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

Equatorial Guinea’s macroeconomic performance in the recent period has been broadly satisfactory. Despite the macroeconomic environment, however, progress in alleviating poverty and meeting the MDGs has been slow. Executive Directors welcome the government’s intention to prepare a National Poverty Reduction Strategy. In the meantime, the budget process needs to be modified. The pegged exchange rate regime has served Equatorial Guinea well, providing an anchor to hold down inflation and a positive influence on investors’ confidence. The data provided by Equatorial Guinea are broadly adequate for surveillance.

Abstract

Equatorial Guinea’s macroeconomic performance in the recent period has been broadly satisfactory. Despite the macroeconomic environment, however, progress in alleviating poverty and meeting the MDGs has been slow. Executive Directors welcome the government’s intention to prepare a National Poverty Reduction Strategy. In the meantime, the budget process needs to be modified. The pegged exchange rate regime has served Equatorial Guinea well, providing an anchor to hold down inflation and a positive influence on investors’ confidence. The data provided by Equatorial Guinea are broadly adequate for surveillance.

May 10, 2006

Introduction

On behalf of my Equatoguinean authorities, I would like to thank staff for the well-balanced set of papers on the recent economic developments in Equatorial Guinea in particular the selected issues paper on key issues and alternative scenarios on how Equatorial Guinea can take advantage of oil windfall and better manage the surpluses in the long term. My authorities commend the reviews of the various models and experiences of other countries and look forward to deepening analysis and dialogue on the issues.

In addition, my Equatoguinean authorities highly value the positive discussions they have had with Board members and the Managing Director who visited recently the country. Indeed, the group of the Executive Directors had helpful meetings not only with the high authorities but also with the representatives of Parliamentarian groups and donors’ community. In the same breath, they welcome the policy advice delivered by the MD during the launching of the seminar on “sources of growth in Africa” organized in Bata last March in the context of the CEMAC summit. It is worth noting that during his visit the MD signed with the authorities the reimbursement agreement for the provision of technical assistance in the areas of public finance management and macro fiscal policy.

As is well-known, Equatorial Guinea is a middle-income country with all the characteristics associated with the group of low-income countries, in terms of poverty and institutional and capacity constraints, and low output. Thanks to the revenue derived from oil production, the country has solved its financial problems, and is now accumulating reserves at a fast pace. The major challenge facing the authorities is to implement a sound and sustainable development plan. In the short time period that oil production has started, important infrastructure projects have started, namely road construction, improving the sea and airports, schools and hospital constructions. However, much more needs to be done, but the country faces a severe shortage of capacity, and the authorities are addressing this issue.

My authorities would like to reiterate their commitment to continue implementing sound policies, designed to lay down solid foundations for broad-based sustainable economic growth and poverty alleviation. To this end, they are cognizant of the challenges facing the country, notably in the areas of economic diversification, social indicators’ improvement, financial resources management and capacity building. In their efforts to strengthen incountry capacity, the authorities will benefit from the Fund’s technical assistance in public finance sector. The Fund technical assistance will be complemented by the assistance from the United States Agency for International Development (USAID) in social service delivery, as well as the World Bank with regard to the national accounts, social statistics and public expenditure review.

The Social Needs Fund

While the country is accumulating large reserves, poverty remains a major problem. The authorities have done much already to alleviate poverty, but the problem is that there is little linkage between the oil sector and the rest of the economy. The oil production started and grew faster in a context of narrow production and export base as well as lack of infrastructure and institutional capacity. In fact, the size of the reserves grew so rapidly, while the capacity to manage this wealth did not follow.

Fighting against poverty, diversifying the economy, developing the infrastructure and enhancing capacity remain at the top of my authorities’ agenda. To address these issues, they are working closely with their development partners. In this regard and until the finalization of the National Poverty Reduction Strategy (NPRS), the authorities have established by Presidential decree No 120/05 on July 4, 2005 a Social Needs Fund. This fund has been set up with the technical assistance of Business for Social Responsibility (BSR) and the key stakeholders in Equatorial Guinea. In order to implement the program assigned to this fund, the authorities and the US government through USAID have signed an agreement to guarantee the quality, accountability and delivery of social service.

The Social Needs Fund, as a temporary mechanism and not a substitute for line ministries mandate, is a mutual effort to improve social service delivery by enhancing the administrative and technical capacity of selected ministries to support the financial disbursement mechanism established by Presidential decree. The Social Needs Fund has been adopted as the mechanism for soliciting, reviewing, adopting, funding, implementing and monitoring projects in the areas of health, education, women’ issues and sanitation. Technical assistance provided through this mechanism will help build capacity and foster transparency and accountability in the design, implementation and evaluation of social needs projects.

For the medium-term, the authorities with other stakeholders are in the process of preparing a NPRS which would provide the framework for social spending and guide government policies.

