Recent Economic Developments

This paper reviews economic developments in Guinea during 1990–95. In 1995, expectations arising from the new discoveries of sizable oil reserves and double-digit growth in the non-oil economy—led by the timber industry—dominated economic developments. However, the fiscal position was again expansionary, as the fiscal deficit grew to 5 percent of GDP, exacerbating imbalances and adding to external payments arrears. Total budgetary revenue as a share of GDP fell and noninterest expenditure increased sharply including unclassified spending on the order of 3 percent of GDP.


This paper reviews economic developments in Guinea during 1990–95. In 1995, expectations arising from the new discoveries of sizable oil reserves and double-digit growth in the non-oil economy—led by the timber industry—dominated economic developments. However, the fiscal position was again expansionary, as the fiscal deficit grew to 5 percent of GDP, exacerbating imbalances and adding to external payments arrears. Total budgetary revenue as a share of GDP fell and noninterest expenditure increased sharply including unclassified spending on the order of 3 percent of GDP.

I. Overview

1. Over the decade following independence in 1968, Equatorial Guinea underwent severe economic, political, and social disruptions that resulted in economic decline and a marked deterioration in the provision of the most basic health services and education. A new government came to power in 1979, and in 1980 pledged a program of economic reconstruction. Economic growth remained elusive, however, reflecting a continuation of expansionary policies, deterioration in crucial infrastructure and a seriously overvalued exchange rate.

2. In 1985, Equatorial Guinea became a member of the Bank of Central African States (BEAC), and adopted the CFA franc as its currency.1 As a result of the new currency arrangement, inflation dropped markedly. Output did not respond as had been envisaged, however, and a significant deterioration in the terms of trade exacerbated fiscal and external imbalances. Repeated attempts through the early 1990s to reduce macroeconomic imbalances and restore economic growth in the context of structural adjustment programs met with little success and, despite the coming on stream of the country’s first oil production in 1992 (see box), the economic activity in timber and cocoa sectors--the country’s traditional export base--continued to stagnate.

3. On January 12, 1994, Equatorial Guinea, in concert with the other members of the CFA franc zone, adjusted the exchange rate from CFAF 50 to CFAF 100 per FF 1--a 50 percent depreciation in foreign currency terms. A program of strong domestic policies, underpinned by a second annual ESAF arrangement, supported this action. The traditional export sectors, notably forestry, responded well to the devaluation and led to renewed economic growth, but highly expansionary fiscal policies and the lack of transparency in financial management led the program quickly off track; a subsequent attempt to reestablish a track record of policy performance under a staff-monitored program also met with unsatisfactory results, owing to broadly similar shortcomings.

General Background

Equatorial Guinea consists of several geographically distinct areas. Rio Muni, the mainland region, accounts for approximately 85 percent of the land area and 80 percent of the total population. The rest of the country includes the island of Bioko, which is the site of the capital city, Malabo, and five additional small islands in the Gulf of Guinea. The total land mass covers about 28,000 square kilometers, with an estimated population of 400,000. The economic bases of this country differ between the islands and the mainland. In the Rio Muni region, timber production and food crops are dominant. Bioko, which is more developed and urbanized than the mainland, has historically focused on cocoa production. However, in 1984, a small offshore hydrocarbon deposit was discovered in the Alba field, 36 kilometers off the coast of Bioko, and, in 1995, larger offshore discoveries were made in the Zafiro field, which borders on Nigerian territorial waters. Oil production began in 1992, when an independent oil company, Walter International, started operations in the Alba field. Mobil Oil and the United Meridian Corporation (UMC) began production from the Zafiro field in August 1996. Exploration for additional deposits, both to the northwest of Bioko and off the coast of Rio Muni, is ongoing, and the prospects, according to the three-dimensional seismic data collected thus far, are encouraging.

Equatorial Guinea is composed of two main ethnic groups, the Fang and the Bubi. The Fang, who are indigenous to the mainland, are the larger of the two ethnic groups, and constitute the ruling class. The Bubi, who are indigenous to the island of Bioko, make up as much as 50 percent of the population there, but have virtually no presence on the mainland. By all accounts the population is growing rapidly, although no data are available to confirm this. The lack of attention paid to health and education over the past three decades has led to low life expectancy (49 years) and a low literacy rate (50 percent).

4. In 1995, expectations arising from the new discoveries of sizable oil reserves and double-digit growth in the non-oil economy--led by the timber industry--dominated economic developments. However, the fiscal position was again expansionary, as the fiscal deficit grew to 5 percent of GDP, exacerbating imbalances and adding to external payments arrears. Total budgetary revenue as a share of GDP fell and noninterest expenditure increased sharply--including unclassified spending on the order of 3 percent of GDP. Public sector financial mismanagement continued to be a serious concern, and structural reform appeared to have come to a standstill.

II. Domestic Economic Developments, 1991-95

A. Aggregate Supply and Demand

5. Equatorial Guinea’s production base is narrow and highly skewed toward the exploitation of exhaustible resources, with output and export earnings heavily dependent on timber and, increasingly, oil (Appendix II, Tables 1 and 2).2 The emergence of the oil sector has allowed real GDP to grow at an average of more than 8 percent for the past five years, and largely masked the weaknesses in the non-oil economy--which grew by less than 2 percent a year on average in the early 1990s (Chart 1; Appendix II, Table 3). However, responding well to the January 1994 devaluation of the CFA franc, non-oil real GDP growth accelerated considerably. In 1994 and 1995, it grew by 7 percent and 11 percent, respectively. The buoyancy in non-oil activity has been led by the forestry sector, which grew by 39 percent in 1994 and by 20 percent in 1995.



Citation: IMF Staff Country Reports 1996, 148; 10.5089/9781451815894.002.A001

Sources: Data provided by the Equatorial Guinean authorities; and staff estimates.
Table 1.

