Statement by Damian Ondo Mañe, Executive Director for the Republic of Equatorial Guinea

This 2005 Article IV Consultation highlights that monetary development in the Republic of Equatorial Guinea continues to be dominated by fiscal policy. Fiscal outcome was marked by an increase in the fiscal surplus in 2004 compared with 2003 on account of a stronger-than-expected revenue performance owing to higher oil prices and increase in hydrocarbon production that was partly offset by a substantial increase in capital expenditure. Important progress has also been made with regard to transparency and accountability of oil-related revenues and public finance.

Abstract

This 2005 Article IV Consultation highlights that monetary development in the Republic of Equatorial Guinea continues to be dominated by fiscal policy. Fiscal outcome was marked by an increase in the fiscal surplus in 2004 compared with 2003 on account of a stronger-than-expected revenue performance owing to higher oil prices and increase in hydrocarbon production that was partly offset by a substantial increase in capital expenditure. Important progress has also been made with regard to transparency and accountability of oil-related revenues and public finance.

Introduction

First of all, I would like to thank staff for the comprehensive and well-written set of papers on the recent macro economic developments in Equatorial Guinea. My authorities welcome these papers which give a thorough analysis of the country’ economic and financial situation as well as the challenges facing Equatorial Guinea. My authorities are also appreciative of the staff’s and management’s commitment to assist them in meeting those challenges especially in the development of policies to diversify the economy, the management of the national resources and the building of capacity in order to reduce poverty and meet the MDGs. Indeed, the oil wealth provides Equatorial Guinea a great opportunity to lay down solid foundations for broad-based economic growth and poverty alleviation.

My authorities’ commitment to implement policies towards the achievement of these objectives were confirmed to Mr. Carstens, Deputy Managing Director, during his visit to Malabo at the end of last January. At the same time, the authorities expressed their wish to have a seminar in collaboration with the Fund on the alternative sources of growth in the CEMAC region.

The lack of capacity has been the key constraint to the authorities’ efforts to build a strong foundation for long term economic prosperity. Taking into account this situation, my authorities would like to benefit from capacity building assistance from the international community and the Bretton Woods Institutions, in particular. Meanwhile, as part of addressing capacity constraint, the authorities have undertaken programs to train Equato Guineans at institutions of higher education abroad. However, this can be a medium term response. To meet the immediate needs of the country, the authorities are relying on the international community for capacity building assistance in the different key sectors.

Based on the Board’s recommendations made in 2003 on the need to improve fiscal management, the authorities have continued to make specific efforts in those areas through, inter alias strengthening the budgetary process and consolidating tax legislation as well as improving transparency and accountability.

Transparency and accountability

In their efforts to introduce further transparency and accountability in the management of petroleum sector revenues and public expenditure, Equatorial Guinea is voluntarily participating in the Extractive Industries’ Transparency Initiative (EITI) with assistance from the World Bank. The authorities have requested and received a fiscal report on Observance of Standards and Codes (ROSC). In this regard, all necessary information were made available to the Bank and Fund staff during their visits, in November 2004 and January 2005, with a view to facilitating data compilation and reconciliation as well as helping to design recommendations and plan of actions. In the same vein, it is worth noting that Equatorial Guinea, in collaboration with the Bank and the Fund, hosted in January 2005 a regional seminar for CEMAC parliamentarians on the management and accountability of oil resources. My authorities are fully committed to implement the recommendations made by the World Bank, EITI and Fiscal transparency ROSC missions. Already, committees comprising of representatives of all stakeholders namely government, oil companies and the civil society have been set up and they have started implementing their respective plans of actions. An interministerial committee was been established in 2004 in order to monitor macroeconomic developments and coordinate policies. Moreover, my authorities have requested technical assistance from the World Bank in order to review ways to strengthen the operational performance of GEPetrol, and the Ministry of Mines, Hydrocarbon and Energy.

In addition it is important to note that in early 2004 all government accounts with Riggs Bank were closed and the balances transferred to the Banque des Etats de l’Afrique Centrale,(BEAC), the regional central bank. The accounts held with Riggs Bank were only transitory accounts meant to deal with local constraints and speed up the payments of oil foreign companies to the Treasury of Equatorial Guinea.

