Gabon: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
03 May 2005
eISBN:
9781451813968
Language:
English
Keywords:
ISCR; CR; oil revenue; oil; Gabon; oil windfall; revenue; benchmark Brent price; Gabon's revenue performance; oil sector; GDP deflator; Oil production; Oil; gas and mining taxes; Oil prices; Sub-Saharan Africa
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This Selected Issues and Statistical Appendix paper on Gabon reviews management of oil revenues, competitiveness, and growth. The nature of Gabon’s problems has not changed during the past 15 years. The need to diversify the economy and the export base; control fiscal expenditure and the wage bill; carefully assess capital expenditure; and reform public sector enterprises are the challenges that the Gabonese need to be prepared to implement adequately. Gabon faces huge medium-term fiscal constraints imposed by the expected steady decline in oil production and its depletion.

Abstract

This Selected Issues and Statistical Appendix paper on Gabon reviews management of oil revenues, competitiveness, and growth. The nature of Gabon’s problems has not changed during the past 15 years. The need to diversify the economy and the export base; control fiscal expenditure and the wage bill; carefully assess capital expenditure; and reform public sector enterprises are the challenges that the Gabonese need to be prepared to implement adequately. Gabon faces huge medium-term fiscal constraints imposed by the expected steady decline in oil production and its depletion.

IV. Medium-Term Fiscal Constraints in Gabon: A Scenario Approach27

A. Introduction

1. Gabon’s macroeconomic performance has been erratic over the past decade. There have been intervals of satisfactory progress followed by periods of sudden surges in government spending, particularly associated with the political cycle, giving rise to large fiscal deficits and accumulation of external and domestic arrears (Figures 1 and 2). However, in recent years, steps have been taken to strengthen budgetary management capacity, improve governance, accelerate the privatization process, and foster private sector development.

Figure 1.
Figure 1.

Gabon: Gouvernment Finance, 1990–2004

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 147; 10.5089/9781451813968.002.A004

Figure 2.
Figure 2.

Gabon: Non-Oil Balance, 1990–2004

(In percent of non-oil GDP)

Citation: IMF Staff Country Reports 2005, 147; 10.5089/9781451813968.002.A004

2. Despite the recent improvement, Gabon’s economy continues to face major challenges, including a secular decline in oil production, a heavy debt burden, and weak social indicators. Gabon’s oil sector, which contributes about 55 percent of government revenues, is projected to decline gradually over the medium term and, without significant new discoveries, oil reserves could be depleted over the next 25 years. At the same time, given the high level of public debt (over 60 percent of GDP in 2004), interest payments, at about 7 percent of non-oil GDP and almost 30 percent of non-oil revenues in 2004, are high and pose a heavy burden on government finances. Gabon’s social indicators are weak and are not better than those of other sub-Saharan African countries, despite a per capita income similar to that of other upper middle-income countries. This puts pressures to increase and improve spending in social sectors.

3. In this context, to ensure a sustainable path for the government debt-to-GDP ratio over the medium term, both mobilizing more non-oil revenue, and containing and prioritizing the current level of expenditure are essential.

4. However, in Gabon non-oil revenue already accounts for a relatively large share of non-oil GDP and the room for a large increase of non-oil revenue to offset the reduction of oil revenue may be limited. In 2002 non-oil revenue was around 24 percent of non-oil GDP, compared with an average of less than 15 percent for five other oil-producing countries, Angola, Azerbaijan, Nigeria, Venezuela, and Yemen, (Table 1). Gabon’s revenue performance is also well above the sub-Saharan African average and is comparable to those of upper-middle-income countries.28

Table 1.

Gabon: Comparison of Oil and Non-Oil Revenues 1/

article image

Data are for 2002.

5. Total expenditures, 39.3 percent of non-oil GDP in 2004, also appear to be high. The composition of public expenditures suggests relatively high spending on wages and salaries, and on interest payments (Figure 3). In 2004, wages and salaries represented 10.8 percent of non-oil GDP and interest payments 7 percent of non-oil GDP. Together they represent 60 percent of total current expenditure.

Figure 3.
Figure 3.

Gabon: Composition of Current Expenditure, 1990-2004

(In percent of non-oil GDP)

Citation: IMF Staff Country Reports 2005, 147; 10.5089/9781451813968.002.A004

6. Thus, while scope remains for further improvement in non-oil revenues, the main instrument of adjustment in Gabon is probably on the public expenditure side. The aim of this paper is to outline the main medium-term fiscal challenges that Gabon will face under decreasing oil production, and to consider possible areas of adjustment both on the revenue and the expenditure side. The remainder of this paper is organized as follows: Section 2 presents scenarios covering 2005–2023, focusing on (i) the path of oil revenue (oil production and oil prices); (ii) the control of the wage bill; (iii) the use (spending versus saving) of the current oil windfall resulting from higher oil production and prices than originally projected; and (iv) the importance of Gabon’s economic diversification. Section 3 discusses policy implications and the last section presents the conclusions.