Real Sector Developments, 1993-95

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

6. The coming on stream of the first oil wells in 1992 and the January 1994 devaluation of the CFA franc led to two structural breaks in the sectoral distribution of GDP over the 1991-95 period. Prior to the production of oil in Equatorial Guinea, the primary sector accounted for some 55 percent of domestic production; the secondary sector, 12 percent; and the tertiary sector, 28 percent. Within the primary sector, subsistence crops (31 percent) and forestry (14 percent) constituted the principal components. From 1991 to 1993, the contribution of oil production to GDP at market prices grew from zero to 14 percent of GDP. Over this period, the growth in the relative importance of oil was offset primarily by a reduction in the share of the non-oil primary sector, as activity in the traditional export sectors remained stagnant and the declines in the secondary and tertiary sectors were mitigated by the growth in construction and the public administration, respectively.

7. The 1994 devaluation brought about sharp growth in nominal and real GDP. It also sparked an increase in the relative importance of the primary sector share in GDP as a result of its price effect on the oil, forestry, and export crop subsectors. At the same time these sectors were also growing strongly in real terms: in the forestry and export crop subsector, this was due to the competitive boost prompted by the devaluation; in the oil sector, it was the result of increased production from the existing wells in the Alba field. Thus, in 1995, the primary sector accounted for more than 71 percent of domestic output, of which the oil sector alone represented 25 percent.

8. Available information indicates that gross domestic expenditure averaged 130 percent of GDP over the period 1991-95, with about 98 percentage points going to consumption (public and private) and 32 percentage points to gross capital formation (Appendix II, Table 4). Gross domestic expenditure in 1991 and 1995 deviated sharply from the period average, to 158 percent and 150 percent of GDP, respectively, as a result of investment in the oil sector. Consumption as a share of GDP exhibited a steadily downward path over the 1991-95 period, falling from 119 percent in 1991 to 83 percent in 1995, owing largely to the rapid growth in oil GDP, and the abrupt decline in external financing from bilateral sources. Gross domestic investment began to surge as of 1994--despite the decline in donor support for the public investment program--because of the start of large-scale investment in the oil sector and an increase in investment in the timber industry. The shift is also evident in the external resource balance: the startup of oil production, reduction in capital imports, and decline in external financing through 1994 led to a swing equivalent to 58 percent of GDP and brought the external resource position into virtual balance. However, in 1995, with the surge in petroleum sector investment, the balance shifted again, and the external resource balance registered a deficit of some 50 percentage points of GDP. Driven by the higher level of private sector savings registered in 1994 and 1995 as a result of the higher rates of economic growth in the timber and petroleum sectors, overall national savings increased markedly over the 1991-95 period, rising from 4 percent of GDP to 24 percent by 1994, before dropping back to 12 percent in 1995, owing to the increase in investment in the oil sector outstripping the growth in the sector’s output.

B. Oil Sector Developments and Prospects

9. Equatorial Guinea is situated at the end of the basin formed by Nigeria and Cameroon, which has favorable geomorphic characteristics. While oil exploration has centered on the offshore zones to the north-northwest of Bioko island, interest extends to other areas, including Rio Muni, though no significant discoveries have been made as yet outside of the offshore zones north of the island. A reliable estimate of Equatorial Guinea’s total proven reserves is not available, since the dimensions of the recent reservoir discoveries are not yet fully known, and other promising, untested structures are in the early stages of examination. Priority is being given to exploration, and the strategy is to rapidly bring reservoirs, once tested, into production. Much of the recent exploration activity in Equatorial Guinea and the Gulf of Guinea can be attributed to technological developments that have lowered the costs of exploration and extraction in medium- and deep-water environments: three-dimensional seismic analysis, horizontal well drilling, behavior modeling of oil wells, shorter development lags, and the use of floating production, storage, and off-loading vessels (FPSOs).

10. The oil sector comprises three oil companies and five geographic blocks (see Box 2). The smallest block, the Alba field, run today by the Northern Michigan Electric Company (NOMECO), began producing 2,500 barrels a day (b/d) in January 1992. By 1995, production had grown to 6,700 b/d and the Alba wells remained the country’s sole source of oil production. Block B, which is operated by Mobil Oil, and in which the United Meridian Corporation (UMC) holds a minority stake, has been actively explored since early 1995. A series of discoveries in early 1995 led to the commercialization of the Zafiro field in October 1995, and production for export began on August 25, 1996. By end-1996 a total of eight wells are expected to be producing some 40,000 b/d. Another 20,000-40,000 b/d are projected to come on stream during the development’s second phase, in 1997. Blocks A, C, and D are controlled by UMC, and exploration of these blocks is set to begin by end-1996.

The Oil Fields in Equatorial Guinea

Alba field

In 1979, the government and the Spanish oil company Hispanoil entered into a joint venture agreement to create Guineo Española de Petróleo (GEPSA). Under the agreement, Hispanoil would bear all exploration expenses, but following commercial discovery, the government would participate equally in all costs and receipts of the contractor. Between 1982 and 1985, GEPSA acquired seismic data and drilled six wells, two of which yielded gas and light oil. Under the contract, GEPSA was to drill one more well before the end of the seventh year of the contract. However, Hispanoil, now REPSOL, did not comply with its obligation, and the contract was ultimately canceled in 1990.

A contract for the development of the Alba field and exploration of surrounding areas by an American oil company, Walter International, was signed in May 1990. Within the framework of this contract, one additional well was drilled, which confirmed the extension of the Alba field, and production began in 1992. In 1995, the Northern Michigan Electric Company (NOMECO) took over the operation of the Alba wells and purchased a 35 percent working interest, although Walter International maintained a minority stake in the consortium.

Production began at a rate of 2,500 barrels a day (b/d), and increased during the year, a second well started producing during the fourth quarter. However, since then, technical problems have sporadically brought production down below full capacity. In 1994, with one of the two wells inoperative for several months, production amounted to only 1.72 million barrels. Production rebounded to full capacity in 1995, and 2.44 million barrels of oil were extracted, or an average of some 6,700 b/d. Proven reserves are reportedly in the range of 50 million barrels, although the high levels of gas in the Alba structure make it difficult to assess the recoverability of these reserves.1 If operated in accordance with international industry practice, production from the Alba field should last another 10-15 years.

After extraction, the hydrocarbon products are transported through a 10-inch pipeline for the 22 miles between the production platform and Bioko island, where condensate and gas are separated; the condensate is exported, while the associated gas is flared The condensate is of exceptional quality (53 degrees API),2 and should begin to command a premium over market benchmarks as it becomes known. Export shipments take place approximately every six weeks, and the condensate is sold primarily in the spot market.