Economic and Financial Performance in 2004

Equatorial Guinea’s economy is dominated by the oil and gas sector which in 2004 accounted for about 90 percent of GDP, 98 percent of exports and 86 percent of government revenues. Due mainly to the expansion in hydrocarbon production, real GDP grew by 34 percent while the non-oil GDP increased by 13 percent boosted by strong performance in the construction, infrastructure and services sectors. At 4,2 percent, inflation decreased from 7,3 percent in 2003 but still remains above the CEMAC’s convergence criterion of 3 percent. The real effective exchange rate appreciated by about 5 percent compared to 15 percent in 2003 and the current account deficit was reduced significantly compared to 2003. The official international reserves increased fourfold to cover 18 months of imports of the non-oil sector.

In the fiscal sector, due to higher world oil prices and the surge in production, total revenue estimated at 37 percent of GDP increased by 44 percent, higher than budgeted though it was offset by substantial public expenditure. In addition to the oil receipts, the non-oil revenue rose by 12 percent owing to economic growth and improvements in tax administration. Capital expenditure grew more than budgeted on account of higher capital spending in the infrastructure sector, while the current outlays remained within budget. As a result the fiscal surplus stood at 14 percent of GDP while non-oil fiscal deficit was 17 percent of GDP. In their efforts to strengthen the fiscal area, my authorities put in place in January 2005 a new tax code replacing the domestic turnover with a value added tax (VAT) and the tax authority was reorganized. Moreover the law regarding the 2004 Budget execution (la ley de la Ejecucion del Presupuesto General del Estado para el Ejercicio Economico 2004) has been presented to the National Assembly as stipulated in the Constitution.

Regarding monetary developments, broad money grew significantly on account of the large inflow of oil revenue and transfers from international oil companies. However, the resulting excess liquidity has not been translated into credit increase to the private sector, due to lack of bankable projects. Overall, the banking system remains sound and compliance with respect to banking supervision norms is respected. In an effort to broaden the banking sector, a new bank whose license was approved in 2004 is expected to operate shortly.

As a member of the Communauté Economique et Monétaire de l’Afrique Centrale (CEMAC) and Banque des Etats de l’Afrique Centrale (BEAC), Equatorial Guinea has deposited the oil revenues in the BEAC. However, in view of the low rate of return and to maximize the value of the oil wealth for future generations, the authorities have started discussions with BEAC in order to find the best scheme and modalities for an appropriate remuneration of funds deposited with the Regional Central Bank. In this respect, the authorities are seeking advice from the Fund given the limited capacities of the country in this very specific and sensitive matter.

On the CEMAC Convergence criteria, Equatorial Guinea has observed three of the four convergence criteria. Only the criterion on inflation was missed due to the large investments in infrastructure notably for the construction of schools, hospitals, buildings and roads. The CEMAC common external tariff (CET) has also been adopted with significant progress in eliminating import tariffs on goods produced within CEMAC zone.

Macroeconomic policies and Medium Term objectives.

The economy of Equatorial Guinea is expected to grow by 5 percent a year between 2005 and 2010 in the context of an increase in hydrocarbon production.. The non-oil sector will also grow rapidly over the medium term given the ongoing investment, including in infrastructure. The fiscal surpluses should average 15 percent of GDP and external current account will be in surplus due to the decline in oil sector imports of capital and good services. The macroeconomic framework needed to achieve these objective was agreed with staff and my authorities are aware that there is a need to move towards further fiscal sustainability, reduce pressures on prices, develop the non-oil sector and strengthen transparency and accountability in the management of natural resources as well as public finance.

In the fiscal area, the authorities will keep spending within budget in order to further reduce inflationary pressures and they agree to adopt the primary non–oil balance as the key policy target. In this regard, the ROSC recommendations will be implemented in addition to the new tax law with a view to strengthen the expenditure tracking and control process. The three stage approach to fiscal policy recommended by staff is appropriate and measures needed for its execution will be put in place notably in improving the public expenditure management through an adequate technical assistance and the development of the National Poverty Reduction Strategy.

