Statement by Damian Ondo Mañe, Executive Director for Gabon

The staff report for the combined consultation and 2005 Article IV Consultation on Gabon highlights economic developments and policies. Preparing Gabon for the post-oil era requires strengthening the efficiency of the public sector and providing a framework for private sector development to raise the productivity of the Gabonese economy. In the public sector, improving expenditure management, especially of public investment, is essential. Gabon remains keen to seek a multiyear follow-up program after the expiration of the Stand-By Arrangement.

Abstract

The staff report for the combined consultation and 2005 Article IV Consultation on Gabon highlights economic developments and policies. Preparing Gabon for the post-oil era requires strengthening the efficiency of the public sector and providing a framework for private sector development to raise the productivity of the Gabonese economy. In the public sector, improving expenditure management, especially of public investment, is essential. Gabon remains keen to seek a multiyear follow-up program after the expiration of the Stand-By Arrangement.

I would like to reiterate my authorities’ appreciation to Management and staff for their continued support to Gabon in its adjustment efforts to address its daunting challenges namely the decline in oil production, high external debt and weak social indicators. Discussions held in Libreville between the Gabonese authorities and the staff have been useful and productive. The staff report is a good reflection of these discussions and describes well the progress achieved in the implementation of the authorities’ program.

My authorities find the issues developed in the Selected Issues Paper (SIP) well targeted given their importance in the country’s strategy. The findings in this paper support the authorities’ views on the need to reduce the country’s oil dependency through, notably the diversification of the economy, and improve the social conditions of its population. On the latter, the issue of the use - spending vs. saving in the Fund for Future Generations - of the oil windfall, which is an important element of discussion between the authorities and the staff, should be addressed against the important investment, in particular infrastructure, and social needs of the country. The finalization of the PRSP will be an important input to deepen this analysis.

Recent Economic Developments and Performance under the SBA

Macroeconomic performance at end-2004 has been broadly consistent with the projections made during the 2nd review of the program, thanks to continued strong policy implementation on the part of the authorities, the continued firmness of oil prices and increased output in manganese mining. For 2004, real GDP is estimated to have grown by 1.4 percent, as oil output was slightly higher than in 2003. It is to be noted that the increase in oil production is due mainly to higher investment in mature fields, made possible by the higher oil prices. Non-oil GDP growth is estimated to have reached 2.3 percent, mostly driven by a strong public demand. Inflation remained subdued, below target at ½ percent. As a result, performance under the SBA has been satisfactory with all quantitative and structural performance criteria for end-December 2004 observed.

The continued high level of oil prices in the last quarter of 2004 and improved expenditure management throughout the year enabled the fiscal sector to record a surplus above target. Oil revenues were lower than expected mainly because of the shift from concession to production- sharing agreements in the upstream sector, which allow for a quicker cost recovery. Expenditures, and particularly the wage bill, have been contained within limits. Non oil primary balance decreased from 8.2 percent to 7.7 percent of GDP. As programmed, oil revenues surpluses in 2004 were used to reduce foreign and domestic debt, and increase deposits in the Fund for Future Generations. An agreement has been reached with the regional central bank, effective since January 2005, to remunerate the fund at a rate of 1.7 percent par annum.

In the external sector, the current account surplus doubled from 5.5 percent of GDP in 2003 to 10.4 percent of GDP in 2004, which led to a significant increase in Gabon’s contribution to the regional central bank NFAs in 2004. As envisaged, external debt declined from 56.0percent of GDP at end- 2003 to 49.6 percent at end-2004 and, should the oil prices remain firm, it is expected to decline further by end-2005. Following the Paris Club agreement in June 2004, most of the bilateral agreements have been completed. However, to ensure that the latest agreements can be concluded, the Secretary General of the Paris Club has granted an extension through end-March 2005 on the signing date for bilateral agreements. Discussions are still ongoing with non-Paris Club creditors and an agreement with the London Club is expected to be signed during the first semester of 2005.

