Introduction

I would like to thank staff for a good report on the economy of Equatorial Guinea. The discussions that form the basis of this report have been helpful to my authorities in the design of their macroeconomic policies. My authorities welcome this report, which is being discussed ahead of the next National Economic Conference to be held early next year to evaluate how the government has fulfilled the recommendations of the first Economic Conference held in 1997. That conference which was attended by representatives of all political parties and social organizations took stock of Equatorial Guinea’s economic and social situation, and designed an economic strategy for the medium term (1997-2001) to ensure a productive use of the country’s natural resources, as well as the country’s development. In this context, it set up objectives and priorities for the government in the areas of macroeconomic policies, governance, privatization, private sector development, civil service reforms, among others. It also set social and sectoral objectives. In particular, it made recommendations as regards education, health, environment and women’s conditions. The Conference also set priorities in the agricultural, fishing and mining sectors. The next Conference will evaluate the progress achieved in these areas, and will decide on the next strategy to follow.

The surge of oil production in Equatorial Guinea since the mid-1990s has led to rapid growth in GDP and generated large increases in fiscal revenues, which have in turn contributed to considerable fiscal surpluses. It also allowed for a significant improvement in the external current account, and a quick accumulation of foreign reserves. Moreover, external debt indicators have improved and some structural reforms have been implemented, particularly in the forestry area, regional trade, and commercial law.

My authorities recognize that the country’s oil wealth provides them with a unique opportunity to establish the foundations for broad-based economic growth and poverty reduction. However, they agree with staff that the oil boom has confronted them with a number of new challenges in economic management. These challenges include the need to ensure that the large oil endowment is translated into tangible benefits for the population, the attainment of a sustainable fiscal position; and the implementation of structural reforms to enhance the development of the non-oil sector and diversify the economy. In this regard, my authorities have provided all necessary information to facilitate the reconciliation of the discrepancies between the budgetary surplus in 2002 and bank account transactions.

Moreover, there is now an improvement in management of key ministries involved in oil activity. Taking advantage of the improvements in government revenue, the authorities have restructured the Ministry of Mines, the Ministries of Economy and Finance, and the Treasury. These ministries have been also equipped with more qualified personnel and better equipments. At the same time, a system of audit of oil companies, service companies, and contractors has been put in place. The authorities have also indicated their intention to participate in the Extractive Industries’ Transparency Initiative (EITI). All these actions go in the direction of improving tracking of government revenue and better governance.

In the fiscal sector, it is important to stress that following large spending overruns in 2002, steps have been taken towards fiscal consolidation in the first half of 2003, and all revenues are now centralized within the Treasury. My Equatorial Guinea authorities are committed to further spending restraint for the remainder of 2003 and for 2004. The recent adoption of a new finance law should help strengthen fiscal discipline. My authorities also share staff’s concerns on the possible effect of “Dutch disease” on the competitiveness of Equatorial Guinea’s economy. Taking into account the depletive nature of oil resources, my authorities are determined to implement good macroeconomic management and appropriate structural reforms, in order to turn the country’s oil wealth into sustainable development of non-oil sector. However, given the limits of the economy’s absorptive capacity and the constraints on implementation skills, Equatorial Guinea will need technical assistance from the international community, in order to fill the gaps in project management capabilities, and to strengthen the management of surplus oil resources for future generations.

Being a member of the CEMAC and the CFA franc zone, Equatorial Guinea has met all the convergence criteria, with the exception of the one related to inflation. My authorities are aware of this problem, and they have set up an Interministerial Committee to deal with the issue, which they attribute to their policy based on large investments in basic and essential social infrastructures, which had not been undertaken in the past due to lack of resources. These investments were for the construction of schools, hospitals, and roads.

Economic and financial performance in 2002 and during the first half of 2003

Equatorial Guinea’s economy has continued to perform well since the last Article IV consultation in August 2001. Reflecting a further strong expansion of the oil sector, real GDP grew by 18 percent in 2002, and non-oil GDP rose by almost 10%, owing to strong performance in services to oil sector and construction activity. At 8 percent in 2002, the annual consumer price inflation exceeded the CEMAC’s regional target of 3 percent. The sound monetary policy of the regional central bank, Banque des Etats de l’Afrique Centrale (BEAC) has helped to keep inflation within single digits. On the external front, although the real effective exchange rate appreciated by 15 percent between end-2001 and mid-2003, the external current account deficit narrowed significantly and is expected to reach near balance in 2003. My authorities are in agreement with staff’s suggestions concerning intergenerational equity considerations, and the development of Equatorial Guinea’s non-oil sector over the coming years.

In the fiscal area, the oil boom has led to rapid budgetary revenue and spending growth, leading to an accumulation in overall surpluses, which averaged 12 percent of GDP between 2002 and mid-2003. However, following public spending overruns in 2002 partly related to investments on social sectors and on infrastructures as noted above, my authorities have, since the first half of 2003, embarked on a process of fiscal consolidation, and overall spending has been brought within budgeted limits.