B. Alternative Scenarios 29

Main assumptions

7. Oil revenues: Given the uncertainty about the future path of oil production, two scenarios are considered. The baseline scenario, tables a conservative approach, extending the 2005-2010 oil projections of the DGH (Direction Générale des Hydrocarbures) to 2023. A second, more optimistic scenario maintains oil production broadly at its current level until 2007 (reflecting the views of the major oil companies active in Gabon) followed by a decline thereafter at the same rate as in the baseline (Figure 4). The assumptions for exchange rates and oil prices are those of the WEO (as of March 1, 2005) up to 2010. After 2010, the assumption is that the dollar exchange rate vis-à-vis euro remains unchanged from the 2010 value. The benchmark Brent price of oil is projected to fall from US$48.1 per barrel in 2005 to US$40.2 in 2010. After 2010, the assumption is that the Brent price converges gradually to US$30.0 per barrel. To show the sensitivity of Gabon’s economy to the volatility of oil prices, a scenario of oil prices 20 percent lower than the baseline scenario is also considered.

Figure 4.
Figure 4.

Gabon: Projection of Oil Revenue

(DGH and optimistic scenarios)

Citation: IMF Staff Country Reports 2005, 147; 10.5089/9781451813968.002.A004

8. Wage bill: As shown in Figure 3, the wage bill accounts for a large share of public expenditure. In 2004, the wage bill was 10.8 percent of non-oil GDP placing Gabon’s civil service among the most expensive in Africa (Figure 5).30 Thus, maintaining the control of the wage bill is an important element of fiscal sustainability. To show the importance of wage bill for fiscal sustainability, two scenarios are presented. In the baseline scenario, the wage bill is assumed to remain constant in real term (that is, the wage bill is assumed to increase at the same rate as the non-oil GDP deflator). Then, a second scenario presents a wage bill constant as a share of non-oil GDP (that is, wage bill increases at the same rate as non-oil GDP).

Figure 5.
Figure 5.

Selected African Countries, Wage Bill as % of GDP

(For Gabon and Cameroon % of non-oil GDP)

Citation: IMF Staff Country Reports 2005, 147; 10.5089/9781451813968.002.A004

Note: data are generally for the most recent year in the 1990s available in World Bank civil service dataset

9. Use of oil windfall: Under the baseline scenario the government is able to maintain both its non-oil revenues and its non-wage primary expenditure constant as a proportion of non-oil GDP. Here, it is implicitly assumed that the current oil windfall—defined as all revenue above US$35 per barrel of Brent (Table 2)—is used to decrease the public debt and increase the assets of the Fund for Future Generations (FGF).31 Then, in a second scenario, the government is allowed to spend the entire windfall (that is, by increasing the level of non-wage primary expenditure).

Table 2.

Gabon: Oil Windfall

(In percent of non-oil GDP) 1/

article image

The oil windfall is defined as the difference between oil fiscal revenues in the baseline scenario and the oil fiscal revenues that would result if Brent prices would be US$35 per barrel.

10. Non-oil growth: In the baseline, non-oil growth is assumed to be approximately 3.8 percent, on average, during the period 2005-23. This is higher than the average non-oil growth over 1990-2003 (2.5 percent). Then two other scenarios are considered: (i) non-oil growth is assumed to be 2 percent lower than in the baseline scenario; (ii) the growth in forestry sector is assumed to be two percent lower than in the baseline scenario.32

The main assumptions of all the scenarios are summarized in the Table 3.

Table 3.

Gabon: Summary of Scenario Assumptions

article image

The results

11. The results for the baseline scenario are reported in Table 4. Under the baseline scenario public debt is sustainable. Gabon’s total public sector debt-to-GDP ratio is projected to fall from 61.9 percent in 2004 to 38.5 percent in 2007, 24.4 percent in 2010, and further to 6.8 percent in 2023. Non-oil primary deficit is projected to fall from 7.7 percent in 2004 to 5 percent in 2007, to 4 percent in 2010, and will almost disappear around 2023. The wage bill, as a share of non-oil GDP, is projected to drop from 10.8 percent in 2004 to 9.5 percent in 2007, 8.4 percent in 2010, and further to 5.1 in 2023. Interest payments are projected to fall from 7.1 percent in 2004 to 3.2 percent in 2007, 1.6 percent in 2010, and further to 0.5 percent in 2023.

Table 4.

Gabon: Government Finance Under Baseline Scenario 1/

(As a share of non-oil GDP)

article image
Sources: Gabonese authorities; and staff estimates.