For the monetary sector, the containment of inflationary pressures remains an important objective of policies conducted by the regional central bank. The authorities are cognizant that there is a need for the regional central bank to strengthen its instruments meant to mop up the excess of liquidity in order to sustain the macroeconomic stability and financial sector soundness. The authorities will continue to contribute to the reduction in the excess of liquidity by maintaining a prudent fiscal policy as outline above. The banking system remains sound and the authorities will continue to enhance the banking supervision while taking necessary actions to ensure that banks comply with prudential regulations. My authorities, in collaboration, with the regional body namely Groupe Anti-blanchiment en Afrique Centrale are committed to implement an anti-money–laundering/combating the financing of terrorism (AML/CFT). In that regard, a coordinating unit will be established by year-end. In addition, my authorities place a high priority on establishing an adequate framework for the management of the country’s growing budget surpluses consistent with its obligations as a member of the BEAC.

The authorities reaffirmed their commitment to comply with the regional directives in enhancing the intra regional trade and implementing the common external tariff. They also intend to phase out over time the remaining export tariffs on cocoa, coffee and logs though their objective is to provide an incentive for higher value-added activities. They fully share the view of eliminating these taxes in order to enhance the profitability and competitiveness of the cocoa, coffee and logs considered as traditional sectors.

Poverty reduction

My authorities recognize the need to scale up their efforts to improve the social indicators and meet the MDGs. To this end they intend to draw on lessons learned from the National Development Plan and develop a full document on poverty reduction strategy (PRSP), for which they are requesting assistance from the World Bank. They agree that the PRSP will provide a framework for adjusting both level and composition of public expenditure with the objective of meeting the social needs of the population. Moreover the poverty reduction strategy will enable the authorities to balance their objective to improve social outcomes with the need for macroeconomic stability and intergenerational equity. The second national conference scheduled for the end of 2005 will discuss the interim document of poverty reduction strategy. In the meantime, the authorities have initiated with the assistance of the U.S. Government, a project to assess social needs in Equatorial Guinea, and develop a mechanism to improve and speed up the execution of social outlays. Social projects were identified at the National Conference on the Assessment of the National Development Strategy held in January 2004.

Capacity building and statistical issues

It is worth stressing that severe institutional capacity constraints have hindered the authorities’ ability to conduct economic policy and to implement their development program over the past years. Therefore, they are mindful of the need to identify priority areas for capacity building and seek external assistance from the international community including from the Fund. Macro statistics, public expenditure management and macro fiscal policy advice front under the implementation of the fiscal transparency ROSC and World Bank EITI recommendations are the priority areas identified. My Equato Guinean authorities are determined to work with the Fund to develop the scheme and financial modalities for this crucial capacity building assistance. In this regard, a formal request has been already submitted to the management. Furthermore, my authorities in collaboration with AFRSTAT and other development partners, will undertake all necessary actions to ensure successful implementation of the national strategy for the development of statistics (NSDS) and to initiate the reforms of the statistical system.

Conclusion

I would like to reiterate the determination of my authorities to closely work with the Fund and other development partners in implementing needed reforms aimed at enhancing transparency and accountability in oil resources management, diversifying the economy and enhancing institutional capacities. They have reiterated their commitment to the EITI Initiative at the last meeting in London, and intend to participate as a pilot in a G–8 Transparency and Accountability Compact. My authorities are also determined to continue their efforts to improve the economic performance of the country, especially through the development of the non-oil sector, structural reforms, including the development of a strong private sector, which they view as critical to ensure sustainable growth of the economy over the medium to long term. My authorities fully recognize the important challenges, notably on capacity building and the need to enhance social indicators. The biggest challenge facing Equatorial Guinea is to overcome the capacity constraint in order to be able to use the fast growing oil revenue to meet the development objectives of the present and future generations. In this regard, my authorities are hopeful that their development partners will provide them with the needed technical assistance.