The high proportion of the Alba oil field gas that is flared has led the government to consider a number of uses for this resource, including utilizing the gas to supply the local market with bottled butane, separating liquefied petroleum gas (LPG) for export, producing diesel for local consumption (requiring thermal power plants on Bioko island), or building a fertilizer plant on the island. The lack of infrastructure in Equatorial Guinea, however, hinders the commercial viability of production for domestic consumption, and at present NOMECO has limited itself to installing an LPG transformation facility to augment exports. Through this facility it should be producing an additional 2,500-3,000 b/d of condensate by early 1997. This will reduce the gas currently being flared by approximately one-fourth.

Development activities in the Alba concession have picked up markedly in the past year. In 1995 NOMECO identified significant offshore natural gas reserves within its concession, although tests have not yet concluded whether extraction will prove commercially viable. Three additional oil wells south-southwest of the current production area are scheduled to be drilled in 1996, and more are planned for 1997.

Zafiro, Opalo, and Topacio--Block B

In June 1992, the government and United Meridian Corporation (UMC) signed a production-sharing agreement to explore and develop concession Block B, northwest of the island of Bioko. Block B is a triangular concession, with the triangle’s hypotenuse contiguous to Nigeria’s territorial waters and the prolific Qua Iboe formation. In May 1994, in order to expedite development of the block, UMC sold a 65 percent stake to Mobil Oil, and shortly thereafter, the two began exploratory drilling. Mobil became the operator in January 1995, and later that year exercised its contractual right to acquire an additional 10 percent participating interest in Block B to bring its share to 75 percent. After oil was discovered in 1995, the Nigerians challenged Equatorial Guinea’s delineation of the aquatic border, claiming that a sizable portion of Block B is in Nigerian waters, and the two governments are holding ongoing talks to resolve the dispute.

Mobil has accelerated the exploration and development plan for Block B. In March 1995, the Zafiro field was discovered. The testing of Zafiro-1 was completed in March 1995, and was found to have a production capacity of 10,500 b/d. Two other Zafiro wells and the wildcat well Opalo-1 were successfully drilled in the same complex shortly thereafter.3 The field was declared commercial in October 1995, and development entered Phase 1. Phase 1 envisages a fast-track development of a total of eight wells that are expected to produce an estimated 40,000 b/d by end-1996. Production from Phase 1 began on August 25,1996, using a floating (FPSO) system connected to eight subsea wells. To anchor the operation, Mobil commissioned the conversion of an oil tanker into the second-largest FPSO vessel in the world, and renamed it the Zafiro Producer.

Mobil announced in March 1996 that it had successfully tested a new well, Topacio-1, 3 miles south of the Zafiro- 1 well but within the Zafiro field. Subsequent Topacio appraisal wells confirmed the extension of the Zafiro field and are expected to add an additional 20,000-40,000 b/d to the country’s production capacity once they are brought on line. For now, however, the Topacio development has been suspended to be part of the future development plan once the results from Phase 1 have undergone a more detailed evaluation later this year.

Mobil and UMC have been very encouraged by what they have found so far in Block B, and intend to pursue aggressively exploration in the remaining 92 percent of the concession. The quality of the crude oil that has been discovered thus far is good (30-38 API) and should compare favorably with the most relevant benchmark, U.K. Brent. The drilling in the area is easy by industry standards, owing to the sandy sedimentary layer on the ocean floor, and the seismic structures are considered promising. Mobil and UMC have developed a 100-well exploration plan that foresees high levels of investment through at least 1998.

Blocks A, C, and D

Block A lies due north of the island of Bioko and borders on Nigerian and Cameroonian offshore oil producing areas. Blocks C and D lie northwest and northeast of Bioko, respectively, with Block C situated between the island and Block B. UMC has signed production-sharing agreements with the government for each block, and is the majority shareholder and operator for the three. Encouraged by the successes in Block B, UMC has announced that a drilling program will begin in earnest by end-1996.

1 The recovery ratio is the portion of the identifiable oil that is considered to be recoverable, and it depends on, inter alia, the maintenance of well pressure, which is influenced by the gas-to-oil balance in a particular reservoir.2 The American Petroleum Institute (API) ranks the gravity of petroleum products by degree, with a higher degree corresponding to a lighter, and typically more expensive, product.3 Wildcat wells are those drilled in areas not yet identified as productive, as opposed to appraisal wells, which gauge the dimensions of previously tested deposits.

C. Non-Oil Sectoral Developments

Agriculture and related sectors

11. Equatorial Guinea has about 2.2 million hectares of forest, mostly on the continent, of which 1 million (45 percent) are now under concession contracts; another 700,000 hectares have reportedly been set aside for protection and conservation. Since the 1994 devaluation, the timber sector has become progressively dominated by a broader base of foreign and domestically owned enterprises. As of end-1995, there were 38 timber concessions, as compared with 15 as of end-1993, and the largest concessionaire held less than 15 percent of total hectares under concession (Appendix II, Table 5). Bolstered by the devaluation, timber output grew by 39 percent in 1994, and by another 20 percent in 1995, reaching 319,400 cubic meters, of which 3.5 percent is sawn wood and 2.7 percent is plywood (Appendix II, Tables 6 and 7). In addition to the competitiveness gains brought about by the devaluation, such high growth reflects an increase in demand for the okume variety by East Asian countries. In 1995, the timber sector accounted for 19 percent of GDP and 25 percent of non-oil GDP.

12. The accelerated growth of the forestry sector has called into question the sustainability of the current production levels and practices. Between 1993 and 1995 total hectares conceded to timber production rose by 75 percent, growing from 597,000 hectares in 1993 to more than 1 million by 1995. Moreover, there are clear indications that a good number of producers, many of them foreign, have not been following established cultivation guidelines, and in particular are not limiting themselves to the boundaries of their concessions. Finally, the deterioration of the system of roads in Equatorial Guinea has induced producers to concentrate their activities in areas with better access to transportation, namely the coastal region. The confluence of these phenomena has had a devastating effect on forest resources in general, and on those of the coastal area in particular. Taking into account the present rate of extraction, available resources would last an estimated 15 years, or about one-fourth of the natural renewal cycle of the trees.

