Abstract
Efficiency and equity reasons suggest placing a high priority on ensuring that fiscal policy is on a sustainable path. This chapter has sought to estimate the sustainable long-term non-oil primary deficit and the optimal adjustment path toward that level. The banks’ inability to monitor effectively the quality of their loan portfolios, paired with the high interest-rate floor on deposits, are key factors behind the very low degree of financial intermediation. The reform of fuel price subsidies in Gabon is necessary to facilitate pro-poor economic growth.
I. Introduction
The sharp rise in energy prices since 2003 has presented oil-exporting countries like Gabon with both opportunities and risks. The large balance-of-payments and fiscal surpluses provide an opportunity to lower debt levels decisively, thereby reducing a major source of Gabon’s past vulnerability to shocks, and build up savings to smooth consumption for future generations even after oil resources are exhausted. But, while additional resources provide fiscal space to address urgent infrastructural and social development needs, economic policies need to ensure that these gains are sustainable over the medium term and provide the foundation for a diversification of the economy away from its dependence on exports of natural resources.
Against this background, the following chapters examine key issues in the management of public resources and the scope for private-sector led growth.
Chapter II looks at long-run fiscal sustainability. The analysis is based on a model of intertemporal social-welfare optimization that takes into account (i) adjustment costs in the form of habit formation and (ii) differential interest rates on sovereign debt and financial assets. It concludes that a sustainable long-run non-oil primary deficit is about 5 percent of non-oil GDP, compared to the 2005 level of 12 percent, and that, under the optimal adjustment path, fiscal policy should aim at reaching the sustainable deficit in about three to five years.
Chapter III addresses the obstacles that have limited the access of the private sector to financial services, focusing on banks’ reluctance to extend credit. In seeking to explain the principal reasons behind this phenomenon, the chapter proposes a simple model in which banks maximize profits over costly monitoring. The narrowing interest-rate spread between deposits and loans, together with the banks’ inability to appraise effectively the quality of their loan portfolios, helps to explain the banks’ caution.
Chapter IV estimates the fiscal cost and social impact of the freezing of domestic retail fuel prices since 2003. Rising oil prices have driven the total fiscal cost of the (implicit) subsidies to more than 3 percent of non-oil GDP in 2005. However, analysis of household data suggests that these subsidies mostly benefit higher-income households and that fuel price subsidies are an ineffective and costly way of protecting the real incomes of the poor.
Chapter V examines the quality of capital expenditure in Gabon. Despite high levels of public investment, averaging about 5 percent of GDP over the last 15 years, their return has been disappointing. The chapter concludes that public investment has generally failed to target poverty reduction and the quality of expenditure linked to the regional independence celebrations, the fêtes tournantes expenditures, has been particularly low.