June 5, 2006

On behalf of my Gabonese authorities, I would like to thank staff for the constructive policy discussions and for their set of papers, in particular the Selected Issues Paper which provides useful analysis of topical issues and can make a valuable contribution to the on-going discussions within the country. My authorities very much appreciated the presentations of staff’s findings in Libreville during the mission, as they enabled an useful exchange of views.

We have noted that the staff report features an innovative introduction of “issues for discussion”, which I think can be helpful in gathering Directors’ guidance on the main issues. However, we are of the view that the new feature should present issues of importance not only for the staff but also for the authorities. In the case of Gabon, the issue of whether spending or saving oil windfall is important for my authorities and is well highlighted.

We would like, at the outset, to note that my Gabonese authorities have embarked, since mid-2002, on a fiscal adjustment and reform program, with Fund support, aimed at coping with the depletion of the oil reserves, and the deterioration of social indicators. These efforts are bearing fruits as macroeconomic stability has been restored and far-reaching reforms were completed, as was recognized by Directors during Board meetings on Gabon since 2002. My authorities would agree that the high level of oil prices since 2004 has favored the implementation of this program. In particular, the windfall revenue made possible the elimination of external debt arrears, and enabled the saving of resources for future generations. In addition, the high oil prices has boosted oil exploration and development of marginal oil fields, which led to the stabilization of the oil production over the past three years. However, my authorities are aware that the high level of oil prices are temporary, and that they will need to pursue steadily their fiscal adjustment efforts. In addition, they consider that there is still a long way to go as regards the improvement of the living conditions of most of the population. Accordingly, they will continue to implement policies towards increasing growth, raising the competitiveness of the economy, reducing the cost of doing business in Gabon, diversifying the economy and reducing poverty.

The government has already adopted a growth and poverty reduction strategy paper (DSCRP), which should permit the implementation of programs and structural reforms that create wealth and employment, by developing sectors other than oil to accelerate the growth of the national economy. Although my authorities recognize that this document still needs some improvement, they are of the view that it can serve as an anchor for policy implementation over the medium-term.

Recent Economic Developments

Economic performance in Gabon has been better than expected in 2005 with real economic growth of 3 percent, low inflation and large fiscal and external surpluses. While developments in the oil sector helped achieve this performance, the non-oil sector also contributed with an impressive 4½ percent growth in 2005 thanks to better performance in timber processing, manganese production and the services sector. As a result, GDP per capita rose for the first-time in five years. Continued high oil prices led to sizeable balance of payments surplus that allowed for a further reduction in external debt to 39 percent of GDP in 2005.

On the fiscal front, while oil revenue increased in line with oil prices, non oil revenue fell short of the objective by about 1½ percent of non-oil GDP, reflecting in particular lower recovery of tax arrears and a larger impact of personal income tax exemptions than originally anticipated. In addition, expenditures exceeded the supplementary budget by 3½ percent of non-oil GDP on account of higher outlays, including unforeseen security-related spending that occurred in November 2005, to ensure that elections take place in a safe environment. As a result, the non-oil primary deficit reached 12 percent of non oil GDP, compared with a target 8½ percent in the government’s supplementary budget. Despite these slippages, the government managed to save half of additional oil revenues in 2005.

After some delays, implementation of structural reform measures accelerated in December 2005 in various sectors. Regarding the privatization process, the timetable established in October 2005 for the sale of 51% of the Gabon Telecom is on track. The tender has been launched in December 2005 and the selection of bidder is expected in July this year. The government is restructuring the postal company, which has been an important drain of the fiscal resources since 2003. The government announced the liquidation of the national airline company Air Gabon in February 2006, and the creation of a new airline company Air Gabon International with Royal Air Maroc (RAM) as a partner holding a majority stake. In the forestry sector, the restructuring undertaken by the new management of the Société Nationale des Bois du Gabon (SNBG) is bearing fruit with the company recording profits in 2005. The elimination of the monopoly of the SNBG appears not to have affected the profitability of the enterprise.

On transparency, Gabon published its first report under the EITI in December. This report compares 2004 payments reported by oil companies with receipts reported by the government. Despite a small discrepancy, which my authorities are in the process of examining, the Independent Administrator of the EITI process finds no evidence of serious anomalies. For statistical reasons, the profit oil has not been included in the coverage of this report. For the next report, my authorities intend not only to broaden the coverage to include profit oil but also to extend the initiative to the mining sector.

Policies over the Medium-Term

Over the medium term, my authorities remain committed to implementing sound policies that will help achieve their social and economic objectives along the four pillars of the DSCRP that are (i) raising growth as a prerequisite for poverty reduction, (ii) improving infrastructure, (iii) improving access to essential services and (iv) strengthening governance. In that context, policies in 2006 are aimed at restoring fiscal discipline and maintaining the momentum of reforms to improve the business climate and promote private sector development, while addressing pressing socio-economic needs. It is my authorities’ intention to request Fund support for their adjustment program under a multi-year arrangement. Discussions on which are expected to start soon with staff.