Implementation of EITI Initiative

The authorities have enhanced their participation in the Extractive Industries Transparency Initiative (EITI) through carrying out of all the necessary arrangements including the adoption of the EITI decree, the creation of EITI National Commission with the participation of the Parliament, the industry and civil society as well as the allocation of the needed financial resources for the functioning of the Commission. The authorities, in collaboration with the World Bank, remain committed to accelerate the implementation of the action plan including the appointment of the aggregator in charge of data compilation and reconciliation as well as quality control. They also will strengthen the civil society participation in the EITI

National Commission, make a presentation of the legal and institutional framework for the implementation of EITI and launch the government information campaign.

In addition, it is important to note that last April, the Head of State met with the acting President of the World Bank and underlined the authorities’ commitment to transparency and good governance. In reviewing progress made in implementing EITI principles, it was agreed that capacity constraints are the main cause of implementation delays. In order to help overcome these constraints, my authorities requested an increased level of technical assistance from the World Bank that would be included in the agreement of services under negotiation. The medium-term reforms identified under this agreement covered transparency, public expenditure review, public revenue reform, and accountability and corruption reform.

Moreover, I am pleased to inform the Board that transparency and good governance are now of the public domain in Equatorial Guinea. For instance, these were broadly supported during the CEMAC parliamentarian seminar in January 2005 and during on “Sources of Growth in Africa” in March 2006.

Macroeconomic Developments in 2005

In 2005, macroeconomic developments were broadly satisfactory. Real GDP grew by 6.5 percent and it is worth noting that the non-oil sector recorded a 10.7 percent growth rate due to the large public infrastructure investment and private housing construction. Inflation declined to 4.8 percent at end-2005 due mainly to the decline in cash crop agriculture and increase in domestic prices for petroleum products in addition to supply bottlenecks in the growing non-oil sector. Despite its slowdown in 2005, the hydrocarbon sector continues to dominate the economy in contributing to more than 90 percent of the GDP and government revenues.

On the fiscal front, revenues as shown in the table below have rapidly increased due to the combined effect of the improvement of oil production capacity and high international oil prices. The non-oil sector also performed better than expected owing to the buoyancy in nonoil activities and sustained efforts to improve tax administration, including the new tax code, in line with FAD’s advice, and which led to the creation of a large tax payers’ unit and the introduction of a value-added tax. In addition, the audit of oil companies has resulted in the collection of large revenue due to the government.

Equatorial Guinea: Central Government Revenue (in CFA Francs billions), 1990 - 2005

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On the expenditure side, the government increased capital outlays to meet the urgent social needs, and accelerated investment in key infrastructure, in the framework of the fight against poverty. Public investment in infrastructure has translated in opening new roads, schools and health centers as well as sanitation improvement and rehabilitation of offices for Ministries. Furthermore, investment in infrastructure within rural areas has eased supply constraints for domestic foodstuffs. In the same vein outlays on goods and services also were increased.

In the monetary sector, the rise in oil exports has led to a substantial buildup of international reserves to about US$ 2.9 billion at end-2005 equivalent to 15 months of non-oil sector imports. The efficient use of oil revenues and the adequate remuneration of the country’s foreign reserves remain the main concerns of my Equatoguinean authorities. Credit to the economy continued to increase mainly in favor of services and construction activities. As regards the exchange rate, the appreciation of the real effective exchange rate for Equatorial Guinea reflects the country’s position as the largest oil exporter in the region and recipient of foreign direct investment relative to GDP, recent developments in the terms of trade, and the relative large weight of the U.S. as the major trading partner.

Policies for 2006 and Objectives for the Medium-Term

My Equatoguinean authorities reiterate their medium-term objective of maintaining a high rate of growth in order to improve substantially the standard of living of the population as the country has adequate resources. To this end, overall growth is projected to about 5 percent annually during 2007-10 thanks mainly to the hydrocarbon sector which will be boosted by the production of liquefied natural gas and the oil production from the new oil field. Furthermore, it is worth noting that following the implementation of structural reforms and the large investment in the infrastructures, growth in the non-oil sector is expected to remain robust at around 10 percent a year. Inflation will decline to reach the CEMAC target of 3 percent by 2008, and the overall balance of payments surpluses will allow for further increases in gross official international reserves covering 61 months of non-oil sector imports, by end-2010. In addition the authorities will continue their efforts to strengthen transparency and accountability in the management of natural resources, as well as public finance.

In the fiscal area, the budget process will be enhanced further. Thanks to the Fund technical assistance, budget formulation and execution processes as well as information reporting and oversight controls will be improved. This should also help to avoid exceeding budgetary expenditures which have been due to underestimation of projects cost or changes in the projects, as well as new additions or the need to meet pressing social needs. My authorities are determined to meet the pressing needs of the country in the social sector and the infrastructures. In 2006 public investment program, they have allocated to these two sectors more than 92 percent of capital spending. Furthermore, the authorities are committed to a more realistic budget estimates and the inclusion of a contingency provision to meet urgent needs with a view to enhancing control, transparency and ability to implement sound fiscal policy. The authorities will also pursue their efforts to implement their fiscal rule which limits recurrent expenditure to non-oil revenue and finances capital expenditure from oil revenue.

