Gabon: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
03 May 2002
eISBN:
9781451813883
Language:
English
Keywords:
ISCR; CR; financing; expansionary expenditure policy; ratchet effect; world oil price; GDP trend; revenue shortfall; Oil prices; Oil; gas and mining taxes
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This Selected Issues paper and Statistical Appendix for Gabon 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. The paper addresses the issue of fiscal and debt sustainability with several existing methodologies, adapted to Gabon’s situation of high and declining oil revenue. The fiscal and debt sustainability analysis also takes into account the expected decline in future oil resources.

Abstract

This Selected Issues paper and Statistical Appendix for Gabon 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. The paper addresses the issue of fiscal and debt sustainability with several existing methodologies, adapted to Gabon’s situation of high and declining oil revenue. The fiscal and debt sustainability analysis also takes into account the expected decline in future oil resources.

II. Fiscal Performance and Impulse Analysis, 1970–20012

A. Analysis of Fiscal Impulse

Background

7. Fiscal deficits generally have an expansionary impact on aggregate demand, while fiscal surpluses have a contractionary effect. However, although the fiscal balance can be a useful indicator of the impact of government operations on the economy, it fails to indicate the contribution of government policies with regard to cyclical effects. In fact, fiscal deficits might entail no expansionary policies but rather reflect weak economic activity and the associated dwindling tax base. Moreover, for countries dependent on oil revenue like Gabon, the fiscal balance essentially reflects parameters that determine government revenue on which the authorities have little control, such as developments in world oil prices.

8. Since the 1980s, the fiscal impact on aggregate demand has been assessed by using measures of cyclically adjusted fiscal balances (IMF, 1998). The underlying idea is that, in the absence of liquidity constraints, cyclical factors in the budget balance are transitory and self-correcting (i.e., so-called automatic stabilizers), and the analysis of the fiscal impact should therefore focus essentially on underlying “discretionary” policy actions that are expected to have a lasting impact on demand. If the economy were in equilibrium, the cyclically neutral balance would characterize situations in which government revenue increases at the same rate as actual GDP, while expenditure increases at the same rate as potential output. Such a fiscal path would link government spending programs to long-term output trends, thereby shielding them from disruptive short-term adjustments. This is particularly important for oil-producing countries whose revenue can be inflated by temporary rises of world oil prices. A deterioration in the terms of trade and the rapid depletion rate of oil reserves are likely to put future fiscal positions under strain, thereby pointing to the need to link spending to a “sustainable” income stream, so as to avoid the so-called ratchet effect.3 A course of action relating to the permanent income approach would lead the government to save any revenue windfall, in excess of the long-run average income during the boom periods, and to use this when oil revenue falls short of permanent income.4 Short-term revenue shortfalls associated with weak economic activity would be covered by government borrowing to be repaid during economic recovery.

Conceptual framework

9. The fiscal impulse (FIt), or the change in the fiscal stance, measures the size of the initial fiscal stimulus to aggregate demand arising from changes in fiscal policy (Chand, 1984). The fiscal stance, or the cyclical effect of the budget (CEBt), is the difference between the actual fiscal balance (Bt) and the cyclically neutral balance (CNBt). These concepts are defined by the following relations:

CNBt=g0Ypt−t0Yt(1)
CEBt=Bt−CNBt=(Gt−Tt)−CNBt=(Gt−g0Ypt)−(Tt−t0Yt)(2)
FIt=ΔCEBt=(ΔGt−goΔYpt)−(ΔTt−toΔYt),(3)

where t0 and g0 are the ratios of revenue and expenditure relative to GDP in the equilibrium base year (output close to potential), Tt and Gt, the nominal revenue and expenditure in period t, and Yt and Ypt the actual and potential GDP in year t.

10. Relation (3) can also be rearranged slightly to provide an analysis of the respective contributions of revenue (TIt) and expenditure (GIt) policies:

FIt==(t0ΔYt−ΔTt)TI︷t++(ΔGt−g0ΔYpt)GI︷t=−YtΔt+(ΔGt−g0ΔYpt)(4)

11. The impact of government revenue is neutral if revenue (Tt) and actual GDP (Yt) grow proportionally (unitary revenue elasticity). The impact is expansionary (contractionary) if revenue grows less (more) than proportionally. The impact of government expenditure is neutral if expenditure (Gt) and potential GDP (Ypt) grow proportionally (unitary spending elasticity); the impact is expansionary (contractionary) if expenditure grows more (less) than proportionally.

