I. Overview of the Chad’s Economic Environment and Situation

Chad is a landlocked country whose climate is partly tropical, partly semi-arid, and mostly desertic. Under the combined pressure of political turmoil and frequent droughts, Chad has remained one of the most impoverished countries in the world.

Infrastructure remains deficient in many areas, including education, health, transportation, energy and telecommunications. As a result, all social indicators of Chad today lag the sub-Saharan African country averages. Limited institutional and administrative capacities also carry weight in the difficulties encountered by my authorities to sustain appropriate policy implementation and structural reform agenda, highlighting the need for financial and technical support for their current efforts. Faced with this difficult environment, and especially following decades-long political turbulence, civil unrest, and widespread poverty, the country has held presidential and parliamentary elections in 1996–97. As part of consolidating the peace process, the authorities are undertaking the integration of former rebels into the regular army.

My authorities have engaged in policies to maintain macroeconomic stability, and they have initiated a national strategy to reduce poverty. The economic developments in 2002 and 2003 have been in large part driven by the oil pipeline construction. Real GDP has grown by almost 10 percent on annual average in the period 2001–03, while inflation has been contained in the last two years following a year of high inflation in 2001. The past two years have also seen the achievement by the authorities of the fiscal deficit targets, despite capacity problems that hamper revenue collection.

Appropriate measures to boost revenue include action plans in the customs area and the strengthening of the income and indirect tax collection, many of which have started to be implemented. Although the revenue objective for 2003 has been barely missed owing to shortfalls in taxes from companies with reduced activities following the end of Doba pipeline construction, efforts to mobilize non-oil revenue are apparent as the ratio of non-oil revenue to the fast-growing GNP has increased notably in 2002 and 2003.

On the expenditure front, my Chadian authorities acknowledge that the composition of fiscal spending can be improved towards increased outlays in priority sectors. However, despite capacity weaknesses as outlined by staff, there have been unexpected security and peace-related developments that have prompted the Chadian authorities to undertake the integration of former rebels into the national army so as to ensure a smooth implementation of the “Accords de Paix”.

The design and adoption of a set of mechanisms that ensure transparency in the use of oil resources as well as an appropriate use of these resources put Chad at the forefront of many oil producing developing countries. These include stabilization and sterilization mechanisms, additionality of spending in the priority sectors financed by oil proceeds, the Fund for Future Generations (FFG), and a resource allocation system to ensure the development of the oil producing region. There have been delays in the adoption of implementation decrees for the last two measures, owing to administrative constraints and slowness, but my authorities have recently given assurances that the decrees are at the final stage of the signature process and will be promulgated in a very short time lapse.

The encouraging results obtained recently have followed more diverse outcomes in the past. As regard the 2000–03 PRGF-supported program, the macroeconomic record and policy implementation have given some encouraging outcomes amid difficulties often stemming from the country’s weak capacities. Indeed, much of this outcome is the result of budget execution difficulties, limited resources, and events outside the control of the authorities such as the historically low world cotton prices in the 2002–03 campaign.

Much progress remains to be done to improve the institutional, infrastructure and administrative capacities of the country, and strengthen the circuit of spending and public expenditure management. My authorities are greatly appreciative of the technical assistance from the Fund on these matters. While they recognize that strengthening governance, better coordinating fiscal agencies, and improving the business environment, my authorities are also eager to see technical assistance augmented in these areas and others. As acknowledged factors have hindered the implementation of TA recommendations in the fiscal area, notably the insufficient physical and human capital, limited budgetary resources to significantly improve the latter and need for private sector to develop. As for governance, corrective actions have been taken. Nevertheless, my authorities indicate that there is a need to induce appropriate budgetary allocations for TA implementation and that conditionality design should take this aspect into consideration.

II. Medium- to Long-term Prospects and Responding to the Challenges Ahead

My authorities have made it clear that maintaining peace and security is of paramount importance to the country, in order to create conditions favorable to macroeconomic stability and sustained development. They stand ready to make their utmost efforts to ensure peace and security in the country so as to maintain an environment favorable to the successful implementation of sound policies and appropriate reforms oriented towards sustained growth and development.

