Gabon: 2006 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Gabon
Author: International Monetary Fund
Publication Date:
23 Jun 2006
eISBN:
9781451814002
Language:
English
Keywords:
ISCR; CR; oil GDP; staff appraisal; percent growth; deficit; oil revenue; fiscal policy; oil price; public expenditure; Oil prices; Oil; gas and mining taxes
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Gabon continues to enjoy record high oil prices, buoying both exports and government revenues. The critical medium-term challenge facing Gabon is managing the transition from an economy highly dependent on oil to a diversified economy that harnesses private sector initiative, and makes decisive progress in poverty reduction. The fiscal policy stance requires significant tightening. Raising economic growth and reducing poverty necessitate the acceleration of the structural reform agenda. Fostering transparency is a key ingredient to strengthening governance and accountability in Gabon.

Abstract

Gabon continues to enjoy record high oil prices, buoying both exports and government revenues. The critical medium-term challenge facing Gabon is managing the transition from an economy highly dependent on oil to a diversified economy that harnesses private sector initiative, and makes decisive progress in poverty reduction. The fiscal policy stance requires significant tightening. Raising economic growth and reducing poverty necessitate the acceleration of the structural reform agenda. Fostering transparency is a key ingredient to strengthening governance and accountability in Gabon.

I. Background

1. Gabon has a history of boom-and-bust cycles. Over the last three decades, oil booms and political cycles resulted in a ratcheting up of public expenditure, followed by painful adjustment periods when oil prices fell. After rapid economic growth in the 1960s and 1970s, making Gabon one of the wealthiest countries in Africa, per capita GDP has stagnated over the past 25 years. And despite its income level, Gabon’s social indicators remain poor and its infrastructure, for the most part, underdeveloped and ill-maintained.1

2. The authorities’ economic program, supported by a 14-month Stand-By Arrangement during 2004–05, represented a break from past practices During the past decade, Gabon embarked on several Fund-supported programs but their implementation was mixed.2 The 2004–05 SBA, which expired in July 2005, was more successful: all performance criteria were met and all reviews were completed. The program restored macroeconomic stability, rescheduled or eliminated most external and domestic payment arrears, and introduced far-reaching structural reforms to foster non-oil growth. The program also took first steps to revitalize the forestry sector, which the World Bank has since supported with a development policy loan,3 and to strengthen governance and transparency.

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Gabon: Boom-and-Bust Cycles, 1990-2005

Citation: IMF Staff Country Reports 2006, 238; 10.5089/9781451814002.002.A001

3. However, the second half of 2005 was marked by fiscal slippages and a loss of momentum in the structural reform process. The 2006 Article IV consultation discussions examined the causes for these slippages and reviewed the government’s economic policies going forward with the objective of restoring macroeconomic stability and resuming growth-enhancing structural reforms.

A. Recent Economic Developments

4. In 2005, economic growth accelerated and inflation remained low. Real GDP grew by 3 percent in 2005, led by stronger non-oil growth of 4½ percent notably in timber processing, manganese production, and the services sector. High oil prices continued to stimulate investment and exploration, keeping oil production slightly lower at 13¼ million tons. Meanwhile, consumer price inflation was close to zero and per-capita GDP rose for the first time in five years.4 The real effective exchange rate depreciated by about 5¼ percent, reflecting primarily the weakening of the euro to which’s Gabon’s currency is pegged, and Gabon’s price competitiveness remained broadly unchanged in 2005. (Figure 1).5

Figure 1.
Figure 1.
Figure 1.

Gabon: Recent Economic Developments

Citation: IMF Staff Country Reports 2006, 238; 10.5089/9781451814002.002.A001

5. Continued buoyant international oil prices led to further large balance of payments and fiscal surpluses. The average export price of Gabonese crude oil rose by 41 percent in 2005 to US$49 per barrel.6 As a result, the overall balance of payments surplus rose by 5½ percentage points to 16 percent of GDP in 2005, allowing a further reduction in external debt to 39 percent of GDP at end-2005. Public savings rose by less and, with the government saving about half of the oil revenue windfalls, the overall fiscal surplus reached 9¾ percent of GDP. (Box 1).

6. The presidential elections in late 2005 were accompanied by large fiscal slippages. The non-oil primary deficit reached 12 percent of non-oil GDP, compared with a target of 8½ percent in the government’s supplementary budget. The bulk of the slippages reflected additional non-interest current expenditure, which exceeded the indicative target by 4 percent of non-oil GDP. In addition, non-oil revenue fell short of the indicative target by about 1½ percentage points of non-oil GDP reflecting, in particular, lower recovery of tax arrears and a larger impact of personal income tax exemptions than originally anticipated.

Use of Additional Oil Resources

The public and private sectors in Gabon saved the bulk of the additional oil GDP that resulted from the sharp increases in prices during 2003–05. Average oil GDP in 2003–05 increased by 14½ percentage points of non-oil GDP relative to 2002. Tight fiscal policy in 2003–04 and a contraction in private-sector spending by 9 percentage points of non-oil GDP resulted in imports rising at a slower pace than the additional income. Net exports increased by 162 percent of additional oil GDP.