13. While timber production dominates in the mainland region, cocoa has traditionally been grown on Bioko. During the 1970s cocoa production reached 20,000 tons per annum on 46,000 hectares of plantations, with almost all of the labor provided by Nigerian contract laborers. Production plummeted in the mid-1970s, however, with the exodus of the Spanish proprietors and the foreign laborers. With assistance from the World Bank and the African Development Bank, steps were taken to rehabilitate the sector in the 1980s. Among other measures, the authorities introduced a system of graduated export taxes such that taxes paralleled movements in the world market prices; this virtually eliminated export tax receipts. A revised system of export grading was also introduced with a view to restoring the confidence of buyers. In addition, in an effort to increase productivity and production in the cocoa sector, the European Union shifted the emphasis of its funding from the support of the producer price of cocoa to an investment program geared to increase productivity; Equatorial Guinea began replacing its aging stock of cocoa trees with new trees in the early 1990s.

14. Most cultivation is undertaken by small-scale sharecroppers, and access to inputs is central to the quality and volume of output when growing in volcanic soil. To address their financing needs, revolving credit facilities were introduced in the early 1990s, financed by counterpart funds from STABEX grants, whereby sharecroppers receive the inputs and repay them at the end of the season out of the cocoa they produce. However, the system had no mechanism to ensure that the sharecroppers did not sell their product elsewhere and default on the credit advanced. The disruptive effect that this had on the channel through which inputs are supplied contributed to the sharp drop in output first evidenced in the 1992/93 season, when cocoa production dropped by 44 percent, to 2,855 tons. In the 1994/95 season, production increased by 24 percent, to 3,770 tons, registering its first significant increase in more than a decade and reflecting the effect of the devaluation on profitability, a rebound in world prices, and the lagged effect of earlier replantings on yields.

15. Coffee production, all of which is of the robusta variety, has declined in recent years and is no longer officially reported. The coffee quality is poor, owing to unfavorable climatic conditions, and the small amount that is still produced, mainly by smallholders as a supplementary cash crop, takes place in the continental region. In 1994, the last year for which production data are available, officially recorded coffee output amounted to only 84 tons, although significant quantities are reportedly still smuggled to neighboring countries. After reaching a peak of CFAF 500 per kilogram during the 1986/87 season, producer prices plummeted to CFAF 125 per kilogram for the 1993/94 season, in line with falling world market prices for robusta, and then rose to CFAF 700 by the 1994/95 season, as a result of the devaluation of the CFA franc and the rising coffee prices on the world market (Appendix II, Table 8).

16. Equatorial Guinea is situated in rich fishing waters. Its marine resources are mainly exploited by foreign fleets under fisheries agreements, primarily with the European Community. In 1986, the government negotiated a multiyear industrial fishing agreement with the European Union, which earned about US$7 million. The agreement, which was renewed in 1989, called for license fees based on boat capacity, eliminating the need to verify the catch. The agreement expired in 1992 and was renewed in 1994.

Manufacturing and energy

17. Industrial development in Equatorial Guinea has been severely limited by a small domestic market, a weak banking system, unreliable public utilities, and an urban and transport infrastructure that is badly dilapidated. Apart from wood processing, there is virtually no industry on the continent, and only cocoa fermenting and drying on Bioko.

18. Equatorial Guinea is well endowed with wood and hydroelectric resources. However, more than 80 percent of the domestic energy needs are still met through consumption of fuel. Until 1989, electricity was generated by a thermoelectric generator on Bioko, and by thermoelectric and hydroelectric generators on the continent. Moreover, many enterprises and households relied upon individual generators. In 1990, a 3.6 MW hydropower plant began operating in Riaba, on Bioko. Its output is sufficient to meet demand through the existing distribution system, which supplies only the towns of Malabo and Riaba during the rainy season. During the dry season, however, the Malabo diesel plant is needed to compensate for the reduction in output from Riaba. Rio Muni is also supplied by a 3.6 MW hydropower plant, located in Bikomo, which on average provides 90 percent of the continent’s energy requirements.

19. The state-owned company EEPGE (Empresa Estatal Petrolífera de Guinea Ecuatorial) is the owner of all the infrastructure for petroleum products storage and distribution in the country. EEPGE leases these facilities to a mixed-capital company, GE-TOTAL (Total Ecuatoguineana de Gestión), which has the exclusive right to manage and operate the supply and distribution of petroleum products in Equatorial Guinea.


20. The services sector, which includes trade and commerce, transport and communications, finance and housing, and public administration, currently accounts for 19 percent of GDP. Trade and commerce continues to be the biggest subsector, with a share in GDP of about 8 percent in 1995. The share of this sector increased significantly after Equatorial Guinea joined the CFA franc zone.

21. The geographical separation of Bioko and Rio Muni makes transportation infrastructure very important. Equatorial Guinea has three ports, located in Bata, Malabo, and Luba, and two airports, one at Malabo and the other at Bata, which benefited from extensive rehabilitation in 1989-90 under an externally financed project. The large-scale investment in the petroleum sector will likely generate the need for a fourth port on the island of Bioko in the near future. The country had a relatively well developed road system at one point, including more than 1,000 kilometers of logging roads on the continent. However, in recent years there has been a considerable deterioration of the road system because of the lack of maintenance and the heavy rainfall associated with the region. Banking and finance activities are relatively undeveloped and are described in Section IV.

D. Prices, Wages, and Employment

22. Equatorial Guinea has a fairly liberalized price system, with only a few administratively fixed prices. Price controls have been progressively reduced and were in 1995 only in effect for bread, petroleum products (Appendix II, Tables 10 and 11), some agricultural inputs, and basic public utilities such as electricity and telecommunications. With regard to producer prices, the government has endeavored to adjust cocoa prices since the 1994 devaluation in line with their international level in order to provide the proper price signals to producers. The level of consumer prices remained broadly stable over the 1991-93 period. In 1994, the pass-through effect of the devaluation caused the average price level to rise by some 39 percent, but by 1995 it had nearly run its course, and the increase in consumer prices slowed to 11 percent (Appendix II, Tables 12 and 13).