B. Fiscal Impulse Analysis Applied to Gabon, 1970–2001

12. The application requires the choice of an equilibrium base year, estimates for potential output, and the selection of an indicator for the fiscal balance. During 1960–72, Gabon’s economy recorded stable growth supported by sound financial policies (Barro Chambrier, 1990). After 1972, Gabon’s economy suffered significant terms of trade shocks, reflecting mainly the booms and slumps of the world oil market and the devaluation of the CFA franc in 1994. For the fiscal impulse analysis, 1970 was chosen as the base year because (i) real GDP growth was satisfactory; (ii) the fiscal and current account balances were close to equilibrium; and (iii) the external debt amounted to only 22 percent of GDP. In the absence of estimates on output capacity, non-oil potential output was estimated by the non-oil GDP trend (10 percent on average, in nominal terms). For the oil sector, the analysis was based on an average production growth of 3½ percent and an average nominal price increase (in U.S. dollars) of 8.2 percent.5 Oil production ranged between 8 and 10 million tons during 1970–86; production rose to above 18 million tons during 1995–97 (mainly with the coming on stream of the new Rabi-Kounga oil fields) before declining gradually to about 13 million tons in 2001 (Table II.1). Gabon being a small oil producer, it is a price taker on the world market, and its supply capacity is only limited by the stock of reserves and its production efficiency and cost structure. Any excess over the long-run income would need to be considered as cyclical and saved; because of the ratchet effect, the alternative of basing government expenditure on the inflated cyclical oil revenue would not be sustainable.

Table II.1.

Gabon: Key Fiscal Indicators, 1970–2001

(In percent of GDP, unless otherwise indicated)

article image
Source: Data communicated by the Gabonese authorities and staff estimates.

13. The primary balance (excluding interest payments) was used instead of the overall fiscal balance, as it is a better indicator of discretionary fiscal policy.6 Gabon’s key fiscal indicators for the period 1970–2001 are summarized in Table II. 1. The fiscal balance and the primary balance were in surplus or close to equilibrium for most of the period, except during the early 1970s, 1985–94 and in 1998. The primary deficit averaged about 4 percent of GDP during the second half of the 1980s and reached 6.4 percent during 1998. Reflecting Gabon’s increasing indebtedness, interest payments soared from 1.4 percent of GDP during 1970–76 to 6.0 percent during 1987–94 and about 9 percent of GDP in 2001.7

C. Analysis of the Results, 1970–2001

14. The fiscal impulse analysis suggests that Gabon’s fiscal policy stance has largely been procyclical, which has limited the stabilization role of fiscal policy (Figure II.1). Developments in the fiscal position were dominated by the expansionary expenditure policies during 1970–76, 1979–86 and in 1998, and contractionary expenditure policies during 1977–78 and for most of 1987–2001, except for during 1996 and 1998. During boom years, the authorities increased government spending, particularly on investment, to levels that could not be durably sustained by revenue.

Figure II.1.
Figure II.1.

Gabon: Fiscal Developments, 1970–2001

Citation: IMF Staff Country Reports 2002, 094; 10.5089/9781451813883.002.A002

Sources: Gabonese authorities; and staff estimates.

15. Fiscal policy was expansionary during 1970–76, with the fiscal impulse averaging 2.4 percent of GDP. The contractionary effect of revenue was dominated by the large increase in expenditure, reflecting essentially increasing public investment that followed the favorable oil price shock of 1973–74. The bulk of the increase in investment since the mid-1970s was related to the financing of the railway (Transgabonais) and the hosting of the OAU conference (1976–77). As a result, the ratio of external debt to GDP increased from less than 30 percent during 1970–76 to more than 47 percent of GDP on average during 1977–78.

16. The fiscal stance became contractionary during 1977–78 under a Fund precautionary arrangement under the Extended Financing Facility (EFF), with an average impulse of −7.5 percent of GDP. During this period, the government enhanced revenue collection, with non-oil revenue increasing to just over 24 percent of non-oil GDP. There was also an effort to reverse the sharp increase in government expenditure in the preceding years, through a reduction of the wage bill and the curtailing of extrabudgetary operations.8

17. The favorable oil shock of 1979–80 led to a relaxation of the adjustment effort. During 1979–86, fiscal policy became expansionary, with an average fiscal impulse of about 3 percent of GDP. During this period, there was a slight decline of both oil and non-oil revenue. World oil prices, which had averaged US$33.7 a barrel during 1979–82, dropped to US$13.8 a barrel in 1986. However, there was no cut in expenditure to adjust to the unfavorable developments in government revenue, reflecting the ratchet effect. In particular, the wage bill rose to the equivalent of 43 percent of total revenue during 1979–86, from 32 percent during 1977–78. As with the first oil shock, high oil prices led the government to embark on ambitious public investment programs. Government expenditure rose to about 50 percent of GDP in 1986 from 28 percent of GDP during 1979–82.9 The fall in oil prices in 1986 led to a larger debt stock, after the significant decline of indebtedness recorded during 1979–85.