Selected Oil Exporters: Use of Additional Oil-GDP, 2003-05

(Base year=2002; in percent)

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Source: IMF staff estimates and projections.

The additional oil-GDP is defined as the difference between the ratio of oil-GDP to non-oil GDP in 2003-05 and the value of this ratio in the base year.

The use is defined as the difference between the ratio of use to non-oil GDP in 2003-05 and the value of this ratio in the base year.

Residual, including errors.

Source: Table 2.1 in MCD September 2005 Regional Economic Outlook, p. 19.

The election-related slippages notwithstanding, the government still saved about one-half of additional oil revenues in 2005. Against the backdrop of export prices increasing by 41 percent, oil revenues—with stagnant production—rose by 44 percent (CFAF 279 billion). Of that amount, the government spent a total of CFAF 140 billion, i.e., 50.3 percent of additional oil revenue.

Gabon: Use of Additional Oil Revenue

(In billions of CFA francs; unless otherwise indicated)

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Privatization-related restructuring costs (social plans).

7. The structural reform agenda stalled in the second half of 2005. In particular, the restructuring and privatization of Air Gabon and Gabon Télécom experienced significant delays.7 After a strong start in 2004, delays also continued to plague the reform of the forestry sector.8 Notably, sizeable tax arrears persist, with collection of the area tax reaching only 22 percent of the target in 2005 and total forestry tax arrears of nearly CFAF 15 billion at end-2005. However, transparency in the natural resources sector was boosted by the publication of Gabon’s first report under the Extractive Industries Transparency Initiative in December 2005 (Box 2).

Oil Revenue Transparency

Careful monitoring and proper accounting are critical to ensuring that the government receives all oil revenue it is owed and that those revenues are reported in the budget. Gabon joined the Extractive Industries Transparency Initiative (EITI) to bolster the credibility of its oil revenue collection efforts and published its first EITI report for 2004 in December 2005 (www.finances.gouv.ga/eiti.htm). The core of the EITI report was prepared by an international accounting firm hired as independent administrator (IA) of the EITI process.

The EITI report compares 2004 payments reported by companies with receipts reported by the government. It notes a discrepancy of CFAF 17 billion (US$33 million) for the oil revenue streams that were covered, roughly 5 percent of the total, and the IA finds no evidence of serious anomalies. The authorities are in the process of examining the reasons for the discrepancy.

The coverage of the first EITI report is incomplete. The IA could not include profit oil – the share of crude oil accruing to the government under the production sharing arrangements – in the 2004 revenue streams. Profit oil accounts for about half of government revenue from the oil sector. The main reason for excluding profit oil cited in the report is the inability of the government to provide a detailed breakdown for 2004 to the IA. The authorities have declared that the next EITI report will include profit oil.

Follow-up to the first EITI report has been limited. There has been no attempt to date to explain the discrepancy between government and company reporting and a planned publicity campaign has not yet taken place. The 2004 oil revenue reported to the IA by the government exceeds earlier revenue estimates provided to staff by CFAF 22 billion (US$42 million); the authorities have not yet explained these differences.

B. The Regional Context

8. Gabon is one of Africa’s major oil producers. With proven reserves of about 2 billion barrels and production in 2005 of 268,000 barrels per day, Gabon ranked third behind Nigeria and Angola in sub-Saharan Africa (Figure 2). Oil dominates the economy: in 2005, it accounted for more than 50 percent of GDP, 63 percent of government revenue, and over 80 percent of total exports. With a relatively small population estimated at about 1.4 million, the exploitation of oil reserves led to rapid increases in per-capita income in 1960-80, making Gabon one of the few middle-income countries in sub-Saharan Africa. However, per-capita GDP has declined since 1980, partly reflecting the impact of repeated economic crises. Moreover, socio-economic development has lagged significantly, and human development indicators—while moderately superior to the other CEMAC countries and African oil exporters—compare unfavorably with countries at similar income levels (see table below).

Figure 2.
Figure 2.
Figure 2.

Gabon: Regional Comparisons

Citation: IMF Staff Country Reports 2006, 238; 10.5089/9781451814002.002.A001

Sources: UNDP (2005 Human Development Index) and IMF, African Department (Regional Economic Outlook).

Selected Social and Governance Indicators

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Cameroon, Central African Republic, Chad, Rep. of Congo, Equatorial Guinea, Gabo.

Angola, Cameroon, Chad, Congo, Equatorial Guinea, Gabon, Nigeria.

Countries with a comparable level of per capita real income, defined as a per capita GDP in US$ PPP of US$6,400 ± US$600 (source: see footnote 4), i.e., Algeria, Belarus, Belize, Bosnia-Herzegovina, Colombia, Dominican Republic, Fiji, Gabon, Iran, Kazakhstan, FYR Macedonia, Namibia, Panama, Samoa (Western), St. Vincent and the Grenadines, Tonga, Turkey, and Turkmenistan.

UNDP, 2005 Human Development Report.

World Bank, World Development Indicators

Transparency International, 2005 Corruption Perception Index.