23. Available data concerning price developments are limited to one consumer price index, compiled by the Office of Statistics of the Ministry of Economy and Finance. The index, which had been based upon a 1984 consumption basket for African residents of Malabo, was re-weighted based on a 1990 survey (stemming from the work of an international consultant). In the new index, coverage extends beyond Malabo to include the largest city on the mainland, Bata, and assigns a 50 percent weight to each. Within the consumption basket, the weight given to food and beverages was reduced from 89 percent to 60 percent, while clothing, health and sanitation services, and gasoline were accorded larger weights than before. However, the new index continues to show large fluctuations, which appear to be statistical, rather than seasonal, in nature, and suffers from compilation lags and difficulties in collecting timely data from the mainland. Furthermore, in light of the effects of the devaluation and the change in relative prices, the extent to which the index reflects post-devaluation consumption patterns is not clear.

24. Data on wages are limited. In April 1990 the government published a Decree-law setting minimum wages for every professional category. Under the decree, minimum wages would be revised every two years, taking into consideration developments in the cost of living and production, as well as the need to maintain a high level of employment. Minimum wages were last set on January 2, 1996, for three categories of labor. Minimum monthly wages for commerce, animal husbandry, fishing and forestry were set at CFAF 41,250 a month; for agricultural workers, at CFAF 23,000; and for laborers in the petroleum sector, at CFAF 100,000. The government provided a 14 percent increase in the average public sector wage in 1994 and left the pay scale unchanged in 1995. In 1996, the government enacted a 37 percent increase in the salary structure, with additional bonuses that will bring the salary increase for the year to 60 percent.

25. Unemployment is not documented. Current estimates indicate that subsistence agriculture absorbs most of the labor force in Equatorial Guinea; the monetized sector accounts for a small fraction of total employment. The government estimates that there are between 5,000 and 7,500 civil servants, including casual labor and the military; the authorities do not have a recent and comprehensive census. Public sector employment, including public enterprises, which has been used increasingly as a social safety net, has become more and more bloated and is highly inefficient. These factors have led to a progressive urbanization of the population and have contributed to the stagnation of agricultural production. In 1992, the government published a law permitting the establishment of trade unions. However, despite the existence of a legal framework, no trade union has yet been established.

III. Public Finance

A. Scope of the Public Sector

26. The nonfinancial public sector of Equatorial Guinea comprises the central government, local governments and municipalities, autonomous agencies, and state and mixed enterprises. In recent years, in the context of structural adjustment programs, the government has targeted a reduction in the scope of its direct intervention in the economy and a strengthening of public enterprise performance. Nonviable parastatals were to be liquidated, and joint ventures with foreign capital and management were to be created. The entities that were considered more potentially attractive to foreign investors--the state-owned maritime transport company (AMGESA), the electric utility (SEGESA), and the national airline (EGA)--were to be privatized first. In the event, there was little progress. An inventory of enterprises and their main assets was completed, however, in 1995, but the authorities have not used this information to elicit investor interest as had been hoped.

27. Overall fiscal operations cover the consolidated transactions of the central and local governments and municipalities. The fiscal year corresponds to the calendar year. While the government, with external technical assistance and increased computerization, has made substantial improvements in compilation and timeliness of basic budgetary data, some serious weaknesses remain in budgetary procedure, data coverage, and classification. Budgetary planning, revenue mobilization, and expenditure control are insufficiently institutionalized for effective policy design and implementation, and consequently the annual budget exercise approved by Parliament generally has little bearing on the fiscal outturn. Communication of information among government units is neither regular nor systematic, and, in particular, data on foreign-financed capital expenditure are not properly centralized and are not reflected in the Ministry of Finance’s budgetary process.

B. Overall Budgetary Developments, 1991-1995 3

28. The financial position of the government deteriorated significantly over the period 1991-95. The overall fiscal deficit (commitment basis, excluding foreign-financed capital expenditure) averaged 4.2 percent of GDP, and worsened from percent 2.5 of GDP in 1991 to 4.7 percent of GDP in 1995, owing to a decline in domestic revenue collections and expenditure overruns (Chart 2; Appendix II, Tables 14 and 15). The lack of transparency in revenue mobilization contributed importantly to the low level of oil revenue and to the fall in non-oil revenues--notably in the collection of import taxes. Total expenditure and net lending remained broadly flat in nominal terms over the 1991-95 period, but the sharp contraction in the capital budget, and in particular foreign-financed capital outlays, masked increases in noninterest domestically financed expenditure. The overall fiscal deficits were not properly financed and led to the accumulation of external payments arrears.



Citation: IMF Staff Country Reports 1996, 148; 10.5089/9781451815894.002.A001

Sources: Data provided by the Equatorial Guinean authorities; and staff estimates.1/ Excluding grants and foreign-financed capital expenditure.2/ Including unclassified expenditure.3/ Excluding scheduled amortization to the Fund.4/ Including payment of arrears, excluding amortization to the Fund.
Table 2.

Fiscal Developments, 1993-95

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

Excluding foreign-financed capital outlays.

C. Revenue Developments, 1991-95

29. Domestic revenue performance in Equatorial Guinea has deteriorated markedly in recent years, declining in terms of GDP from 21 percent in 1991 to 15 percent in 1995, as the emergence of oil proceeds did little to offset the weakness in non-oil revenue (Appendix II, Table 16). For its part, non-oil revenue fell from 21 percent of non-oil GDP in 1991 to less than 17 percent in 1995. These results were due in large part to the inability to channel oil revenue to the budget and to the further deterioration in the customs administration, which has been plagued with extensive ad hoc exemptions and mismanagement.

