Recent Economic Developments and Performance under the SBA

During the first half of the present year, macroeconomic performance improved and performance under the SBA has been satisfactory. Non-oil GDP growth, especially in the mining and forestry sectors, has picked up. In the oil sector, the significant increase in world oil prices has allowed for higher investment in the sector such that instead of declining production, as was projected, oil production at end-June 2004 was quasi-identical to that in 2003 for the same period. Inflation remained under 2 percent as projected.

In the fiscal sector, performance remains on track. Non-oil revenues were broadly in line with the program, while expenditures were lower than expected. The wage bill remained under the agreed limits as a result of the numerous measures applied since April 2004. On the revenue side, a strong performance was recorded by non tax revenues and the revenue from the taxes on income and financial assets. However, revenues from forestry taxation were below target, due to the late publication of the 2004 Budget law, but collections have since been accelerated, including on tax arrears. Higher oil export revenue enabled the budget to record a surplus, and as provided under the program, the surplus was used to increase government deposits in the banking system, and to accelerate the repayment of the treasury float, including the reduction of domestic debt.

Higher oil prices and increased manganese exports enabled the external sector to record better than expected balances during the first six months of the year. This led to a sharp increase in net foreign assets of the banking system - and Gabon’s contributions to the Bank of Central African States (BEAC) - which in turn led to a 5.0 percent increase in money supply, following the fall of 1.2 percent in 2003. Credit to the economy decreased by 9.8 percent as the high level of domestic debt payments strengthened the liquidity of the private sector. The banking system remains sound.

Following the approval last May by the Board of the request for a 14-month SBA, the Paris Club concluded on June 11, 2004, an agreement with Gabon on rescheduling external arrears at end-2004 and current maturities for the period May 2004 - June 2005 of an amount of FCFA 472 billion, lower by FCFA 45 billion than envisaged under the program. The two-phase agreement envisions that part of the reschedulable amounts will be so only upon completion of the second review of the present SBA before March 1, 2004. There are ongoing discussions with the London Club banks and other bilateral creditors to reschedule debt payments on terms comparable to those granted by the Paris Club.

There has been progress in the reform agenda. The Council of Ministers adopted in mid-May 2004 the letter of development policy in the forestry, fishery and environmental sectors, prepared in consultation with the World Bank. A decree was issued on August 9, 2004 to implement the main actions outlined in that letter, in particular, a moratorium on the allocation of forestry permits and the launching of a pilot test for the allocation of permits by auction.

The authorities are accelerating the speed of the privatization of Gabon Telecom. They have decided in early September to increase the shares for sale from 35 percent to at least 50 percent as many investors, in light of the improved prospects in the telecommunication sector, have expressed interest for higher participation. As a result, the selection of the successful bidder will be delayed from October 2004 as initially scheduled to January 2005. Likewise, concerning Air Gabon, in view of the informal contacts with potential investors, the government has decided, along with the ongoing restructuring, to privatize partially the company and, to this end, launched a call for expressions of interest on July 19.

On governance, the Constitutional Court decided that various provisions of the wealth declaration bill adopted early this year were unconstitutional. Accordingly, the government drafted a new version that addresses the court’s concerns and a new decree setting the procedures for wealth declaration by government officials will be reissued.

In the context of improving transparency and efficiency of budgetary management, my authorities carried out an audit mission to assess the physical and financial execution of a sample of priority investment projects in all provinces of the country. This mission identified, among others, weaknesses in preparation, implementation and tracking of projects as the main reasons of the poor public investment execution rate. Moreover, the recently established Directorate General of Public Procurement is reviewing contracts above CFAF 30 million -and not billion as stated in the report - and has blocked a number of contracts because of noncompliance with regulations. The roundtable government discussions on the 2005 budget held in July and August took into account the execution rate of project in deciding budgetary allocations, and are giving priority to the completion of projects already under way.

At end-June 2004, all performance criteria and indicative targets were observed with the exception of the target related to the non-oil revenues. In view of this satisfactory performance, my authorities request the completion of the first review under the SBA.

Economic Outlook and Policies for the Second Half of 2004

The economic prospects for Gabon over the medium-term appear broadly better as the oil world prices are projected to remain at levels above those retained originally in the program. However, the slower than expected non-oil economic activity imposed a downward revision of GDP growth in the program for 2004 from 3 percent to 2.3 percent. The inflation rate at end-year is projected to remain below 2 percent. For the remainder of the year, my authorities will pursue steadfastly the adjustment and reforms initiated since 2002 and to achieve the program targets for 2004.

In the fiscal sector, the authorities are focusing on measures to strengthen revenue collection and enhance efficiency in budgetary programming and execution. The main tax reforms measures that are being implemented and are expected to be completed by year-end include (i) the establishment of the Large Enterprise Directorate (DGE) - the decree to this effect has been adopted on September 9; (ii) the update of the taxpayer rosters - the review of the taxpayers’ registration system has started; (iii) the strengthening of the collection of back taxes, in particular those from the forestry sector - permits will continue to be withdrawn in case of non compliance with tax obligations; and (iv) the establishment of an update land registry to increase the yield of real estate taxes. As regards VAT, the government will examine the possibility of reducing the higher rate of 25 percent applied to telecommunications services, banking services and luxury goods to 18 percent in the 2005 budget law, after conducting an impact analysis.