II. Policy Discussions

9. The critical medium-term challenge facing Gabon is managing the transition from an economy highly dependent on oil to a diversified one that harnesses private sector initiative and makes decisive progress in poverty reduction. The next few years are likely to be marked by moderate economic growth and continued large fiscal and balance of payments surpluses. Against this background, discussions centered on sustainable economic policies in the context of exhaustible oil reserves, the challenges for fiscal policy and public expenditure management, and the need for structural reform policies to foster economic diversification.

A. Sustainable Policies in the Context of Exhaustible Oil Reserves

10. High oil prices represent both a challenge and an opportunity for Gabon. 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 after oil resources are exhausted. The debt sustainability analysis shows that, assuming continued high oil prices and a resumption of fiscal restraint, total public debt would fall from 44 percent of GDP at end-2005 to 23 percent by 2008 and further to 10 percent by 2011 (Appendix IV).

11 Addressing pressing socio-economic development challenges must be balanced by maintaining macroeconomic stability and medium-term sustainability. The needs for infrastructure improvements and strengthened social services are very large and higher government revenue will allow Gabon to address these needs. At the same time, the mission underlined the importance of balancing such expenditure pressures with appropriate attention to the sustainability of public spending and the absorptive capacity of the economy. It suggested that an appropriate anchor for fiscal policy would be the permanently sustainable non-oil primary deficit, which it estimated at about 5 percent of non-oil GDP.9 The objective should be to reach the sustainable level over about three to five years (Box 3). Against the background of continued price stability within a fixed exchange-rate environment, staff considers such a fiscal policy stance consistent with overall macroeconomic stability.

Exhaustible Oil Reserves, Habits, and Sustainable Fiscal Policy

Gabon’s oil revenue currently accounts for 60 percent of all government revenue, but oil reserves are expected to be depleted within 30 years. Ensuring that fiscal policy is on a sustainable path is therefore a high priority. The analysis presented in an accompanying selected issues paper estimates the sustainable long-run nonoil primary deficit and the optimal adjustment path towards that level. The analysis is based on a model of intertemporal optimization with adjustment costs in the form of habit formation and differential rates on sovereign debt and financial assets, where “habits” reflect the notion that consumers become addicted to the level of consumption enjoyed in previous periods. The following three main conclusions emerge from the analysis:

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Estimated Permanently Sustainable Non-oil Primary Deficit

(in percent of non-oil GDP)

Citation: IMF Staff Country Reports 2006, 238; 10.5089/9781451814002.002.A001

  • (i) The current stance of fiscal policy is not sustainable. The permanently sustainable non-oil primary deficit, estimated at 5 percent of non-oil GDP, is well below the 2005 level of 12 percent of non-oil GDP.

  • (ii) Due to habit formation and the existence of adjustment costs, the optimal policy involves spreading the bulk of the adjustment over a period of three to five years rather than conducting the single, abrupt adjustment that standard permanent-income models without habits would prescribe.

  • (iii) Given the uncertainty regarding future economic conditions, precautionary motives would suggest front-loading the fiscal adjustment and targeting a smaller long-run deficit. For example, a decline in real oil prices to 30 US dollars per barrel would reduce the permanently sustainable primary deficit to 3¾ percent of non-oil GDP. In addition, the existence of an interest rate spread between sovereign debt and financial assets creates a further incentive for faster adjustment to pay off net debt.

12. The authorities agreed with the need to reduce poverty and prepare Gabon for the post-oil era, while accepting that medium-term fiscal adjustment is needed to ensure fiscal sustainability in the face of declining government revenue from oil. In seeking the right balance between the required speed of fiscal adjustment and achieving their socio-economic development objectives, the authorities emphasized the urgency to provide a strong basis for economic growth and employment creation, which in their view would have the greatest impact on poverty (see text table below). In particular, they pointed to severe infrastructural bottlenecks in the transportation, health, and education sectors that need to be addressed. Against that background, they noted that the government’s GPRSP, finalized in early 2006, rests on four pillars: raising growth as a pre-requisite for poverty reduction; improving infrastructure; improving access to essential services, including education and health; and strengthening governance. (Appendix III).

Gabon. Macroeconomic Framework, 2005-08

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Sources: Gabonese authorities; and staff projections.

B. Fiscal Policy and Public Expenditure Management

13. There was agreement that the large slippages in 2005 warranted a substantial fiscal adjustment. While high international oil prices produce growing fiscal surpluses now, Gabon’s oil reserves are estimated to be exhausted within about 30 years and there is a need to put public finances on a permanently-sustainable basis. Moreover, Gabon’s fiscal and external positions remain very vulnerable to swings in oil prices, suggesting the need for additional fiscal prudence.