30. Tax revenue, which had averaged 14 percent of GDP in the late 1980s, fell from 13 percent of GDP in 1991 to 9 percent in 1995, with the largest fall experienced in 1994, when tax revenue fell by 3 percentage points of GDP. The drop in tax revenue can be traced in the main to problems with the collection of import taxes. In 1995, import taxes amounted to an estimated 8 percent of taxable imports, as compared with 18 percent in 1991. Notwithstanding the 1994 devaluation, nominal import tax revenue fell over the five-year period, from CFAF 1.5 billion in 1991 to CFAF 1.4 billion in 1995--a 55 percent decline in real terms (using the import deflator). Extensive ad hoc exemptions, tax evasion, and mismanagement reduced import taxes collected in 1995 to less than one-third of the import taxes assessed at customs. Export taxes increased nearly fourfold over the period as a result of the effects of the devaluation on the taxable base and the strong increase in timber export volumes. However, tax evasion in the timber industry has recently become more marked, as the timber tax yield has fallen from 17 percent in 1993 to less than 14 percent in 1995. Income tax from oil production has not yet materialized; the authorities explained that differences in interpreting the contractual tax base have yet to be settled, and therefore no income tax payments have been received by the government since production began in 1992.

31. Nontax revenue (excluding oil revenue) has fallen as a share of GDP by more than half, declining from 7 percent in 1991 to 3 percent in 1995. This is attributable to the poor performance of public enterprises and to the inability of the government to channel to the budget fees stemming from the jump in timber concessions in 1994-1995. Nontax receipts from the oil sector, namely royalties and exploration fees, have partially offset the weakness in other areas of revenue administration, growing from 0.3 percent of GDP in 1991 to 2.5 percent in 1995. However, total government oil revenue--virtually all of which has been nontax in nature--has averaged some 10 percent of export earnings, which is low by international standards.4 Moreover, bonus payments associated with the discovery and commercialization of oil production zones have not been captured by the budget.

32. In the context of the regional customs union (UDEAC) reforms, a major simplification and reduction of import tariffs was implemented in August 1994. Import tariffs (as well as turnover and excise taxes) for the UDEAC countries were set at the regional level, thus limiting Equatorial Guinea’s ability to modify these rates unilaterally. The common duty rate for basic necessities was reduced to 5 percent; for raw materials and capital goods, 10 percent; for intermediate and miscellaneous goods, 20 percent; and for consumer goods, 30 percent. The reform was designed to be revenue neutral, as a broadening of the taxable import base and the introduction of a broad-based turnover tax were to accompany the lowering of the import tax rates. Import surcharges were modified in early 1995, shortly after the introduction of the new UDEAC rate structure.

D. Expenditure Developments, 1991-95

33. The lack of proper expenditure procedures coupled with limited budgetary resources contributed to a strong shift in the composition of expenditure over the period, away from capital expenditure and in favor of current noninterest outlays, while total expenditure remained broadly stable in nominal terms (Appendix II, Table 17). Total expenditure remained near CFAF 20 billion over the 1991-95 period, but fell sharply in terms of GDP, from 54 percent in 1991 to 22 percent in 1995, and can be accounted for by the decline in foreign-financed capital outlays, which arose from the donor community’s heightened concerns regarding governance issues triggered by the November 1993 municipal elections.

34. Domestically financed noninterest expenditure doubled in nominal terms, but remained broadly flat in terms of GDP, at some 15 percent. Expenditure growth in the areas of the wage bill and the purchases of goods and services mirrored the overall trend, but outlays for subsidies and transfers--which constitute a sizable portion of spending on health and education services--shrank as a share of GDP, from 3 percent in 1991 to 1 percent in 1995. Unclassified expenditure was in large measure driving the significant fiscal slippage in 1993 and 1995, with unexplained outlays in those years totaling 7 percent and 2½ percent of GDP, respectively. Scheduled interest payments on external debt averaged some 34 percent of domestic revenue over the period, and total scheduled external debt service averaged some 89 percent. In contrast, total cash payments on the external debt--including payments on arrears--averaged 14 percent of domestic revenue.5

IV. Money and Banking

A. Institutional Setting, Policies and Instruments

35. Equatorial Guinea is one of the six member countries of the Bank of Central African States (BEAC) that share the CFA franc as a common currency.6

36. Monetary and credit policy in the area is formulated by the BEAC Board of Directors, in consultation with the National Monetary Committee in each country, which are the entities responsible for the implementation of monetary and credit policies and the assessment of credit requirements. The central objective of monetary policy is to validate the parity of the CFA franc vis-à-vis the French franc. In pursuit of this, the BEAC had traditionally relied on credit rationing and administrative controls. Credit to central governments is anchored by a statutory limit on the stock of central bank advances to the government, which is set equal to 20 percent of fiscal receipts from the preceding fiscal year.

37. In recent years, the BEAC has undertaken a monetary policy reform to gradually shift from direct controls to indirect instruments. A major step in this direction was taken in July 1994, when the BEAC launched a regional money market consisting of weekly auctions of central bank credit and an interbank market. Under the new system, the basic discount rate was discontinued and replaced, as a reference rate, by the central bank auction rate (taux d’intérêt des appels d’offres, or TIAO), which is set by the Governor of the BEAC at the time of each auction. In order to provide short-term liquidity, the central bank also introduced repurchase agreements (prises en pension) and, to absorb excess liquidity from the banking system, it offered to hold special deposits from commercial banks at pre-announced rates of remuneration. An additional step was taken in February 1996, when a system of weekly reverse auctions of central bank bills (appels d’offres negatifs) was introduced to progressively replace central bank special deposits. However, the development of the new monetary policy instruments has been undermined by the BEAC’s attempts at fixing both interest rates and quantities available at the central bank weekly auctions, and by the deterioration of confidence in the banking sectors in Cameroon and Congo, which has limited the effectiveness of the interbank market.

B. Banking System

38. From 1986 until the establishment of a second bank in September 1995, the Meridian Banque Internationale de l’Afrique Occidentale - Guinée Equatoriale (MBIAO-GE) was the only commercial bank in Equatorial Guinea, with its headquarters in Malabo and a branch in Bata. In April 1995, the main shareholder of the bank’s foreign owner (MIBL-Bahamas) was placed in receivership, and the bank’s management was replaced with an administrator appointed by the regional supervision commission (COBAC).7 At the same time, in line with the COBAC’s recommendation, the bank began to make provisions on its balance sheet in order to cover the full amount of certain assets blocked abroad. In August 1995, however, it was able to recover the totality of the assets previously held by MIBL-Bahamas. A Belgian bank, the Belgolaise, recently reached an agreement with the MBIAO-GE, whereby it would become the majority shareholder; the agreement’s ratification by the Belgian bank is still pending. Under the agreement, the prospective shareholder would contribute most of the CFAF 700 million needed for the banks’ full recapitalization.