There has also been progress in the implementation of structural reforms although the pace has been less than envisaged, resulting in the non-observance of some structural benchmarks. The new law on the general civil service statute has been adopted by the parliament in late 2004 but its content has been modified from its original draft by Parliament. As a result, the government decided to postpone the adoption of implementing decrees until the relevance and budgetary impact of these modifications are assessed. Moreover, the remaining special accounts to be integrated in the budget will be through a supplemental budget in 2005. The adoption of the implementation regulations for the mining code has been delayed pending the completion of work on a standard concession agreement for the mining sector, which is now scheduled for the second quarter of 2005.

In the forestry sector, where an important reform is being undertaken with the assistance of the World Bank, the government made public the list of holders of forest permits, the list of currently valid permits, the list of permits reverted to the government and the maps showing the distribution of forestry permits and national parks since February 200530. In addition, it launched the pilot project for public auction of forestry permits. No forestry permits will be awarded outside this pilot project and before its completion. As noted in the SIP, the reform of the forestry taxation in 2004 did not meet the expectations as tax arrears occurred despite the simplification of the tax structure. As a result, the government decided to introduce a withholding system to ensure a better tax collection and stop tax arrears accumulation. The government will withdraw forestry permits in case of non-payment of taxes.

The anti-corruption commission (CNLEI) released its first annual report in December 2004. The report will be published in the Journal Officiel and on the Commission’s website once it is established. The Commission’s working program for 2005 includes, among others, the promotion of the observance of the financial asset disclosure procedures and, surveys and educational campaigns on its mission.

Macroeconomic Outlook and Policies for 2005

As indicated in my previous Buff statement, the outlook for 2005 remains positive; helped by the favorable environment in the oil sector, and an increased interest in investment in sectors such as mining, agro industries, wood processing and housing by foreign investors. Non-oil activity is therefore expected to grow by 3.0 percent in real terms. My authorities remain committed to their adjustment program as they consider the recent developments in the oil sector as transitory. Policies in 2005 will aim at pursuing the adjustment efforts with the strengthening of the public finance management and the promotion of the activity in non-oil sectors through the implementation of structural measures. The 2005 budget law approved by the Parliament last December is in line with the current Stand-By Arrangement.

More specifically, in the fiscal sector, the 2005 budget targets a reduction in the non-oil primary budget deficit by 2.0 percent of GDP through an increase of non-oil revenue and a reduction in primary expenditures. The increase in non-oil revenue is expected from a better tax administration through notably the computerization of customs services, improved collection of tax arrears and strengthened control of VAT reimbursements. My authorities will accelerate the implementation of the Large Enterprise Directorate (DGE) for its full operationalization in 2006.

On the expenditure side, efforts to contain non-essential current spending will be pursued. However, as noted above, delay in the application of the new civil service law reduces the scope for further contraction of the wage bill. My authorities will therefore continue to implement administrative measures to contain the wage bill. Nonwage expenditures such as transfers and subsidies to public enterprises are also expected to decline.

In addition, measures are underway to reduce pressures on public finances on many fronts. The restructuring plans of the two social security funds will be continued and will help to reduce their costs, notably their wage bills, and restore their financial viability. The action plan to strengthen the finances of local governments is being elaborated with a particular focus on developing new sources of revenues such as the property tax, and containing personnel costs. Likewise, an analytical report is under preparation to examine the measures needed to reduce costs and increase revenue in Gabon Poste.

The investment budget will be maintained at its level at around 4 percent of GDP in 2005. Nevertheless, my authorities will pursue their efforts to enhance efficiency and transparency of the public investment spending and it is expected that the audit of expenditures for the independence celebrations and that of the arrears of the Road Maintenance Fund (FER) will be completed by end- August and end-June respectively. In addition, the government intends to fully enforce the provisions of the public procurement code, in particular to the expenditures related to the FER.

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. Credit to the economy is projected to increase as new projects, notably in the housing sector, are expected to start in 2005. The monetary authorities recognize the risks posed by the high liquidity in the banking system; situation that is also common to almost all countries in Central Africa. In collaboration with the regional banking commission COBAC, they will continue to monitor credit developments and strengthen the prudential supervision to ensure the well functioning of the financial sector.