14. Discussions focused on the pace of fiscal adjustment. The mission recommended sharply reducing the non-oil primary deficit from 12 percent of non-oil GDP in 2005 to 7¼ percent of non-oil GDP in 2006, arguing notably that most of the fiscal slippage in 2005 was of a one-off nature and, hence, reversible. The authorities preferred a more gradual pace, especially with parliamentary elections scheduled for November. In particular, the authorities believed that the target for 2006 should take into account (i) continued temporary subsidies to Air Gabon during the six-month transition period (paragraph 24); and (ii) additional public investment in line with expectations among the population generated by the finalization of the GPRSP and promises of large infrastructure projects made by the authorities in the last quarter of 2005. The authorities considered appropriate a fiscal framework for 2006–08 that would result in a non-oil primary deficit of about 9 percent of non-oil GDP in 2006 and a 2008 target of 6½ percent.10

15. Irrespective of the speed of adjustment, achieving a sustainable fiscal path will require decisive action on the expenditure side. In particular, the mission emphasized the need to regain control of current expenditure by reining in transfers and subsidies. The successor airline to Air Gabon should be managed on a fully commercial basis, without further budgetary support. Spending from the security and sovereignty fund, which does not follow ordinary budgetary procedures, should be kept to a strict minimum. And spending on pensions, which overshot the 2005 budget allocation by 50 percent, represents a growing threat for budgetary stability and requires a fundamental reassessment of the capacity of the public finances to deal with the wave of retirement in the public sector. The mission saw scope for raising productive public investment, but cautioned that the quality of public investment needed to be improved if it is to have an lasting impact on economic growth.11

16. Debt and reserve management take on additional importance in an environment characterized by ambitious fiscal objectives. Easing the transition to the post-oil era by saving the bulk of the current windfall revenue over many years requires optimizing the use of the government’s savings. In the short term, accelerating the reduction in public debt—including pre-paying external debt owed to Paris Club creditors—is likely to yield significant benefits by reducing Gabon’s annual interest bill, lowering its vulnerability to future shocks, and increasing the fiscal space for GPRSP investments. Eliminating the costly bons d’équipement, on which the government is paying 7½ percent interest, should be an immediate priority.12 Beyond the short term, it will be important to ensure that Gabon has the ability to invest its windfall surplus in an optimal manner. This will mean replacing the current Fonds pour les générations futures (FFG), on which the BEAC currently pays a nominal rate of 1½ percent, by a more effective institutional framework for accumulating long-term financial assets.

17. Petroleum price subsidies are a growing burden on public finances. The freeze in domestic retail prices since 2002 combined with sharp increases in international oil prices has led to large and growing implicit subsidies, reaching 3¼ percent of non-oil GDP in 2005. At current oil prices, the cost of the subsidies could rise to 4½ percent of non-oil GDP (Box 4). Moreover, a Poverty and Social Impact Analysis (PSIA) carried out by staff in an accompanying selected issues paper suggests that the bulk of the subsidies accrues to the rich rather than the poor. The mission proposed that the authorities consider the following options: (i) reflect both the foregone revenue and the implicit subsidies transparently in the budget; (ii) gradually raise the ex-refinery prices of petroleum products to import-parity levels with the objective of eliminating the subsidy over a three-year period; and (iii) offset the impact of price increases by raising targeted subsidies to the poor and GPRSP spending. The authorities appreciated the analysis provided by the mission. They noted the importance of transport costs for the Gabonese economy given the size of the sparsely populated country, but recognized the rising cost of the subsidies, and are considering options to reduce them.13

Implicit Fuel Price Subsidies in Gabon

At the core of the implicit fuel price subsidies in Gabon are the ex-refinery prices of 7 petroleum products that have been frozen since August 2002. The sole supplier of these products to the domestic market is the majority-privately-owned refinery SOGARA. The refinery purchases the crude oil required for its operations at a price that has increased with world crude oil prices. But because domestic fuel prices are frozen, the refinery sustains a loss when it sells the refined products. To quantify the loss, i.e. the value of the fuel price subsidy due to the price freeze, a reference import parity price (IPP) is computed every month by SOGARA based on international market prices, local taxes, costs, fees, and margins. The difference between the IPP and the frozen ex-refinery price multiplied by the quantity sold equals the monthly loss to the refinery for which it is compensated fully by the government. Payment is made in the form of crude oil delivered free of charge to SOGARA. These subsidies are not reported explicitly in the fiscal accounts but are instead netted against oil revenue, i.e. they are implicit.

The total fiscal cost of the subsidies implied by the ex-refinery price freeze is estimated to have reached 3.2 percent of non-oil GDP in 2005 and could increase to 4.5 percent in 2006, as compared to an estimated subsidy cost equivalent to less than 1 percent of annual non-oil GDP in 2003. The bulk of the cost of the subsidies corresponds to diesel which is used mainly by heavy industry and for transportation. For comparison, total public spending on health and education comprised 2.2 and 3.1 percent of non-oil GDP in 2005, respectively. Reflecting the implicit subsidies in the budget would have raised the non-oil primary deficit from 12 percent to 15¾ percent of non-oil GDP in 2005.

The size of the fiscal cost of the fuel price subsidy in Gabon is not unusual for an oil-exporting country. In Gabon, the cost of the subsidies is likely to have reached 1.6 percent of overall GDP in 2005. The size of implicit subsidies in eight countries for which data were available are estimated to range from 0.3 percent of GDP (Cameroon) to 9.9 percent (Azerbaijan), with a median of 2.0 percent of GDP.