In the monetary sector, reflecting the rise in oil exports, there was a buildup of net foreign assets of the banking system, as the government accumulated deposits with the BEAC and with domestic commercial banks, in addition to growing balances kept in bank accounts abroad. Credit to the economy increased significantly between 2000 and 2002, mainly in the form of bridge financing to construction companies engaged in public works.

Macroeconomic policies and objectives for the medium-term

The macroeconomic objectives for the medium-term aim at generating an average growth rate of GDP of about 13 percent in 2004–08, with oil production expected to reach 556,000 barrels per day by 2008. Surpluses in the external and fiscal accounts are projected to lead to an accumulation of net foreign assets of around US$9 billion by 2008. The non-oil economy is expected to increase by an average of 8 percent in real terms during 2004–08. My authorities consider the macroeconomic framework proposed by staff as appropriate for the remainder of 2003 and for 2004. This framework aims at reducing pressures on prices and the exchange rate, through a gradual move towards fiscal sustainability.

In the fiscal area, there is an agreement between my authorities and staff to maintain overall spending within limits in 2003 and to contain overall spending in 2004 at its 2003 level, in line with the need to move to a sustainable fiscal stance. In order to strengthen the budgetary process, particularly through expenditure tracking and control, a new public finance law was adopted and regulations for public accounting are under preparation. A new draft tax code was prepared, incorporating formerly dispersed legislation into one document. Efforts are being made to regularize external arrears. Following a debt-rescheduling agreement with Russia in 2002, an agreement with Spain has been signed and contacts were initiated with other creditors.

Monetary policy, which is conducted by the BEAC, will continue to be prudent and consistent with the net foreign assets target. The BEAC recognizes that the current instruments for liquidity management were unable to help counteract the increase and large swings in liquidity caused by government deposits with domestic commercial banks. Under these circumstances, my authorities share the view that fiscal consolidation and a permanent reduction in government deposits with domestic commercial banks would help control monetary expansion and reduce the scope for excessive credit to the economy. Under the macroeconomic framework for 2003–04, credit to the economy would increase at a moderate rate, also reflecting the current problems in extending loans to local enterprises. It is also important to stress that Equatorial Guinea’s banking system remains sound, as reflected by the stability of the share of nonperforming loans in overall loans between end-2001 and March 2003. My authorities will continue to monitor closely the banking system.

My authorities remain determined to pursue efforts to establish full transparency of oil-related transactions. With regard to the public oil company (GEPETROL), its objective is to support the government management of oil resources. It is also important to indicate that use of advance payments on oil revenue has been discontinued.

Poverty Reduction and Human Resource Development

One of the biggest challenges of the authorities is to improve capacity and institutional building in Equatorial Guinea. They recognize that more needs to be done to improve social indicators. They are now taking steps to develop a new and more effective poverty-reduction strategy. Already, my authorities have completed a review of their economic and social plan for 1997–2001. Moreover, they have embarked on the construction of poverty profiles that will be a key input in designing the new strategy. Another important action undertaken is related to the development of a broad-based education plan, which is detailed in Box 3 of the staff report. My authorities are giving a major importance to the training of nationals in foreign universities. A comprehensive training plan has been put in place, and it is already bearing fruits as some of these students start returning to Equatorial Guinea. This should go in the direction of capacity building. In this regard, it is to be noted that the National University of Equatorial Guinea (UNGE) has exchange arrangements with US and other foreign universities.

On the other structural reforms, my authorities are implementing a strategy to revive the agricultural sector, which will contribute to poverty reduction and the improvement of rural life. The plan also aims at stopping the recent migration from rural areas to urban centers, and to increase the sector’s productivity through the strengthening of basic infrastructure, with emphasis on the need to regain a higher degree of self sufficiency in basic food production. This strategy is in line with regional policies to achieve a higher degree of food security.

Regarding statistical issues and technical assistance, despite recent improvements in the accuracy and timeliness of budget execution, my authorities recognize the weaknesses prevailing in the quality and timely production of key statistics. They are taking steps to strengthen capacity in this area. In particular, they are implementing a strategy to improve the country’s statistical system in 2003–08, with support from the World Bank. My authorities have requested technical assistance from the World Bank on gas and oil resources management and intend to request shortly a fiscal ROSC from the IMF.

In conclusion, my authorities have taken steps to improve the country’s resource management and maintain a stable macroeconomic environment. They are also giving full consideration to the medium- and long- term impact of excess liquidity and fiscal surpluses, as recommended by the staff. Strengthening of capacity and institution buildings is ongoing and is helping to improve economic management.

At the same time, progress is being made in the areas of infrastructure, education and health. Steps are also being taken to develop the non-oil sector, by actions aimed at improving the business climate, promote competition, and create adequate infrastructure, by improving road and telecommunications networks, thus laying the foundations for private sector led growth. However, it should be noted that Equatorial Guinea has been a very poor country, with weak technical and institutional capacities. The authorities are now giving priority to these issues, and in their efforts, they hope that the international community will provide them with much needed technical assistance.