As regards the monetary sector, policies to contain the inflationary pressures and further promote the financial intermediation will be strengthened. The authorities are cognizant that fiscal policy has to assume the main role in liquidity management as the monetary policy is implemented by the regional central bank. The establishment of an appropriate medium-term framework for managing the country’s vast oil wealth will be helpful in the reduction of the excess liquidity through implementing a prudent fiscal policy.

Regarding the issue on the foreign assets’ remuneration, the authorities’ objective is to maintain the real value over the medium-term. It is important to note that this issue is very crucial for the authorities owing to its impact on the macroeconomic developments over the years to come. My Equatoguinean authorities are very appreciative of the staff analysis in the selected issues paper and call for further analysis and alternatives. They will pursue the discussions with BEAC and other stakeholders and welcome the Fund’s readiness to assist in evaluating proposals on the reserve management and related issues.

The banking system remains sound, and the authorities are determined to ensure that all banks comply with all prudential ratios. They will strengthen the financial intermediation with a view to further finance the private sector through actions designed to enhance capacity to assess risks, enforce contracts and collect collateral as well as to encourage the establishment of micro-credit institutions notably in the rural areas.

With regard to the competitiveness, the authorities intend to focus on the macroeconomic and structural policies to improve the resilience and productivity of the economy, but this will take time. The authorities view their ongoing efforts in the areas of education, health, infrastructure, and measures to improve the business climate as contributing to economic diversification, increasing labor productivity and making the economy more competitive.

My authorities have reiterated their commitment to regional integration. Following the trade liberalization and tax reforms in accordance with CEMAC standards, my authorities are willing to pursue their efforts with the other CEMAC partners to gradually reduce the remaining challenges in trade liberalization and improve development prospects for the regional market.

Technical assistance, capacity building and statistical issues

The authorities’ ability to implement policies has been impeded, over the past years, by the severe capacity constraints and weaknesses in the institutional environment. In order to overcome these constraints, technical assistance is being sought from development partners. In capacity building financed through national resources, it is worth noting that more than 100 students graduated from overseas universities over the last two years and this number will increase in the year to come. In the areas of the public finance management system, development of an operational fiscal framework for the medium-term and economic statistics, two resident advisors will be provided by the Fund under the technical assistance contract signed last March in Bata. All necessary arrangements have been put in place with a view to launch this assistance as of next July. Regarding the preparation of the poverty reduction strategy and related data collection and treatment, the authorities and the World Bank are finalizing the services’ agreement which is expected to be signed next June. In collaboration with other partners, the authorities will implement all necessary measures to allocate adequate resources to enhance capacity building and the establishment of the National Statistical Institute to improve the frequency and scope of data reporting.

Poverty reduction strategy

Poverty reduction and the achievement of the MDGs remain the main objective of my Equatoguinean authorities. My authorities are also aware of developing a National Poverty Reduction Strategy (NPRS) conceived as a framework for adjusting both level and composition of public expenditure with the objective of improving the social indicators. Towards the preparation of the NPRS, the authorities intend to organize, before the end of 2006, a national conference on poverty with the participation of the civil society, the NGOs and donors. Four key elements to the NPRS have been identified namely (i) institutional capacity building; (ii) public investment in physical infrastructure; (iii) removal of impediments to financial intermediation; and (iv) creation of an appropriate business environment. The technical assistance expected from the World Bank will be helpful in the preparation of the authorities’ NPRS including the establishment of a poverty profile, restructuring the energy sector and assessing sectoral policies to encourage economic diversification.

Conclusion

My Equatoguinean authorities are fully determined to pursue their policy dialogue with the Fund and other development partners in order to strengthen their efforts in enhancing institutional capacities and take opportunity of oil resources to diversify the economy. Under the EITI Initiative, they are implementing measures to enhance transparency and accountability in the management of the country’s hydrocarbon resources. In addition, my authorities fully recognize that the challenge facing the country is to tackle the capacity constraints in order to implement sound and appropriate policies enabling the fight against poverty and achieving the MDGs. Lack of capacity is not an excuse. It is a real challenge and risk facing the economy of Equatorial Guinea which expects from now to 2020 revenues estimated at more than US$ 30 billions. Therefore, the issues of institutional and capacity building are of the highest priority. My authorities are aware that the technical assistance benefited from the Fund, the World Bank and the USAID is only temporary, but they are determined to seize this opportunity to improve the quality and the delivery of sound macroeconomic management. The authorities are thankful to development partners, both bilateral and multilateral, for their assistance in helping them to achieve their development objective and are hopeful that the international community, in particular the Fund, will continue providing them with such assistance.