39. A second commercial bank, the Caisse Commune d’Epargne et d’Investissement-Equatorial Guinea (CCEI), started operation in September 1995, bringing some competition into the financial market. The majority of the new bank’s capital is owned by the CCEI-Cameroon. Since March 1996, the new bank suffered indirectly from the situation of its main shareholder, as the BEAC central services requested capital control on all transfers made by CCEI banks in the entire zone, which caused transaction delays. By June 1996, the bank had attracted deposits for about half the value of those at the MBIAO, but had provided few loans. Ultimately, the CCEI intends to establish rural credit cooperatives, building on its experience in Cameroon.

C. Monetary Developments

40. Over the last two years, delays in the sorting of bank notes have caused distortions in the measurement of money in circulation in BEAC countries and obscured the interpretation of monetary developments.8 Specifically, this resulted in underestimation of money supply and net foreign assets in countries that are net importers of notes, and overestimation of currency in circulation and net foreign assets in countries, such as Equatorial Guinea, that are net exporters of notes. The problem appears to be particularly acute in Equatorial Guinea, as the country traditionally has a large trade deficit vis-à-vis other BEAC members, and is therefore likely to export a large share of the gross currency it emits.9 As a result, monetary data--in particular foreign assets and currency in circulation--should be assessed with caution.

41. The growth in broad money, after averaging 12 percent a year over the 1991-93 period, is reported to have grown by some 140 percent in 1994, and by another 49 percent in 1995. The income velocity of money decreased considerably over the period, as nominal non-oil GDP grew by an average of 2 percent between 1991 and 1993, before jumping to 50 percent and 18 percent in 1994 and 1995, respectively. After having deteriorated steadily over the 1991-93 period, Equatorial Guinea’s net foreign asset position strengthened in 1994 and 1995 (in foreign currency terms) in response to the devaluation. In CFA franc terms, net foreign assets increased by CFAF 1.4 billion in 1994, and by CFAF 3.5 billion in 1995, owing in large part to import substitution and to the improved performance of the traditional export sectors (Chart 3; Appendix II, Tables 18 and 19).



Citation: IMF Staff Country Reports 1996, 148; 10.5089/9781451815894.002.A001

Sources: Data provided by the Equatorial Guinean authorities; and staff estimates.1/ Non-oil GDP relative to average broad money.

42. Domestic credit (in terms of beginning-of-period stock of money) expanded on average by 92 percent a year between 1991 and 1995, driven primarily by credit to the government, which expanded at an annual rate of 81 percent a year. In 1991, the government assumed responsibility for CFAF 4.7 billion in loans made originally by the BEAC to banks liquidated in 1986, which caused a sharp expansion in credit to the government. Over the period 1992-95, credit to the government grew primarily as a result of increases in the BEAC statutory borrowing ceilings and in the domestic counterpart of Fund resources.10 In 1995, however, net credit to the government contracted modestly, as the government drawings under the BEAC statutory limit were more than offset by repayments to the Fund and an increase in transaction balances at the MBIAO-GE (Appendix II, Tables 20 and 21). Credit to the private sector rose by an average of 12 percent in terms of broad money over the 1991-95 period, reflecting the limited size of the non-oil sector and the reluctance of the banking system to expand its private sector lending activities beyond the extension of trade credits, owing to the narrowness of the creditworthy client base.11 Since the devaluation, however, growth in credit to the private sector has accelerated somewhat, as the forestry and the cocoa sectors have come to rely on the domestic banking system to contract their short-term, seasonal loans, which the exporters guarantee through the opening of letters of credit with foreign banks.

43. Data regarding sectoral distribution of credit are incomplete and considered unreliable (Appendix II, Table 22). The pool of borrowers remains very narrow, with the main clients including semipublic enterprises such as SEGESA (the electricity company) and GE-TOTAL (the petroleum distributor), and private traders such as Casa Mallo S.A. and APRA (the main cocoa exporters), and ABAYAK (the cement trader). The COBAC judges the credit portfolio of the MBIAO-GE to be sound.

44. Recent developments in deposit and lending rates applied by the central bank and the commercial banks are summarized in Appendix II, Table 23. Interest rates applicable in Equatorial Guinea are determined within the context of the policies of the BEAC. Progressively, interest rate policy in Equatorial Guinea has reflected the BEAC’s more flexible and market-oriented stance. In 1994, the change in parity and the resulting gain in confidence in the CFA franc allowed the BEAC to reduce administratively set interest rates, including the remuneration on deposits at the central bank, maximum lending rates, and minimum savings deposit rates. In November 1995, the BEAC also reduced its controls on commercial bank rates, maintaining only a maximum lending rate (currently set at 22 percent, a 7 percent margin above the penalty rate), and a minimum rate for small depositors (5.5 percent as of June 1996).12

V. External Developments

45. Equatorial Guinea’s balance of payments reflects the recent changes in the structure of the economy: 1) the growing dominance of oil production; 2) the strong supply response of non-oil exports following the devaluation; and 3) the sharp decline in official foreign financing resulting from the deterioration in relations with the donor community since 1994 (Appendix II, Tables 24-27). It also depicts a narrow export base concentrated on few exhaustible resources, and a need to reestablish orderly relations with creditors. In 1994 and 1995, the country benefited from a slight improvement in its terms of trade, which partially reversed the fall in export prices that had taken place in the first part of the decade (Appendix II, Table 31). Also, over the last two years, it was able to strengthen its competitiveness position, as cost-push inflationary pressures were contained and the gains from the devaluation preserved (Appendix II, Table 34).

Table 3.

External Sector Developments, 1993-95

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

Includes payment of arrears.

46. The evolution of the current account is mostly driven by the activities of the oil companies. In both 1991 and 1995, the pace of oil exploration and drilling intensified and caused the current account deficit to reach 35 percent and 54 percent of GDP, respectively. By contrast, during the period 1992-94, when new oil investments were lower, the current account deficit declined from 13 percent of GDP to 1 percent of GDP. Over the same period, the trade balance swung from a deficit of US$3 million to a surplus of US$17 million, as a result of both growing oil exports and declining imports. Since 1992, with movements in the capital account largely compensating for changes in the current account, the overall balance remained broadly stable in U.S. dollar terms, although the deficit declined in percent of GDP from 20 percent to 9 percent. Equatorial Guinea financed most of its overall deficit through the accumulation of external payments arrears, including to multilateral creditors.