My authorities intend to pursue the implementation of their reform agenda that aims at improving the business climate, promoting the private sector through economic diversification, as well as improving its competitiveness. In this regard, a workshop was held in Libreville in February 2005 to examine the findings of the FIAS report on the constraints to private sector investment in Gabon. On the basis of this report, my Gabonese authorities intend to implement a package of measures aimed at minimizing regulatory and administrative requirements as the basis for an effective investment promotion policy.

As regards the privatization/restructuration of public enterprises, my authorities adopted the regulatory framework for the Agence de Régulation des Télécommunications (ARTEL), which constituted the last obstacle to the selection of a successful bidder for Gabon Telecom. The selection process is expected to be completed by end-April of this year. Despite some technical problems related to its aircrafts, Air Gabon managed to improve its financial situation although no surplus has been reached in its operational results in 2004 as anticipated. In the context of its partial privatization, the consultant hired to assist the authorities in this process will submit a diagnostic assessment of the economic and financial performance of Air Gabon, including the documentation to select pre-qualified bidders by end-April 2005.

As regards transparency in the oil sector in the context of the EITI, a working group comprising the Office of President, the Office of the Prime Minister, the Ministry of Finance, the Ministry of Hydrocarbons, and the CNLEI has been established and has started the technical work required to reconcile the financial flows between the oil companies and the government. The report on this technical work will be transmitted by end-June 2005 to an interest group to be formed in April 2005 and which will comprise representatives of the oil companies, the civil society and the government. An independent audit firm will then conduct an audit of the reconciliation by end-September 2005. It is my authorities’ intention to conduct such audits on a semiannual basis. In light of the results of this exercise in the oil sector, my authorities plan to expand the initiative to the mining sector in 2006. In conjunction with this exercise, my authorities are requesting that the Fund prepare a fiscal ROSC in the course of 2006, which will focus particularly on natural resource revenue transparency.

My authorities remain committed to finalize a high-quality PRSP, which will lay the foundations for its development strategy. To this end, they are implementing the needed actions to its finalization. It is worth noting that, following an internal review of the progress achieved in the preparation of this document in late 2004, several measures, including the appointment of a new team to conduct this process, have been taken to ensure that the document be ready as soon as possible. Since then, the acceleration of the process has been visible with notably the preparation of sectoral strategies and the conduct of regional consultations with the civil society and the private sector, in the context of participatory process. The finalization of the PRSP is pending the completion of the ongoing poverty survey. Moreover, the government is working closely with several donors to prepare a public expenditure framework compatible with PRSP. This framework will help design the public investment program during the preparation of the 2006 budget.

Conclusion

My authorities have continued to demonstrate their commitment to and ownership of their adjustment program. As noted in my previous statements, my authorities are fully aware of the structural changes in the economy and the challenges this situation entails. It is their intention to pursue their adjustment policies to address these challenges, namely the decline in oil production, high external debt and weak social indicators.

In this context, my authorities reiterate their willingness to continue their close relationship with the Fund through a successor arrangement that will help the country achieve its economic and social objectives. I would like to recall that the initial request of my authorities was for an EFF. However, in order to build the necessary track record, my authorities agreed to an SMP, which was followed by the current SBA. Their understanding was always that, after the successful implementation of the SBA, it will be followed by a multiyear arrangement.

My authorities remain of the view that the SBA has helped to set the foundation for such a multi year arrangement, which is best suited to support the country’s far-reaching structural reforms and the implementation of its poverty reduction strategy, especially in view of the expected decline in its oil production as of 2006, and its vulnerability to swings in oil prices. Therefore, they are requesting that the discussions on such an arrangement start as soon as possible. I would ask Directors for their support for my Gabonese authorities’ request.

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All these documents can be consulted on Internet at http://www.finances.gouv.ga/fiscforet.htm.