Should oil prices remain high, the oil revenues surplus will amount to CFAF 110 billion. After repaying the external debt arrears as agreed with the Paris Club, my authorities intend to use the excess oil revenue to increase the resources of the Fund for Future Generations by around CFAF 50 billion and reduce the domestic debt in excess of the original program’s targets. To this end, they request that performance criteria on net credit to government and on the stock of domestic arrears for end-September and end-December 2004 be modified accordingly, as indicated in table 1 attached to the staff report.

My authorities will continue their efforts to contain the expenditures, including the wage bill within the program’s limits, except for an allocation of CFAF 1 billion for (i) conducting the audit of the Road Maintenance Fund (FER) arrears and the regional investment expenditures which are timed with the independence day celebrations; and (ii) securing technical assistance needed for applying the new budgetary classification to the investment budget. Since this increase in spending can not be accommodated by savings in other lines and the non-oil growth is projected to lower, my authorities request the revision of the performance criterion for end-December 2004 on the primary balance to take into account this increase in spending and the higher oil revenue, as indicated in table 1 attached to the staff report.

A public expenditure review (PER) of key sectors will start in October, with assistance from the World Bank and other donors. The PER exercise will provide an opportunity to analyze the cost of the priority programs that are likely to be included in the PRSP, and their possible financing. In addition, a commission set up by the government with the participation of the Senate and the Cour des Comptes is currently carrying out a study to review local government finances and identify measures to ensure their financial viability. The study is proceeding on schedule, and the commission report will be finalized and presented to the government by end-October, as planned. Efforts to improve the financial situation of social security funds are also progressing. In particular, my authorities are identifying measures to ensure the financial viability of the CNGS.

The draft budget law for 2005 is being prepared with the goal to strengthen consistency with the guidelines of the PRSP in preparation. My authorities intend to integrate into the investment budget for 2005 some of the priority social projects identified during the preparation of the PRSP. Such integration may imply higher spending, which could be financed with the projected excess oil revenues and thus may require a slight revision of the macroeconomic framework for 2005. My authorities look forward to the next meeting with Fund staff for advice and more in depth discussions on the draft budget law.

Monetary policy will continue to be conducted at the regional level by the BEAC, consistent with the fixed exchange rate regime that has served the country well. As regards financial sector policies, my authorities are taking measures to strengthen microfinance and housing finance, and are looking into the feasibility of revising the statutes of the Development and Expansion Fund (FODEX) to enable it to operate in the microfinance sector in line with the directives of the regional banking commission on microfinance. In addition to simplifying the procedures for allocating lots for housing, financing arrangements are being finalized with domestic and foreign private banks to support new housing developments.

In the same vein, structural measures to improve the investment climate, promote non-oil economic activity, in particular in the forestry and mining sectors, accelerate the privatization process and improve transparency will be pursued. The government is expected this month the report on the findings of the mission from the FIAS on the business climate. This report will provide the basis for establishing a plan of reforms. In the forestry sector, the study on the role of the SNBG by an internationally recognized consultant is underway and is expected to be completed by end-October as scheduled in the program. In order to improve the regulatory framework in the mining sector where there is a growing interest by foreign investors, the implementing regulations of the mining code are expected to be approved by end-December 2004 and the standard concession agreement, which will define the taxation applicable to investors is currently under preparation. In the postal sector, the consulting firm preparing a plan to restructure Gabon Poste is expected to submit its report by end-October 2004. Progress is being made in the implementation of the Extractive Industry Transparency Initiative (EITI) to which Gabon became an associate member in May 2004.

The civil service reform is progressing well as two draft laws are now at the Parliament for examination during the September-December 2004 session and the preparation of another one is expected to be completed by end-December 2004. In addition, the harmonization of the rosters of the civil service and the payroll office should be completed by year-end.

My authorities remain committed to price liberalization. In this regard, they intend to reintroduce, at the latest by end-March 2005, the automatic price adjustment mechanism for petroleum product to reflect changes in international prices. As regards surtaxes on imports, they will eliminate tariffs surtaxes on eggs and cigarettes by end-2004. The authorities will propose at the next interministerial meeting of CEMAC to start consultations on the adoption of a common sugar policy to promote regional competition which should lead to elimination of surtaxes in all CEMAC countries.

With the better prospects in the oil sector and in the mining sector, external sector balances and debt sustainability are expected to improve. However, as the sensitivity tests in the DSA showed, the debt sustainability remains vulnerable to shocks on the non-oil growth and of course oil prices, thus pointing to the need to continue economic diversification efforts, and to prudent financial management.

The preparation of the PRSP has been accelerated and it is expected to be finalized in early 2005. A survey to update the poverty and social indicators started in August and is expected to be completed by year-end. In addition, a wide consultative process has begun in July, starting with Libreville, and line ministries have become more involved in its preparation.

Conclusion

The continued good performance under the SBA, with the implementation of all the macroeconomic and structural measures, and the achievement of the performance criteria and benchmarks are strong indications of my Gabonese authorities’ commitment to the adjustment process. A supportive environment and assistance from economic partners have also been helpful. My authorities would like to reaffirm their determination to maintain the reform efforts and to achieve the medium-term objectives, and are hopeful that the international community will continue to support their efforts both through technical and financial assistance. In this regard, I would like to request the support of my colleagues for today’s proposed decision.