In line with the experience of other countries, it is mostly higher-income households that benefit from the subsidy. Based on the 2004 Gabon EGEP household survey dataset, staff estimates that the top 10 percent of households receive about one-third of the total subsidy. Meanwhile, the bottom 30 percent of individuals are estimated to receive only 13 percent of the subsidy, highlighting that fuel price subsidies are a very costly way to protect the real incomes of the poor.

Gabon: Cost of Implicit Fuel Price Subsidies, 2005-08

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Source: Gabonese authorities and IMF staff calculations and projections.

Projections for 2006-08 are based on the assumption that ex-refinery prices remain unchanged, international fuel prices evolve following WEO projections, and domestic fuel consumption expands at the rate of real non-oil GDP growth.

Total appropriations in the 2005 supplementary budget on wages and salaries, goods and services, transfers, and domestically-financed investment spending, in the education and health sectors, respectively.

18. Gabon public finances are characterized by severe weaknesses in the planning and monitoring of public expenditure. Close to half of current expenditure is devoted to the public sector wage bill and interest payments, while there are insufficient provisions for goods and services and maintenance. Public investment has averaged 5 percent of GDP over the past five years, but the return on this investment is estimated to have been very low or even negative. Large infrastructure projects are often not subjected to rigorous cost-benefit analysis. Notably, public investment in the context of the fêtes tournantes (the rotating regional independence day celebrations) is notoriously unproductive, as confirmed by a recent audit that revealed very serious weaknesses in control over procurement, execution, quality, and prices.

19. Improving public expenditure management is critical to raising the quality of public investment and preventing a repetition of the 2005 slippages. A recent fiscal ROSC mission and a World Bank public expenditure review both examined Gabon’s fiscal institutional framework (Box 5). Key expenditure management recommendations include: (i) establishing a hierarchy of priorities for investment projects in the Public Investment Program to ensure a coherent selection system;14 (ii) ensuring that the functional expenditure classification is finalized and implemented with the 2007 budget; (iii) subjecting expenditure related to the fêtes tournantes to standard budgetary procedures and to the scrutiny of regular published audits; (iv) streamlining budget execution and monitoring procedures to avoid slippages; and (v) reporting spending on implicit fuel-price subsidies in the budget.

20. Increasing the room for high-quality spending will require reversing the erosion of non-oil revenue and enhancing the efficiency of public revenue management. The large tax-payer unit (LTU) still needs to become fully operational. The tax system remains subject to frequent discretionary modifications that are not reflected in the tax code. In addition, the proliferation of tax exemptions has narrowed the tax base, notably for the VAT, and non-transparent special tax regimes deter foreign direct investment. Key revenue management recommendations reiterated in the recent ROSC include: (i) revising the tax code to reflect all modifications; (ii) estimating the cost of tax expenditures and reporting them in the budget documentation; and (iii) reinforcing oil revenue administration, including by replacing the current annual projection model with a detailed monthly model. Problems also persist in forestry taxation, where the lack of enforcement has had a negative impact on tax payer compliance, and the mission urged the authorities to proceed rapidly with the return to the public domain of forestry permits that cannot meet their tax obligations. The mission raised concerns regarding a proposed law, currently with parliament, that would earmark—if implemented—a large share of existing taxes (and possibly numerous new taxes and fees) for a National Forestry Fund. The mission underlined that the proposed law is at odds with good budgetary practice and would risk weakening governance in this important sector.

Preliminary Conclusions of the 2006 Fiscal ROSC

Although the legal framework for fiscal management is well defined, implementation falls short of best practice in several areas. The existence of two separate budgets, one for recurrent and one for investment expenditures, prepared by two different ministries poses severe coordination problems. Budget execution is subject to cumbersome procedures and ineffective compliance controls and the lack of an effective financial information system precludes the production of regular and accurate reports. Budget documentation is incomplete, excluding information on implicit subsidies and fiscal risks. The tax system is subject to frequent discretionary modifications that are not reflected in the tax code.

The principal ROSC recommendations include the following:

  • Streamline fiscal policy formulation. Ensure the consistency of macroeconomic projections across different ministries and departments. Prepare the 2007 budget in the context of a medium-term expenditure framework for 2007–09. Establish a hierarchy of priorities for investment projects in the Public Investment Program to ensure a coherent selection system.

  • Improve natural resource revenue transparency. To ensure that all oil revenues due to the government—including those paid in kind—are collected by the Treasury, replace the current annual projection model with a detailed monthly model. Extend coverage of the EITI report to include profit oil (about half of oil revenues) and revenue streams in the mining sector.

  • Enhance budget transparency and presentation. Repor revenue and expenditure that is currently excluded, such as in-kind oil revenue that implicitly subsidizes fuel prices. Ensure that the functional expenditure classification is finalized and implemented with the 2007 budget. Make the budget documentation easier to understand by including summary tables for revenues and expenditures, information on previous budgets, including their outturns, and estimates for the next two fiscal years. Submit an updated tax code to parliament.

