I. Introduction¹

1. This selected issues paper discusses fiscal and development issues with a focus on problems caused by Gabon’s high dependence on oil, with large oil price-related fluctuations in government revenue and rapidly declining oil production since its peak in 1997. Oil has represented about one-third of GDP during the last decade and contributed some 15 percent of GDP on average to government revenue. This dependence on oil has given rise to large variations in fiscal balances and corresponding effects on aggregate demand, high levels of government borrowing to maintain expenditure initiated during boom years, and an appreciation of the real exchange rate adversely affecting the traditional export and other non-oil sectors. It also raises issues about the optimal management of the remaining oil resources in the medium and long term, knowing that oil production is projected to decline by one-half over the next six years and decline further thereafter, and given the objective of ensuring that future generations benefit from this oil wealth and are not, instead, saddled with a heavy debt burden.

2. A typical phenomenon in Gabon has been that during oil boom years large expenditure programs were initiated, but during subsequent periods of lower oil prices and lower government revenue, these programs proved very difficult to cut back or postpone. As a result of this so-called ratchet effect, Gabon has often resorted to domestic and external borrowing, which caused its debt-to-GDP ratio to triple from around 30 percent of GDP in 1970 to almost 100 percent in 1998–99. Section II (by Joseph Ntamatungiro) applies fiscal impulse analysis to the period 1970–2001. During this period, Gabon experienced heavily fluctuating oil prices, gradually increasing and then falling oil production, large variations in real GDP growth, ambitious investment programs, and episodes of strong fiscal adjustment (in part under Fund-supported programs) with strong wage restraint, stepped-up tax collection, and deep cuts in investment spending. The fiscal impulse analysis tries to determine the extent to which fiscal policy has been pro-cyclical, that is, has exacerbated the fluctuations in economic activity caused by factors outside direct control of the government. This section shows that fiscal policy has been largely pro-cyclical mirroring developments in oil revenue, and has had only a limited stabilization role. The positive fiscal impulse has been particularly large during the three to four year periods immediately following the first (1973–74) and second (1979–81) favorable oil shocks, as well as during the 1998 spending spree and breakdown of budget management. Despite periods of contractionary fiscal policy and fiscal adjustment efforts, overall, the expansionary expenditure policies have dominated the 1970–2001 period and have caused the government to incur deficits financed by increasingly unsustainable debt.

3. Section III (also by Joseph Ntamatungiro) addresses the issue of fiscal and debt sustainability with several existing methodologies, adapted to Gabon’s situation of high and declining oil revenue. The first part of the section applies the relation between primary fiscal balances and debt-to-GDP ratio—from the debt dynamics developed by Blanchard and others (1990)—to Gabon for the 1991–2001 period. It derives a quantitative measure for the primary balance gaps, that is, the fiscal efforts necessary to stabilize the debt stock for each of those years. The analysis is then extended by introducing a normative (desirable) debt-to-GDP ratio—much lower than today’s level and to be reached in a number of years; it derives the respective fiscal adjustment efforts needed (i) to reach that target in a given number of years; and (ii) stabilize the debt-to-GDP ratio at that level thereafter. For example, the illustrative calculations for plausible GDP growth and interest rates show that, to reduce Gabon’s debt from 70 percent of GDP in 2001 to 50 percent by 2004, annual primary surpluses of about 8 percent of non-oil GDP are required during 2002–04.

4. The second part of section in further deepens the fiscal and debt sustainability analysis by taking into account the expected decline in future oil resources. It emphasizes that a forwardlooking fiscal policy is needed to ensure (i) an equitable intergenerational distribution of the existing oil wealth; (ii) a relatively stable path for the primary fiscal balances, so that fiscal policies do not have to be revised drastically—at the expense of future generations—when oil resources come to exhaustion; and (iii) a relatively smooth path for real exchange depreciation which is required to replace declining oil resources by non-oil tradable production over time. The section uses a long-term projection and simulation model which—in addition to projecting the non oil economy, oil revenue, and the fiscal accounts during 2001-30—describes the path of an oil savings fund (“for future generations”), as well as the transfers of oil revenue made to it and the income transfers made to the budget. The central idea is to ensure (i) a relatively constant oil-based income stream over time (e.g., constant relative to non-oil GDP or in real per capita terms); and (ii) an appropriate total net wealth position (oil based assets minus non oil financial debt) for the future, say by 2030. Based on assumptions about inter alia, the path of oil production and prices, the rate of return on the oil savings fund, GDP growth, and a target for net wealth at the end of the period, the simulations derive a “sustainable path” for the non-oil primary fiscal deficits, the oil-based income transfers, and the overall primary fiscal surpluses, consistent with appropriate levels for oil wealth and financial debt. For example, maintaining a non-oil primary deficit of 4 percent of non-oil GDP, using oil-based revenue equivalent to 6.7 percent of non-oil GDP (in early years only direct oil revenue, in later years transfers from the oil savings fund) would allow the government to reduce the debt-to-non-oil GDP ratio to 20 percent in 2030 (from 120 percent in 2001) while having an oil savings fund equivalent to over 120 percent of non-oil GDP at the end of the period. This path would be sustainable and intergenerationally equitable, as primary non-oil deficits are constant (allowing the same provision of public goods over time) and total net wealth in percent of non oil GDP remains relatively close to its 2001 level.

5. Section IV (by Ludvig Soderling) examines the prospects for development of the non-oil sector in the face of a rapidly declining oil production. The oil sector provides not only fiscal revenue but, equally important, a sizable overall surplus on the balance of payments, which effectively finances large savings-investment imbalances of the non-oil sector, and a heavy government external debt burden. While oil declines as a source of financing, significant financing needs remain to tackle poverty and social- and physical infrastructure needs. Moreover, the promotion of non-oil growth is essential to improve employment opportunities for the poor. The Computable General Equilibrium model developed captures the key characteristics of the Gabonese economy, which are (i) the oil sector, which acts as an enclave and serves the non-oil sector essentially by financing a large savings-investment deficit; (ii) the high levels of external debt service by the government; (iii) the financing constraints for private non-oil investment; and (iv) the complementary role of the government in providing public infrastructure and pursuing fiscal consolidation and business-friendly policies.

6. Simulation exercises are undertaken in section IV, based on assumptions consistent with the Fund staff’s latest macroeconomic framework. The impact of three negative external shocks are analyzed: (i) a drop in oil prices; (ii) the failure to obtain a rescheduling of external debt; and (iii) an equivalent drop in private capital inflows. The results of the simulations highlight Gabon’s dependence on foreign financing—especially private—and its vulnerability to fluctuations in oil prices. To cope with the difficult financial situation, Gabon needs to (i) promote access to foreign financing by continuing its efforts to normalize relations with the international community and pursue business-friendly policies so as to attract foreign investment; (ii) pursue fiscal consolidation; and (iii) pay particular attention to its real effective exchange rate, in order to facilitate the required adjustment to offset the declining balance of payment surpluses currently produced by the oil sector. Furthermore, the potential role of an oil savings Fund for Future Generations is analyzed; such a fund would be most effective if designed in a way to channel government savings to finance private domestic investment.