Oil revenues are DGH; wage bill grows at the same rate as non-oil GDP deflator; non-oil revenues and rest of primary expenditures remain constant as percentage of non-oil GDP.

12. For other scenarios (Scenario B-Scenario H), the financial gaps as a percentage of non-oil GDP and total public debt as a percentage of GDP are reported in Figures 6 –7 and Figure 8–9 respectively. The main results can be summarized as follows:

Figure 6.
Figure 6.

Gabon: Financing Gap

(As a percentage of non-oil GDP)

Citation: IMF Staff Country Reports 2005, 147; 10.5089/9781451813968.002.A004

Figure 7.
Figure 7.

Gabon: Financing Gap

(As a percentage of non-oil GDP)

Citation: IMF Staff Country Reports 2005, 147; 10.5089/9781451813968.002.A004

Sources: Fund staff estimates; and calculations.
Figure 8.
Figure 8.

Gabon: Total Public Debt

(As a percentage of GDP)

Citation: IMF Staff Country Reports 2005, 147; 10.5089/9781451813968.002.A004

Figure 9.
Figure 9.

Gabon: Total Public Debt

(As a percentage of GDP)

Citation: IMF Staff Country Reports 2005, 147; 10.5089/9781451813968.002.A004

  • Gabon’s economy remains highly vulnerable to oil revenue (oil production and oil prices). Because the fiscal path is already sustainable under the baseline scenario, an increase in oil production (optimistic path of oil production) will further improve Gabon’s fiscal sustainability (scenario B). However, a drop of oil prices by 20 percent from projected levels will generate financial gaps and public debt becomes unsustainable (scenario F).

  • Maintaining control of the wage bill is an important element of fiscal sustainability, and this even with an optimistic path of oil production. If government maintains the wage bill constant as a percentage of non-oil GDP (instead of remaining constant, in real terms, at its 2005 level), public debt will be placed on an unsustainable path. Given the high oil prices, the effect of this scenario is more important when oil production and revenues decrease. In the end, the debt dynamics originated in this wage bill policy makes public debt turn unsustainable in the longer term (scenario C). If oil revenues are high on account of higher oil production and, at the same time, the wage bill remains constant as a percentage of non-oil GDP, still the public debt-to-GDP ratio increases, although the effect of the higher oil revenue dominates through 2014 (scenario D).

  • The use of oil windfall (spending versus saving) is a crucial element of fiscal sustainability. If government spends the oil windfall, beginning in 2005, this has an immediate effect on fiscal sustainability: under this scenario, the public debt-to-GDP ratio would be approximately 50 percent by 2007, 44.1 percent by 2010 and the debt dynamics caused by the higher expenditures make public debt turn unsustainable (scenario E).

  • The ability to sustain a steady growth in the non-oil sector through diversification is a crucial element of debt sustainability. A lower growth rate in non-oil sector or in its components, depending on the size of the component, will undermine fiscal sustainability (scenarios G and H). Also a lower non-oil growth would make public debt less sustainable in scenarios B to F.

C. Policy Implications

13. The main policy implications from these simulations are as follows:

• The use of the windfall: the virtuous circle

The level of public debt is high in Gabon (over 60 percent of GDP in 2004); this generates high levels of interest payments (about 7 percent of non-oil GDP and almost 30 percent of non-oil revenues in 2004). Higher oil revenue, resulting from higher oil prices and a slower decline of oil production than projected, provides the government with a crucial choice: spending or saving the windfall. The scenarios show that if Gabon maintains its budgetary discipline, and manages its oil windfall prudently, foreign debt can fall by more than half by 2010. This will generate a virtuous circle for the public finances by reducing the heavy burden imposed by public debt. If, on the other hand, Gabon relaxes fiscal policy today, foreign debt will remain at current levels and unsustainable financing gaps will open up. Thus, if the government saves (spends) the oil windfall, it can be a blessing (curse) for Gabon.

• Wage bill

A key element for Gabon’s fiscal sustainability is to contain the wage bill. The recently promulgated civil service law poses risks for maintaining control of the wage bill. In particular, the creation of five separate civil services could reduce discipline in public sector hiring and remuneration decisions. To have its full impact, implementing decrees and a number of complementary laws need to be passed. These decrees and laws should provide instruments for the government to contain the wage bill. However, if the new civil service law inflates the wage bill, there would be serious risks for public debt sustainability.

