatory environment, so as to reduce production costs, improve competitiveness, and promote private sector initiatives in the non-oil sector; (d) encouraging savings and efficient financial intermediation; and (e) revising sector policies, particularly for transportation and forestry. In this context, priority was given to the development of (a) agriculture and agro-business, with a view to improving rural incomes and the standard of living; (b) forestry and the timber industry; (c) fishing and the seafood industry; and (d) small- and medium-size enterprises and indigenous service activities. Regarding public utilities and the transport sector, the reforms focused on streamlining the operations of the enterprises, reducing costs, and restoring financial discipline. Given the importance of the oil sector for the overall economy and public finances, efforts were also made to improve the transparency of the marketing operations of the oil sector and its financial relationship with the Government.

b. Policy implementation and performance

Policy implementation during the internal adjustment period was broadly ineffective, hampered by the growing social and political pressures, continued weakness in world oil prices, and, in the later years, persistent rumors about a possible devaluation of the CFA franc. As a result, economic and financial performance fell short of initial expectations.

Government expenditure was cut drastically in nominal terms, by 43 percent in 1987 and 17 percent in 1988. The investment budget bore the brunt of the expenditure retrenchment, declining from 28 percent of GDP in 1986 to only 6 percent in 1988. In contrast, current expenditure increased from 21.6 percent of GDP to 25.4 percent of GDP, respectively, due in large part to overruns on the civil service wage bill (Chart 5). The Government found it difficult to contain the growth of the civil service wage bill. Despite the elimination of multiple salaries and incentives for early retirement, both real wages and the overall size of the civil service remained largely unchanged during 1987-88. In addition, substantial wage increases were granted in March 1990 to cope with civil unrest; these included the full restoration of the special compensation that had been curtailed by 45 percent in 1986, and its generalization to all categories of government employees in July 1990. Overall, total government expenditure was reduced from about 50 percent of GDP in 1986 to around 27 percent of GDP in 1989, but edged up somewhat to almost 29 percent of GDP by 1993. Total government revenue fell from almost 35 percent of GDP in 1985 to 19 percent in 1989, before recovering to 23 percent by 1993. The weakening in world oil prices, coupled with the initial stagnation of oil production at around 8 tons, caused government oil revenue to fall from 22 percent of GDP in 1985 to less than 6 percent in 1987; owing to the one-year lag in oil revenue collection, the impact of the decline in oil prices was not felt until 1987. The discovery and coming on stream of new fields allowed a recovery in oil revenue in subsequent years, to over 10 percent of GDP by 1993. Non-oil revenue was substantially affected by the developments in economic activity, and remained virtually stable in relation to total GDP between 1985 and 1993, at about 13 percent. The overall budget deficit, on a commitment basis and including grants, narrowed markedly, from 12.8 percent of GDP in 1986 to 2.2 percent of GDP by 1991, but widened again to 5.7 percent by 1993 (Tables 4 and 5).

CHART 5
CHART 5

GABON FISCAL DEVELOPMENTS

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 129; 10.5089/9781451813845.002.A001

Source: Data provided by the Gabonese authorities.
Table 4.

Gabon: Savings and Investment Balances, 1980–94

(In percent of GDP)

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Sources: Data provided by the Gabonese authorities; and staff estimates.

Including public enterprises.

Due to data limitations the split between the savings of the oil and the nonoil private sectors is subject to some uncertainty.

Due to large discrepancies between National Accounts and Balance of Payments data, estimates for the savings and the financial balances of private sectors before 1990 are only tentative.

Table 5.

Gabon: Fiscal Operations of the Central Government, 1990–94

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Source: Ministry of Finance, Economy, Budget, and Participations.