July 8, 2005

We welcome this fourth and final review under the SBA as it provides an opportunity to assess Gabon’s adjustment efforts. Indeed, it is worth recalling that in the past, Gabon’s performance under Fund-supported programs had been mixed with arrangements never reaching their terms, in account of slippages on the fiscal front and delays in the reform agenda. However, the beginning of the decline in oil production, in a context of high debt service burden and deteriorating social indicators, make the Gabonese authorities at the highest levels fully aware of the need to change policy stance. Accordingly, since mid-2002, the government has committed itself to undertaking major reforms and to implementing polices aimed at strengthening public finance management and promoting non-oil sector.

As a first step, and with staff’s assistance, my authorities took measures to address the main causes of the slippages of the past. They adopted an austerity budget for 2003 and in order to establish a track record, budgetary targets were set and observed for the first part of 2003. These included the repayment of all external debt-service arrears to multilateral institutions, as well as arrears to post-cut off date debt and debt service under the 2000 Paris Club rescheduling for debt owed to bilateral creditors.

The authorities’ efforts were further strengthened in mid-2003 in the context of a Staff Monitored Program, which satisfactory implementation demonstrated continued determination of my authorities to strengthen budgetary management and restructure the economy, and to make it less oil-dependent.

The Gabonese authorities’ ownership of their adjustment program was further confirmed with the satisfactory implementation of the current SBA. Its conclusion at the end of this month will mark a 3-year period of unprecedented record of reforms in the country.

On behalf of my authorities, I would like to express my appreciation to Management and staff for their continuous advice and support. My authorities highly appreciate the cordial atmosphere in which the discussions have taken place during the current arrangement. The paper before us describes well the substantial achievements over the past three years as well as the policy challenges the country faces over the medium-term.

Recent Economic Developments and Performance under SBA

As indicated in my previous statement on Gabon last March, economic performance in 2004 has been consistent with the projections thanks to strong policy implementation, firmness of oil prices and increased production in the manganese sector Real GDP is estimated to have grown by 1½ percent, as oil output was slightly higher than in 2003. Non-oil GDP growth is estimated to have reached 2¼ percent, mostly driven by strong public demand. Inflation remained subdued, below target at ½ percent.

The high level of oil prices in 2004 and improved expenditure management throughout the year enabled the fiscal sector to record a surplus. Oil revenue windfalls in 2004 were used to eliminate external payment arrears, further reduce domestic arrears, trim down overall debt, and increase deposits in the Fund for Future Generations. Expenditures, and particularly the wage bill, have been contained within limits. As a result, non oil primary deficit decreased from 8.2 percent to 7.7 percent of non-oil GDP. In the external sector, the current account surplus remained strong at 10½ percent in 2004. As envisaged, external debt declined from 56 percent of GDP at end-2003 to 50 percent at end-2004 and, should the oil prices remain firm, it is expected to decline further by end-2005 to 42 percent GDP. Following the Paris Club agreement in June 2004, most of the bilateral debt negotiations have been completed. Discussions are still ongoing with non-Paris Club creditors and an agreement with the London Club is expected to be signed during the course of this year.

Preliminary information indicates a strengthening of economic activity across sectors in the first quarter of 2005. Non-oil fiscal performance therefore was higher than projected while expenditures remained under control. As a result, the non-oil primary balance was higher than expected. However, although oil production remained stable, oil revenues were lower than expected due to widening price discounts for Gabon’s oil relative to the Brent. This oil revenue trend may persist, should large discounts remain throughout the year. Nevertheless the performance criterion on the fiscal primary balance at end-March 2005 was met. And so were the other quantitative performance criteria at end-March 2005.

On the structural front, new developments occurred as regards the airline company Air Gabon. Despite several restructuring attempts, the financial situation of the company failed to improve and even deteriorated lately. In light of this situation, the Gabonese government took the difficult decision to liquidate the company despite strong social pressures to keep the company in the public enterprise sector, in part because the transportation structure has long lied essentially on air transportation. They decided to create a new airline company with a majority private sector participation, which would be managed on a commercial basis. There have been several expressions of interest by potential buyers and my authorities expect to choose the strategic partner by end-July 2005. Given the strategic importance of the sector, the government intends to maintain a minority stake in the new company while ensuring the end of drain by the sector on public resources and providing better services to the population.

With a satisfactory performance under the SBA in the first quarter of 2005, my authorities are requesting the completion of the fourth review under the SBA. In addition, in view of the authorities’ good faith efforts and substantial progress made in negotiating with non-Paris Club and London creditors, my authorities request also the completion of the financing assurances review.

Policies for the Remainder of 2005 and the Medium Term

With the economic recovery in many non oil sectors such as mining, forestry, construction and agro-industry, the continued firmness in oil prices and the stabilization of the oil production, the economic outlook for 2005 remains positive. In particular the non-oil sector is expected to grow further by 3 percent in real terms in 2005, boosted by strong external demand of manganese and timber and the revival of domestic demand. The current account surplus should increase by 2 percentage points, contributing to further accumulation of reserves. While inflation is expected to increase, it should not exceed 1 percent. As no financing needs is foreseen, my authorities will continue to treat this arrangement as precautionary.

My authorities, as indicated in their letter of intent, aim to maintain the thrust of present policies for the remainder of the year. They are committed to continue their adjustment efforts with the strengthening of public finance management and the finalization of the remaining structural reforms.

