1. This statement contains information that has become available since the issuance of the staff report for the 2004 Article IV consultation (2/23/04). The information pertains to the adoption and implementation of the modalities of the use of oil resources, progress in the implementation of other measures discussed with the October 2003 Fund mission and presented in the staff report, and the 2004 budget recently adopted by Parliament. While there are positive developments in some of these areas, further progress remains to be made on a number of issues. The thrust of the staff appraisal remains unchanged.

2. A Chadian delegation, headed by the Prime Minister, visited the Fund during March 8–10,2004. The authorities reiterated their interest in reaching understandings on an economic program that could be supported by a new arrangement under the Poverty Reduction and Growth Facility.

3. Today we received information that the two remaining decrees on the use of oil revenues have been promulgated. The two decrees concern the Fund for Future Generations and the use of oil revenue by the oil producing region. The decree on the oil producing region includes the possibility of a transitory mechanism for spending the oil revenues allocated to the region (before the decentralized institutions to receive the revenues are created), and a certain definition of the oil producing region. There is a need to check the consistency of these steps with the World Bank pipeline loan agreement.

4. A number of issues have arisen concerning the implementation of the adopted modalities of the use of oil revenues. First, the additionality constraint1 is not met in the 2004 budget that was adopted by Parliament. Second, the authorities are considering using earmarked oil revenue to solve temporary cash flow problems in carrying out expenditures slated to be financed by nonearmarked budget resources, which would be inconsistent with the adopted modalities. Third, they are considering having more than one commercial bank be the recipient of the oil revenues from abroad, which would be inconsistent with the provisions of the decree on sterilization of oil revenues aimed at facilitating transparency. The staff continues to advise the authorities to respect the adopted modalities of the use of oil revenues.

5. While progress has been made in implementing certain measures discussed with the October 2003 Fund mission, further progress remains to be made in several areas.

• Public expenditure management. The authorities have started, as envisaged, to take stock of domestic arrears. The authorities indicated that the completion of the computerization of the expenditure circuit is imminent. However, there have been delays regarding the production of the table of the four stages of the expenditure process, the cash flow plan for 2004, and the commitment plans in priority sectors.

• Other areas of governance. The 2002 budget settlement law was adopted by Parliament and the new procurement code was signed by the President. The preparation of implementation decrees of the new procurement code is behind schedule, but some progress has been made in this area. Steps remain to be taken in establishing a budget discipline court and strengthening the inspectorates of the Ministry of Finance and priority sector ministries. Some initial steps have been taken towards the implementation of the recommendations of various audits. The identification of cross debts between the government and Cotontchad was completed.

• Revenue enhancing measures. The action plans for customs and the Tax Directorate continue to be implemented, but the action plan for the taxation of livestock and the implementation of certain anticorruption measures have experienced delays.

6. Regarding the fiscal outcome in 2003, the broad fiscal balance targets were achieved, but the composition of expenditure was less favorable compared with both the original program and the revised projections reported in the staff report. Priority sector expenditures were compressed to CFAF 65.7 billion, CFAF 17.3 billion less than originally programmed, and also lower than in the revised projections reported in the staff report. Nonpriority sector spending reached CFAF 91.1 billion, about CFAF 4 billion less than in the revised projections. At the same time, expenditures for military wages were significantly higher compared to both the original program and the revised projections. Fiscal revenues were CFAF 4.5 billion lower than projected on account of shortfalls in non-tax revenues and profit taxes. The financing gap that had been projected for 2003 was closed mainly through a compression of both priority and nonpriority expenditures, accumulation of external arrears, and the use of HIPC resources.

7. Regarding the use of HIPC account resources, preliminary estimates indicate that about CFAF 10.3 billion were used for other than the intended purposes, compared with the CFAF 4.5 billion mentioned in the staff report. The authorities noted that the HIPC account will be replenished fully on the basis of a cash flow plan, which, however, has yet to be finalized. The full amount of external arrears, including to the Fund and the World Bank, was regularized in mid-February 2004, using a loan from the regional central bank (BEAC). However, Chad had run up new arrears of CFAF 716 million as of March 16, 2004.²

8. The 2004 budget approved by Parliament continues to differ from the recommendations of the staff in the aspects mentioned in the staff report. The budget also implies a higher overall deficit, of 13.4 percent of GNP, compared with the authorities’ projection of a deficit of 12.4 percent of GNP reported in the staff report. This reflects, inter alia, the postponement of HIPC and oil bonus-financed expenditures in the additional budget (equivalent to 0.8 percent of GNP) from 2003 to 2004. The higher budget deficit now envisaged for 2004 would have to be financed through a larger accumulation of domestic arrears and/or additional budgetary support.