  • Develop a systematic fiscal risk-management strategy. Include a fiscal sustainability analysis that accounts for the decline of oil revenue and an evaluation of the potential future liabilities of the social security and pension funds in the budgetary documentation. Estimate and report the cost of tax expenditures.

  • Streamline budget execution and monitoring procedures to avoid slippages. Prepare a monthly limit for program appropriations and make the budget appropriations available from the beginning of the fiscal year. Publish monthly execution reports. Reduce the treasury’s current 120-day payment period to one month. Subject expenditure related to the fêtes tournantes to standard budgetary procedures and to the scrutiny of regular published audits. Strictly enforce the decisions of the public tender control office, report any slippages and, when appropriate, apply sanctions.

C. Structural Policies for Economic Diversification

21. An uninviting business climate remains the country’s Achilles’ heel. To diversify its economy, Gabon needs to attract private-sector investment to increase total factor productivity and the country’s non-oil growth potential. The authorities need to accelerate their structural reform agenda in the areas of the financial and labor markets, its trade regime, and—in particular—governance.

22. Financial sector stability has improved since the 2002 Financial Sector Stability Assessment (FSAP), but important structural challenges remain.15, 16 Gabon’s financial sector remains shallow even by regional standards, and banks appear to be withdrawing further from lending activities. Credit to the private sector declined from a peak of over 13 percent of GDP in 2002 to 9 percent in 2005, likely reflecting the effects of administratively determined interest rate floors and ceilings as well as the difficulties faced by banks to effectively monitor the quality of their loan portfolios (Box 6). In the absence of domestic lending opportunities, or any other financial instruments, commercial banks have sharply increased their holdings of foreign assets. At the same time, banks curtail their domestic activities by enforcing restrictions on minimum deposits and/or depositors’ minimum income as a means to limiting financial services to a few trusted enterprises, public-sector employees, and expatriates. Small and medium-sized enterprises, in particular, have little access to the banking system. The authorities agreed with staff’s analysis. They noted that underdevelopment of the financial sector is partly a reflection of the nature of the Gabonese economy in which the dominant oil sector is financed largely from abroad. But they agreed that it is crucial to improve private sector access to the financial sector, including to micro-financing.

23. Fostering diversification and Gabon’s integration in the global economy requires trade liberalization, including at the regional level, and further flexibility of its labor markets.17 The mission urged the authorities to play a lead role in regional discussions within the CEMAC to foster progress in this area. In particular, the relatively high common external tariff (CET), which affects about 22 percent of taxable imports, hampers private sector development. Further liberalization, coupled with trade-enabling investments in infrastructure and enhanced governance, would improve Gabon’s competitiveness and result in welfare gains. The authorities agreed with the mission’s assessment, but noted that trade policy is determined at a regional rather than a national level. They also expressed concern about the fiscal implications of lowering the CET and its possible impact on the nascent agro-industries that have begun to produce for the domestic market.18 Rigid labor markets are an additional obstacle to increased private-sector activity, with deeply entrenched protection clauses—both explicit and implicit—that make dismissals very difficult and costly.

Insufficient Private-Sector Access to Credit

Gabon’s financial sector is shallow even by regional standards, and banks appear to be withdrawing further from lending activities. High international oil prices resulted in an increased availability of funds. However, credit to the private sector—already only about one-half the average of countries in sub-Saharan Africa—continued to decline, from a peak of 13.2 percent of GDP in 2002 to 9.0 percent in 2005 (or, respectively, from 22.6 to 19.0 percent of non-oil GDP). Meanwhile, despite regional prudential regulations, excess liquidity has been transferred to correspondent banks outside the CEMAC zone, improving the net foreign asset position of commercial banks from –0.3 percent of GDP in 2002 to 4.4 percent in 2005. At the same time, banks continue to limit their liabilities by enforcing restrictions on minimum deposits and/or depositors’ minimum income.

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Bank Assets and Liabilities, Jan. 2002 - Jan. 2006

Citation: IMF Staff Country Reports 2006, 238; 10.5089/9781451814002.002.A001

A successful growth and poverty reduction strategy will require a more active financial sector. In particular, it requires banks that are both willing and able to increase access to credit by the private sector, possibly at rates lower than currently prevailing. An accompanying selected issues paper, which models banks as profit maximizers over costly monitoring, points to two principal constraints. It concludes that reforms in this area should aim at (i) reducing the minimum rate on deposits (if not fully liberalize it); and (ii) overcoming structural obstacles that have prevented banks thus far from assessing and monitoring effectively the credit risk of potential clients’ investment proposals. Such a reform agenda needs to include measures to (i) strengthen the legal environment for commercial matters; (ii) facilitate the registration of collateral and accelerate their collection; (iii) reinforce creditor rights; and (iv) improve corporate accounting practices.