Fiscal policy for the remainder of the year will be consistent with the 2005 budget law. More specifically, non-oil revenue in 2005 is expected to increase by 1 percentage point of non-oil GDP. On the expenditure side, measures will be implemented to ensure that the wage bill remains within budget. However, the budget will have to accommodate the spending related to the liquidation of Air Gabon. To this end, my authorities intend to adopt during this quarter a supplementary budget that will also incorporate some poverty reduction-related expenditures that may be needed once the PRSP is finalized in August 2005. As a result, the non-oil primary deficit in 2005 is expected to fall at a slower pace than originally envisaged, by only 1 percentage point of non-oil GDP. It is my authorities’ intention to maintain the same pace of fiscal adjustment over the medium-term. To this end, they will: (i) continue efforts to raise non-oil revenue, which are expected to be boosted with the operationalization of Large Tax Payer Unit in 2006, and (ii) continue to streamline expenditures, particularly on the wage bill. As all domestic arrears were eliminated and all external arrears cleared in accordance with the 2004 Paris Club agreement, my authorities intend to save future oil revenue windfalls after provisions for investment and social spending consistent with the PRSP.

In preparation of the 2006 budget law, my authorities envisage to improve the coordination between the current and the investments budgets by reintroducing joint budgetary conferences and harmonizing the technical preparation of the budgets between the Ministry of Finance and the Ministry of Planning. They also intend to make the 3-year Public Investment Program (PIP), a more binding framework for public investment spending. Finally, they aim to finalize promptly the work on the functional budget classification. My authorities welcome and view the ongoing work on a Public Expenditure Review as critical in addressing these issues.

As regards transparency of the public investment spending, 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-July respectively. In addition, the government intends to continue the full enforcement of the provisions of the public procurement code, in particular to the expenditures related to the new FER.

As regard the reform agenda, I would like to recall that the design of the current SBA provided for a frontloading of structural measures, with most of them having been implemented, either as scheduled or sometimes with some delay. Nevertheless there are still structural reforms that are taking longer time to complete than expected. My authorities are working on completing these reforms, which in some instances require greater political and public consensus.

In particular, the government remains committed to the completion of the privatization process of Gabon Telecom (GT) and Air Gabon. With the ongoing measures to eliminate the remaining uncertainties and streamline the company’s balance sheet, the divestment from a majority stake of GT is now expected for end-September 2005.

As a follow-up to the workshop on the impediments to the private sector development, the government is finalizing a program that aims to improve the investment climate through notably: (i) the reduction of factor costs; (ii) the simplification of administrative procedures and the improvement of the environment for foreign investors; and (iii) the finalization of the new tax code and the effective elimination of quasi fiscal taxes. Given the importance of access to credit for the private sector development, my authorities intend to address this issue by first aligning the tax treatment of banks’ provisions with the norms of the COBAC across the CEMAC zone and then by further harmonizing regulatory and legal frameworks.

In the forestry sector, the ongoing work on the new role of the Société Nationale des Bois du Gabon (SNBG) should be completed before the lifting of its monopoly is effective January 1, 2006. As regards transparency in the sector, my authorities intend to seize, beginning August 2005, the forest permits held by individuals and corporations that fail to clear their forestry-related tax arrears or adopt a well-defined repayment schedule.

On governance and transparency in the oil sector, progress is being made towards meeting the requirements of full adherence to the EITI. An international bid for the selection of an international audit firm has been launched and expressions of interest have to be submitted by July 15, 2005. The stakeholder group comprising the government, the oil companies, and civil society is being created and its first meeting is scheduled for end-July 2005. On this occasion, the government will present an action plan aimed at meeting the EITI principles by September 2005. It will also select the firm to conduct the audit of the first reconciliation. As indicated in previous statements, it is expected that this audit be carried out and published by end-September 2005. In order to complete all these reforms regarding governance and transparency in natural resource sector, technical assistance will be needed.

Work on the PRSP is on track. The data collection phase of the quick poverty survey ended last weak. The ongoing treatment and the analysis of the data are expected to be completed by the end of this month. Consultations with civil society and the private sector are also underway. The government intends to use this work, together with the public expenditure review scheduled for June-July, to prioritize the three-year PIP and harmonize it with the 2006 budget.

Successor Arrangement

Since mid-2002, my authorities have embarked on an ambitious adjustment program, with the goal to address these challenges. The measures undertaken have focused on strengthening budgetary management, reforming tax and customs administrations, improving the functioning of the Budget and Treasury Departments, speeding up the privatization process, strengthening governance and transparency in various areas, creating an environment conducive to private sector development, and developing a poverty reduction strategy. Among other major achievements, we note the restoration of fiscal discipline, the establishment of the National Commission against Illicit Enrichment (CNLEI), the adoption of an ethics code for civil servants, the creation of a Directorate General of Procurement and the sale of state-owned agribusinesses.

As I noted in my previous statements, my authorities are fully aware that the positive developments in the oil sector, although contributing to the stabilization of the oil revenues and improving some economic indicators, are temporary and therefore should not mask the nature of challenges yet to tackle, namely the need to reduce oil dependency through notably economic diversification, and that to improve social indicators.

With the completion of the present review, Gabon will have achieved a satisfactory performance throughout the arrangement period, thus consolidating its commitment to sound macroeconomic and structural policies. My authorities are of the view that this performance has helped to set the foundations and the needed track record for 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 over the medium term. Such an arrangement will provide an important signal to donors and international community on the extent to which Gabon has changed its economic management.

Furthermore, although the DSA shows that there are no financing needs until 2014 and hence no need for further debt rescheduling, the risk of oil prices declining below 35 dollars can not be underestimated. Accordingly, my authorities are still of the view that despite its apparent sustainability, the high debt service remains an impediment to a faster implementation of their development strategy. They are looking forward to an arrangement that can help Gabon benefit from a debt relief that will free more resources for their economic program and enable the country to achieve fiscal sustainability.

Therefore, they are requesting that formal discussions on such an arrangement start as soon as possible. I ask Directors for their support to my Gabonese authorities’ request.