My authorities’ commitment to make as much efficient and effective the use of oil resources as possible has induced the elaboration of the modalities under the Law on Petroleum Revenue Management (LPRM) and their implementation decrees which puts Chad at the forefront among oil producing countries. My authorities are aware of the risks of Dutch Disease effects and the crowding-out of yet weak non-oil sector activities. They have expressed their appreciation of the decisive contribution of the Fund and the Bank in the preparation of their national strategy of poverty reduction on the one hand, and on the other hand the elaboration of the modalities pertaining to the oil-related legislation. They remain fully committed to this core law as they have confirmed at the highest level, and they are equally committed to improving the living conditions of the Chadian population, with the building of human and physical capital and the fight against poverty. As for the use of resources from future oil fields, there is a need to take into account the tremendous social and infrastructure needs of the country highlighted above, while maintaining the spirit of the legislation on the use of oil revenue.

My authorities have also expressed their desire to improve the composition of expenditures, effectively giving more weight to priority sectors. Preparation of expenditure will be made with the view to contributing more effectively to the objectives of the national strategy of poverty reduction, ensuing macroeconomic stability and long-term fiscal sustainability while taking account of actual sectoral needs.

My authorities have been confronted with the problem of external arrears, which partially find its source in the limited budgetary resources and the non-disbursement of external assistance. As a result, the authorities have often faced the daunting prioritization choice between domestic obligations (payments of civil service salaries) and external debt servicing. More predictable external financing will alleviate these difficulties and reduce the risks associated with the closing of recurrent financial gaps. In the same vein, exogenous shocks related to events such as abrupt decline in worldwide cotton and oil prices, cotton subsidies in developed countries and other impediments to fair trade hamper the growth prospects of Chad. We call on the international community to advance multilateral- or bilateral as a second-best solution - negotiations to create the conditions for fair and efficient trade. On their part, my authorities will pursue their efforts towards regional integration within the Central African Economic and Monetary Community (CEMAC), strengthen the financial sector in the context of the satisfactory situation of the Chadian banking system as discussed with staff, advance the reform of the cotton sector, and in particular they remain committed to fulfilling their external financial obligations.

Amid these daunting challenges, my authorities have renewed their commitment to sound economic policies and appropriate structural reforms that are needed to put the country on a sustained path to growth, development and poverty alleviation. To this end however, the support of the international community and the Fund in particular will be of crucial importance. An illustration of the critical need for international support to prepare the country today for the oil era and thereafter is the exponentially-growing priority sector expenditure in contrast to the abrupt decline in oil revenues after 2010 as depicted in staffs long-term macroeconomic framework (Figure 2 of staff report). This is even more so in light of the relatively small contribution of oil revenue to the government budget, which will amount to less than one-third of total revenue in the next three years.

III. Implementation of the National Strategy of Poverty Reduction and HIPC Initative Completion Point

My authorities have started to implement their national strategy of poverty reduction which was endorsed by the Board of the Fund. The PRSP monitoring mechanism is being finalized. As regard the HIPC Initiative Completion Point conditions, progress has been made in priority sectors. Indeed, the outcomes in health, education, basic infrastructure and rural development have either reached the objectives or are in progress since 1998, including in 2003.

Concerning governance, a functional expenditure-tracking system for education and health is operational; a treasury plan will be finalized soon; commercial courts are being built and judges are already being trained abroad. The code on public procurement has been finalized and has been promulgated; audits of the some big contracts awarded in 2002 have been completed in 2003; a new computerized system to monitor the four phases of expenditure is under consideration. In addition, the statistical system in the education and health sectors are being revamped and strengthened so as to better monitor the implementation of the conditions related to the HEPC Initiative process. My authorities hope that the HIPC Initiative Completion Point will be attained as soon as possible. In light of their encouraging actions and results, it would be most useful to free more resources for poverty reduction.

IV. New PRGF Arrangement

Chad should benefit from a new oil economy. The challenges and risks highlighted above and the momentum of the policy implementation and reform measures underway, albeit with bumps due to limited capacities, demand the support of the international community, at both financial and technical levels. My authorities have repeatedly - and again recently -expressed their commitment to sound policy and appropriate reforms.

As for the Fund’s highly needed contribution, a new PRGF arrangement would be best-suited to not only reinforce incentives for sound policies and reforms but also enable Chad to meet the expected financial needs necessary for the strengthening of its capacities, the preparation of the post-oil era, the long road to development and the sustained implementation of their national strategy of poverty reduction. Therefore, my authorities are hopeful that following the conclusion of this Article IV discussion, a Fund mission will soon visit Chad to initiate discussions on a program that could receive Fund support under a PRGF arrangement.