24. Concluding rapidly the privatizations of Gabon Télécom and Air Gabon will contribute to strengthening productivity while reducing the drain on the budget. The mission welcomed the tender for a majority share in Gabon Télécom. It will now be important that the remaining steps are taken to ensure a successful and transparent sale by mid-year, as envisaged by the government’s timetable. The liquidation of Air Gabon is an important recognition that the public sector is ill-placed to manage a commercial airline. The objective should now be to allow the liquidator to complete its task as fast as possible, and without undue interference. The mission welcomed the agreement to establish a new airline, Air Gabon International (AGI), in which Royal Air Maroc (RAM) would have a majority stake; however, it expressed regret that until AGI becomes operational the government will continue to bear part of the financial burden of operating several routes deemed important, at a cost estimated at over CFAF 2 billion. This sends a mixed signal regarding the government’s commitment to withdrawal from the airline business, and it will need to make it clear that its financial involvement will end when AGI becomes operational.

25. Improving governance and containing corruption are critical to improving the business climate. The 2004 governance indicators published by the World Bank rank Gabon in the bottom third on the control of corruption.19 On Transparency International’s Corruption Perception Index, Gabon slipped from the 74th place in 2004 (with a score of 3.3) to 88th place in 2005 (with a of score 2.9). Recent initiatives to improve governance have yet to show their effectiveness. The 2004 diagnosis of Gabon’s investment climate by the World Bank’s Foreign Investment Advisory Service (FIAS) has not yet been translated into a comprehensive action plan. The National Commission Against Illicit Enrichment has taken important first steps, but challenges remain to enforce its asset declaration system. According to the Commission’s Annual Report 2005, about one-third of senior officials had filed their income and wealth statements by end-June 2005 (with the number having increased to about one-half by year’s end). The mission urged the Commission to move ahead and accelerate the implementation of the financial disclosure regime and to move forward in other areas, including investigations. The 2004 governance indicators published by the World Bank rank Gabon in the bottom third on the control of corruption.19 On Transparency International’s Corruption Perception Index, Gabon slipped from the 74th place in 2004 (with a score of 3.3) to 88th place in 2005 (with a of score 2.9). Recent initiatives to improve governance have yet to show their effectiveness. The 2004 diagnosis of Gabon’s investment climate by the World Bank’s Foreign Investment Advisory Service (FIAS) has not yet been translated into a comprehensive action plan. The National Commission Against Illicit Enrichment has taken important first steps, but challenges remain to enforce its asset declaration system. According to the Commission’s Annual Report 2005, about one-third of senior officials had filed their income and wealth statements by end-June 2005 (with the number having increased to about one-half by year’s end). The mission urged the Commission to move ahead and accelerate the implementation of the financial disclosure regime and to move forward in other areas, including investigations.

26. Significant scope remains to increase transparency and improve the availability of economic information in Gabon. Over the past few years, several important audits and reports have been prepared, highlighting the problems faced by various public institutions. Some have been published, including the list of forestry permit holders, but many documents are not regularly published or are very difficult to access. The mission urged the authorities to make further progress in transparency and publish key documents on the government’s internet site, including the reports of the supreme audit office (cour des comptes) on budget execution in 2003 and 2004, the supplementary budget laws for 2004 and 2005, the recent audits of the fêtes tournantes and the road maintenance fund (FER), as well as the annual reports of the National Commission Against Illicit Enrichment. In addition, progress needs to be made to establish a system of regular public reporting of economic statistics consistent with the GDDS framework, including timely and comprehensive reports on public finances. Rapid adoption of a new statistics law and a boost in the resources of the Statistics Directorate should therefore be a priority. The authorities underscored their commitment to raising transparency and to making available to a larger audience several reports.

27. Transparency in the oil sector received a welcome boost with the publication of Gabon’s first EITI report. The mission encouraged the authorities to increase further the transparency of oil sector operations by broadening the coverage of the next report. The authorities noted that they are in the process of drawing lessons from their first EITI report and hope to be able to broaden the coverage of the next report, scheduled for the third quarter of 2006, to include profit oil (the share of crude oil accruing to the government under the production sharing arrangements). They also plan to extend the report to the mining sector.

III. Staff Appraisal

28. In 2005, Gabon continued to enjoy record high oil prices, buoying both exports and government revenues. Benefiting from high prices for other primary commodities, and the macroeconomic discipline established in the context of the 2004–05 Stand-By Arrangement, non-oil growth also accelerated while inflation remained moderate, resulting in the first increase in per-capita GDP since 1999. The elimination of external and domestic arrears and the lowering of external debt provided a welcome boost to confidence, complementing the far-reaching structural reforms initiated since 2004. However, the presidential elections in late-2005 were accompanied by large fiscal slippages and delays in structural reforms, and the parliamentary elections scheduled for late 2006 pose a further risk for financial stability. The key short-term priority must therefore be to re-establish fiscal discipline and re-invigorate the structural reform program.

29. The critical medium-term challenge facing Gabon is managing the transition from an economy highly dependent on oil to a diversified economy that harnesses private sector initiative and makes decisive progress in poverty reduction. The current high levels of oil prices represent an opportunity to lower debt levels decisively, thereby reducing a major source of Gabon’s past vulnerability to shocks. They also allow the government to address some of the pressing social and infrastructural needs facing the country. The challenge for policy is to strike a judicious balance between the pressures for public spending to address these needs and raising public savings to prepare for the inevitable exhaustion of oil reserves and the decline in the government’s main revenue source. But without macroeconomic stability and effective public financial management, sharp increases in public spending are unlikely to be effective nor sustainable. For both these reasons, it will be critical to save the bulk of the oil windfall in the coming years.