18. Fiscal policy became contractionary during 1987–94, with the fiscal impulse indicator averaging −2.7 percent of GDP. During this period, following the sharp drop in world oil prices in 1986, the government proceeded with expenditure cuts in the context of “internal adjustment” policies. Public investment dropped from an average of about 18 percent of GDP during 1979–86 to some 6 percent during 1987–94. However, despite these cuts, the fiscal position remained weak and the fiscal balance turned into significant deficits. This reflected the more than halving of oil revenue, the drop in non-oil revenue, and the rise in the wage bill, which represented about 69 percent of total revenue (up from 43 percent during 1979–86).10

19. Following the devaluation of the CFA franc in 1994, the government embarked on a comprehensive adjustment program. There was a resumption of growth owing to a recovery of external competitiveness and a substantial improvement in public finances. Fiscal policy was contractionary in 1995, slightly expansionary during 1996, and neutral in 1997. During 1998, however, there was a collapse in budget management and the fiscal position deteriorated considerably, owing to a large deficit. Since 1999, the authorities have been dealing with recovering from the 1998 crisis and the need to increase the primary surplus in order to service the heavy external debt obligations and reestablish orderly relations with Gabon’s creditors. Fiscal policy became very contractionary during 1999–2000, with an average impulse of about −12 percent of GDP, and overall it was neutral in 2001. Efforts were made to improve the collection of non-oil revenue and to rein in expenditure. The primary balance turned from a deficit of over 6 percent of GDP in 1998 to surpluses of 17 percent of GDP during 2000–01. This significant adjustment was painful, as it was accompanied by a sharp reduction in public investment11 and a freeze of wages and salaries, in the context of a very modest real GDP growth. The cut in public investment made it difficult to maintain an adequate economic and social infrastructure, with a negative impact on the provision of social services and the development of private activities.

D. Conclusions

20. Fiscal policy constitutes a fundamental tool for Gabon’s sustainable development. The analysis of fiscal performance since the 1970s using fiscal impulse indicators shows that Gabon’s fiscal stance has generally been procyclical, mirroring mainly developments in oil revenue. Developments in the fiscal position were dominated by the expansionary expenditure policies during 1970–76 and 1979–86, following the first and second oil crises. Fiscal policy became contractionary during 1977–78 (under a Fund-supported program) and for most of the period after 1987 (internal adjustment during 1987–94 and adjustment under Fund-supported programs after 1994, with the exception of 1996 and 1998). During boom years, the authorities increased government spending, notably on investment, to unsustainable levels, particularly following the downward adjustments in oil prices. This led to increased public indebtedness, with a heavy debt service exerting lasting strain on public finances for the period after the mid-1980s.

21. Following the 1994 devaluation, the authorities opted for a medium-term consolidation of public finances, notably through a strengthening of transparency in the management of resources. However, the debt burden remains heavy, and fiscal developments are very dependent on the oil sector. The prospective steady decline in oil production and the associated government revenue will require a further strengthening of adjustment efforts, in particular to improve the non-oil revenue base and reduce nonpriority current spending.

References

  • Barro Chambrier, A. H., 1990, “L’Economie du Gabon: Analyse des politiques d’ajustement et d’adaptation,” Economica.

  • Chand Sheetal K. 1984, “The Stabilizing Role of Fiscal Policy,” Finance and Development, March.

  • Gelb, Alan, and associates, 1988, Oil Windfalls: Blessing or Curse? (New York: Oxford University Press for the World Bank).

  • Hotelling, Harold, 1931 “The Economics of Exhaustible Resources”, Journal of Political Economy, Vol. 39, No. 2 (April), pp. 137– 75.

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  • IMF, World Economic Outlook, May 1998 (Washington: International Monetary Fund).

2

This section has been prepared by Joseph Ntamatungiro.

3

The ratchet effect results from the fact that when oil revenue is high, there is strong pressure to raise expenditure and, when oil revenue is low, it becomes difficult to cut spending. Information deficiencies on the temporary or permanent nature of revenue shocks complicates budget management and may lead to unnecessary abrupt cuts in priority spending, unsustainable borrowing, or the accumulation of arrears. Moreover, upsurges in oil revenue and the associated spending without proper control mechanisms may lead to waste, owing to poor governance and low effectiveness of public spending.

4

Gelb and others (1988) suggest that governments should save some 70 percent of the oil revenue windfall.

5

The increase in oil prices is somewhat stronger than the one suggested by Hotelling (1931), namely, that the equilibrium real price for irreplaceable resources should rise at a rate equal to the real interest rate in order to maintain the real value of resources.

6

Interest payments on external debt have no direct impact on domestic demand and they are outside government control; similarly, since interest payments on domestic debt are meant mainly to compensate creditors for the erosion of the value of government paper, they have little effect on domestic demand.

7

The increase in interest payments since 1994 partly reflects the 1994 devaluation of the CFA franc.

8

Extrabudgetary investment outlays, consisting essentially of investment on infrastructure, represented between 23 and 50 percent of total expenditure during 1974–77, and between 5 percent and 8 percent of total spending during 1980-84. These outlays were generally financed through external and domestic borrowing.

9

Fiscal imbalances would have been larger if the fall in oil prices had not been partially compensated for by the appreciation of the U.S. dollar.

10

The rise in the wage bill reflected the substantial wage increases granted in March 1990.

11

Since public and private investments are likely to be complementary, a strong reduction in public investment could be detrimental to private investment.

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Cover IMF Staff Country Reports
Gabon: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2002: Issue 094
Publisher:
International Monetary Fund
ISBN:
9781451813883
ISSN:
1934-7685
Pages:
136
DOI:
https://doi.org/10.5089/9781451813883.002

Gabon: Fiscal Developments, 1970–2001