• Non-oil revenue mobilization

In the scenarios we assumed that non-oil revenue remains constant as a share of non-oil GDP (that is, it grows at the same rate as the non-oil GDP). This does not mean that there is an unchanged tax effort. Indeed, some non-oil revenues are related to oil activities (e.g., taxes on wages for employees in oil companies; tax revenues from consumption by expatriates working in oil companies, etc). These revenues will decrease with the decline of oil production, raising pressures on other non-oil revenue to be constant as a percentage of non-oil GDP. Thus, government should maintain and enhance its tax effort. In this regard, a fund technical assistance report on tax policy and administration made a number of key recommendations. Many of them still have to be implemented:33

  • (i) streamlining of tax incentives and elimination of discretionary exemptions granted to specific businesses;

  • (ii) simplifying the structure of VAT and limiting exemptions;

  • (iii) strengthening the recovery of tax arrears, particularly VAT and forestry taxes; and

  • (iv) modernizing tax administration, including transferring all tax collection responsibilities from the Treasury to the Direction Générale des Impôts (DGI); increasing the number of tax auditors, and widening the coverage of tax audits.

14. The report also recommended the creation of a Large Taxpayers Unit (LTU). The decree establishing the LTU (Direction des Grandes Entreprises, DGE) in the tax directorate was adopted in September 2004. The DGE will begin its operations in 2005 and is expected to be fully operational during 2006. The task is now to make the DGE effective in enhancing revenue mobilization.

• Public expenditure management

Given the limited scope for increasing non-oil revenue, the core of fiscal adjustment is to contain public expenditures and enhance their efficiency. In this regard, a second technical assistance report34 contains many valuable suggestions that are still to be put into practice, covering budget preparation, budget execution, and sound public accounting practices. Important priorities in the public expenditure management area include:

  • (i) integration of all special funds in the budget;

  • (ii) clarification on the division of responsibilities, and separation of functions, between the DGST (Treasury) and the DGCP (General Public Accounting Department);

  • (iii) enhancing the management of public investment. A large part of capital spending should be integrated into current expenditure. The investment budget needs to focus on true development projects; and

  • (iv) the establishment, over the medium term, of a medium-term expenditure framework.

D. Conclusion

15. Gabon faces huge medium term fiscal constraints imposed by the expected steady decline in oil production and its depletion in about 25 years. Clearly, a sustainable fiscal path needs (i) to maintain both tax effort and control of public expenditure, and (ii) to foster sustainable growth in the non-oil sector through diversification.

  • Benon, Olivier, Eric Lesprit, Maureen Kidd, and Alain Jousten, February 2004, “Gabon: Amélioration du Système Fiscal et Modernisation de la Direction Générale des Impôts,” (Washington: International Monetary Fund).

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  • Hélis, Jean Luc, July 2004, Gabon: “Proposition pour une Amélioration de la Gestion Budgétaire,” (Washington: International Monetary Fund).

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  • Keen, Michael and Alejandro Simone, (2004), “Tax policy in Developing Countries: Some Lessons from the 1990s, and Some Challenges Ahead,” in Sanjeev Gupta, Ben Clements, and Gabriela Inchauste (eds): Helping Countries Develop: The Role of the Fiscal Policy, (Washington: International Monetary Fund).

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27

Paper prepared by Tahsin Saadi Sedik.

28

See Keen and Simone (2004) for an international comparison of the level and composition of government revenue performances.

29

For the traditional debt sustainability analysis and further alternative scenarios, see Appendix IV in the accompanying staff report.

30

The international comparisons are based on a World Bank dataset from the website http://www1.worldbank.org/publicsector/civilservice/.

31

For the accumulation of assets at the FGF, it is supposed that the law is observed. (See Chapter II).

32

See Chapter III in this SEI paper for details on the factors limiting/enhancing the growth in the non-oil sector in Gabon.

33

Benon, Olivier, Eric Lesprit, Maureen Kidd, and Alain Jousten, February 2004, Gabon: “Amélioration du Système Fiscal et Modernisation de la Direction Générale des Impôts” (Washington: International Monetary Fund).

34

Hélis, Jean Luc, July 2004, “Gabon: Proposition pour une Amélioration de la Gestion Budgétaire,” (Washington: International Monetary Fund).

Same Series

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Cover IMF Staff Country Reports
Gabon: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2005: Issue 147
Publisher:
International Monetary Fund
ISBN:
9781451813968
ISSN:
1934-7685
Pages:
99
DOI:
https://doi.org/10.5089/9781451813968.002

Gabon: Gouvernment Finance, 1990–2004

(In percent of GDP)

Gabon: Non-Oil Balance, 1990–2004

(In percent of non-oil GDP)

Gabon: Composition of Current Expenditure, 1990-2004

(In percent of non-oil GDP)

Gabon: Projection of Oil Revenue

(DGH and optimistic scenarios)

Selected African Countries, Wage Bill as % of GDP

(For Gabon and Cameroon % of non-oil GDP)

Gabon: Financing Gap

(As a percentage of non-oil GDP)

Gabon: Financing Gap

(As a percentage of non-oil GDP)

Gabon: Total Public Debt

(As a percentage of GDP)

Gabon: Total Public Debt

(As a percentage of GDP)