A. The Oil Sector

47. Crude oil export volume increased from some 3,000 b/d in 1992 to 6,243 b/d in 199513 and it is expected to reach some 40,000 b/d by end-1996. In the past, export prices have fluctuated around the level of international reference prices, as difficulties associated with finding buyers for small quantities from a relatively unestablished source have tended to reduce the premium that this product should otherwise command.

48. The effect of the petroleum sector on the current account has been positive in years when exploration and fixed investment in the oil sector have been moderate, as was the case in 1992-94. However, in 1995, imports of goods and services by the oil companies increased to US$123 million, from US$20 million in 1994, in support of drilling, three-dimensional seismic surveys, an LPG plant, and infrastructure construction in the Zafiro field. Imports by the oil sector are expected to reach US$156 million in 1996. The oil companies, in financing the boom in imports from abroad, generated an enormous shift in the capital account, from a deficit of US$15 million in 1994 to a surplus of US$87 million in 1995. The net effect of the petroleum sector on the overall balance of payments corresponds to the sum of payments to government, primarily as royalties, and leakages into the local private sector in terms of payments for local goods and services (which are estimated to be about 3 percent of production and development costs).

B. The Non-Oil Sector

49. The non-oil trade balance improved markedly after the devaluation, swinging from a deficit of 11 percent of GDP in 1993 to a surplus 7 percent in 1995. Over the same period, the current account and the overall balances followed a similar evolution, with a deficit declining from 20 percent to 6 percent of GDP and from 22 percent to 13 percent of GDP, respectively. Both a 37 percent contraction in non-oil imports (see below) and a 27 percent growth in non-oil exports contributed to the adjustment in 1994, while the strength of continued export growth outweighed a partial recovery in imports in 1995 (Chart 4).



Citation: IMF Staff Country Reports 1996, 148; 10.5089/9781451815894.002.A001

Sources: Data provided by the Equatorial Guinean authorities; and staff estimates.1/ Excluding re-exports.2/ Excluding imports for re-exports.

50. As described in Section II C, timber production has increased rapidly since 1993. Export volume grew by 36 percent in 1994 and by 23 percent in 1995. Favorable international prices together with a growing proportion of precious woods contributed to a strong increase in export prices. However, until recently, efforts to stimulate wood manufacturing have met with little success, as in 1995 processed timber accounted for only 9 percent of the total value of timber exports.

51. The partial recovery in cocoa production reflects the incentive effect of particularly favorable export prices (1995 prices were almost 40 percent higher than in 1993), and the lagged effect of the replantings that were initiated in 1992. In 1995, the volume of cocoa exports was 80 percent higher than in 1993, albeit well below the levels registered in 1991 and 1992.

52. Other export crops--including coffee, malanga, bananas, black pepper, and, more recently, medicinal plants produced by the cocoa exporter APRA--together generate the same level of export earnings as cocoa. In 1995, these crops accounted for as much as 10 percent of non-oil exports.

53. The significant decline in imports observed in 1994 was almost entirely due to cuts in the public investment program, as foreign donors reduced their contribution from US$40 million in 1993 to US$9 million 1994 (Appendix II, Table 29). In fact, the change in relative prices resulting from the devaluation contributed little to the contraction in imports. The reduction in foreign assistance also affected imports of services, as technical assistance dropped from US$15 million in 1993 to US$4 million in 1994 and fell even further in 1995, as well as the non-oil capital account, which swung from a US$2 million surplus in 1993 to a US$8 million deficit in 1995. Indeed, the only important source of disbursements in 1995 was the Chinese government, which continued to sponsor infrastructrual projects in transportation and health.

External debt

54. The burden of Equatorial Guinea’s outstanding medium- and long-term public debt, in terms of GDP, remained stable over the 1991-93 period, then increased sharply in 1994 as a result of the devaluation (Appendix II, Table 32). In 1995, however, influenced by the strong growth in GDP in 1994-95 and the concessional Paris Club terms of reference rescheduling in December 1994, total external debt fell to 130 percent of GDP (US$233 million), as compared with 203 percent of GDP (or US$261 million) at end-1994, and 159 percent of GDP (or US$225 million) at end-1991.

55. The structure of the debt also changed over the 1991-95 period, as the debt owed to multilateral institutions increased from 37 percent of total external debt (US$84 million) in 1991 to 54 percent (US$127 million) in 1995, and bilateral debt declined during the same period from 63 percent (US$142 million) of total debt to 45 percent (US$105 million). The shift in the debt structure was driven by the increase in multilateral lending and the decline in outstanding Paris Club debt that resulted from the concessional debt relief granted by the Paris Club in 1992 and 1995, which reduced the total debt outstanding to Paris Club members from US$100 million in 1991 to about US$60 million in 1995.

56. With regard to Paris Club creditors, US$42 million was owed to Spain at end-1995, US$6 million to France, and nearly US$13 million to Italy. The major non-Paris Club creditors are the People’s Republic of China, with US$25 million at end-1995, and Argentina, with about US$10 million.

57. At the end of 1995 external payments arrears stood at US$37 million, of which US$14 million represented interest payments arrears. About 23 percent of external payments arrears was owed to multilateral institutions, 21 percent to Paris Club creditors, and 55 percent to other bilateral creditors.

58. Scheduled external debt service remained stable over the 1991-95 period at an average of US$25 million; however, as a percentage of exports of goods and nonfactor services, it declined from 56 percent in 1991 to 28 percent in 1995, owing to the sharp increase in oil and timber exports (Appendix II, Table 33). Cash payments effected--including those on arrears--were a fraction of scheduled debt service, averaging 7 percent of exports of goods and nonfactor services, and falling from 16 percent in 1991 to 2 percent in 1995. The burden of scheduled debt service was only marginally higher in terms of domestic revenue, as described in Section III.D.

Guinea: Recent Economic Developments
Author: International Monetary Fund