There is broad agreement that fiscal policy has to be tightened, and that measures will have to be taken to put the public finances on a permanently sustainable basis, especially in view of the fact that the country faces declining revenue from oil over the medium- to long-term. However, it should be pointed out that given the large social and infrastructure needs of the country, a right balance has to be struck between satisfying those needs and the speed of adjustment. Accordingly, my authorities are of the view that the fiscal adjustment process should be more gradual. In this context, they envisage a three-year span to reverse fully the slippages that occurred in 2005 and achieve fiscal sustainability. The DCSRP has generated high expectations and the proposed gradual, but front-loaded adjustment pace is a reflection of higher spending in infrastructure, health and education to satisfy these social demands, as set out in the DSCRP. At the same time, my authorities view these investments in the health and education sectors and infrastructure as strengthening the economic foundations of the country and contributing to raising the growth potential of the country.

For 2006, measures are being taken that should help to reduce the non-oil primary deficit from 12 percent of non-oil GDP in 2005 to 9 percent in 2006.

My authorities will continue their prudent use of the oil windfall. Part of this windfall will be used to finance spending related to the DSCRP, with the remainder being saved. My authorities are not opposed to the suggestion of using the oil windfall for debt reduction, but they are looking at all the options and intend to use the oil revenue windfall most effectively.

Despite the slippages last year, control of expenditure has improved over the last years, especially since the creation of the department of public procurement. In the context of improving governance and transparency, several audits have been launched whose reports have highlighted weaknesses in public expenditure management. In light of the findings of these reports and the recommendations of the recently completed 2006 fiscal ROSC, the authorities will develop an action plan to strengthen the public financial management. In the short-term, they will focus on improving efficiency of certain capital outlays, including those related to Independence Day spending for 2006 and 2007. On this issue, it is to be noted that Independence Day is celebrated each year in a different region, and the government takes this opportunity to undertake infrastructure and social spending in that region. In addition, my authorities will continue to reduce unnecessary current expenditures.

On the implicit petroleum subsidies, my Gabonese authorities acknowledge that they need to be addressed. They appreciate the analysis from the staff on the issue, especially the finding that the subsidies are benefiting primarily the wealthiest. They are considering ways not only to reduce the subsidies but also to better target the poor population.

On fiscal reforms, efforts will continue with regard to the reform of the tax and customs administration, with the view to increase non-oil revenues. In this context, a thorough update of the tax code has been completed. The updated tax code now integrates the various changes in the tax code that have occurred over time and will ensure the overall consistency of the tax legislation and structure. It will be circulated to technical administration for comments before being officially presented to the government for approval. In the same vein, the LTU is expected to start its operations later this year as the training of new personnel is completed. My authorities would, however, highlight the fact that these important reforms will not translate into higher non oil revenues in the short-term as some time will be needed for them to become effective.

My authorities fully share the staff’s assessment on the financial sector, in particular regarding the issue of credit access. They would like to point out that this particular issue has been repeatedly raised by SMEs and individual entrepreneurs during the DSCRP consultative process throughout the country and further highlighted in the World bank’s FIAS report on the business environment in Gabon. Efforts to promote the microfinance will be pursued to allow low income people to have access to credit. They are studying ways for the FODEX (Fund for the Development and Expansion of SMEs) to extend its operations to microfinancing. They took a decisive action in this regard in removing and jailing the management of this institution for embezzlement. On the declining trend in the private sector credit, banks usually flag the absence of bankable projects and the difficulties to recover assets. Nevertheless, my authorities also note that this decline could also reflect strengthened domestic debt management by the government, which helped improve liquidity situation in enterprises, and hence limit their recourse to banks for cash management purposes.

On other structural reforms, my authorities are confident that the privatization of Gabon Telecom will be completed on time during the third quarter of this year. Regarding the new airline company Air Gabon International, my authorities reiterate that it will be managed on a fully commercial basis. My authorities will reinvigorate the reform in the forestry sector.

My authorities will continue their efforts to strengthen governance and transparency in order to improve accountability and the business climate. In particular, publication of key documents and reports including that of the EITI is increasing.

Conclusion

My Gabonese authorities are strongly committed to the adjustment process and determined to restructure the economy, and to make it less oil-dependent. However, as I indicated in previous meetings, these are long-lasting efforts, which require the assistance of the international community. My authorities still believe that a multi-year arrangement with the Fund is the best framework to consolidate the gains and maintain the momentum of reforms in the country. They welcome the negotiations on such an arrangement in the coming weeks.