30. The fiscal policy stance in 2006 requires significant tightening. The end-2005 slippages have pushed the non-oil primary deficit well above sustainable levels. Both sustainability and vulnerability concerns suggest that the slippages should be fully reversed in 2006. A full assessment of the fiscal stance also requires taking into account the fastgrowing implicit subsidies on petroleum products, which under the current regime could reach 4½ of non-oil GDP in 2006. These subsidies are benefiting primarily higher income households and it will be important to adjust retail prices to import parity levels. The social and economic impact of such a adjustment can be mitigated by doing so gradually and by raising targeted subsidies to the poor. In any case, to increase transparency and accountability, the foregone revenue and implicit subsidies should be reflected fully in the budget.

31. Improving public expenditure management is critical to strengthening expenditure control and raising the quality of public investment. The recent fiscal transparency ROSC revealed significant shortcomings in the planning, monitoring, and ex-post control of public expenditure, as well as in revenue administration. Key measures required include a more effective prioritization of the public investment program; strengthening budget execution and monitoring; improving the transparency of the budget, notably of oil revenue; and improving the efficiency of the tax system by broadening the non-oil revenue base. Efforts should be made to address these issues with urgency, at the latest in the context of the 2007 budget.

32. Raising economic growth and reducing poverty necessitate the acceleration of the structural reform agenda. The GPRSP needs to be made operational by formulating concrete poverty-reducing programs. There is also a need to improve the investment climate to foster private sector development. The problems are well known and include legal and regulatory uncertainty, the absence of a dynamic financial sector, rigid labor markets, and continued weaknesses in governance. Notably, the rapid conclusion of the privatization of Air Gabon and Gabon Télécom will contribute to strengthening the productivity of Gabon’s economy. Going forward, it will be important to ensure that the successor airline to Air Gabon no longer represents a drain on public resources.

33. Fostering transparency is a key ingredient to strengthening governance and accountability. Progress has been made and the recent publication of Gabon’s first EITI report represents a further important step. Nevertheless, significant scope remains to reinforce transparency. There is a need to improve access to information, including through the regular publication of timely and accurate economic statistics and the broader dissemination of government reports. The work of the National Commission Against Illicit Enrichment should be accelerated, including in the area of investigations. Work on the EITI needs to continue, with the objective of making its next report more comprehensive, notably by including revenue streams related to profit oil. And reforms in the forestry sector, which had a strong start in 2004, should resume, notably by dealing decisively with the holders of forestry permits that have tax arrears and ensuring that its financing remains within the government budget.

34. Gabon is at a crucial juncture. The current high oil prices are an opportunity to decisively lower debt levels, thereby reducing Gabon’s historical vulnerability to oil price swings, and address the country’s pressing social and infrastructural needs. This will require maintaining sound economic policies and, in particular, raising the quality of public spending. But high oil prices and temporarily higher government revenue do not change the reality that oil resources are finite and will eventually run out. Policies must be sustainable and provide an environment in which both the public and the private sectors can contribute to tackling the great challenges facing Gabon: ensuring sustained, broad-based growth and prosperity for all future generations.

Table 1.

Gabon: Selected Economic Indicators, 2001–08

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Sources: Gabonese authorities; and Fund staff estimates and projections.

Velocity is projected to decline as result of a financial sector reform, aimed at increasing intermediation.

Domestic debt does not include statutory advances from the BEAC.

Table 2.

Gabon: Fiscal Operations of the Central Government Summary, 2001-08

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Sources: Gabonese authorities; and Fund staff estimates and projections.

Non-oil revenue (including grants) minus primary spending (excluding fuel price subsidies).

Includes the social plans and debt assumptions for Gabon Telecom, Air Gabon, AgroGabon, Gabon Poste, SNBG, and CNGS.

The value of crude oil provided free to the refinery (SOGARA) to compensate it for the difference between import parity fuel prices and the controlled ex-SOGARA price. These subsidies are not reported in the government budget.

The augmented balance includes the restructuring costs and assumes continued fuel price subsidies.

Table 3.

Gabon: Fiscal Operations of the Central Government, 2001–08

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Sources: Gabonese authorities; and Fund staff estimates and projections

In the 2004 budget, outlays of the Road Maintenance Fund (FER) are in an annex to the budget. Other special funds are recorded off budget.

Includes treasury correspondents, local governments, checks written but not yet cashed, and errors and omissions.

The corresponding national oil prices are US$1-4 lower.

Non-oil revenue (including grants) minus primary spending (excluding fuel price subsidies).

Includes the social plans and debt assumptions for Gabon Telecom, Air Gabon, AgroGabon, Gabon Poste, SNBG, and CNGS.

The value of crude oil provided free to the refinery (SOGARA) to compensate it for the difference between import parity fuel prices and the controlled ex-SOGARA price. These subsidies are not reported in the government budget.

The augmented balance includes the restructuring costs and assumes continued fuel price subsidies.