Chad: 2006 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Chad

This 2006 Article IV Consultation highlights that despite some progress in macroeconomic stabilization and reform under IMF-supported programs during the 1990s, Chad’s indicators on business climate, governance, and socioeconomic conditions still remain among the lowest in the world. In 2006, real GDP is expected to grow by 1.3 percent, reflecting higher non-oil growth offsetting a somewhat larger fall in oil production than envisaged earlier. Executive Directors have noted Chad’s efforts in maintaining macroeconomic stability and in channeling resources to priority sectors despite a difficult political and security environment.

Abstract

This 2006 Article IV Consultation highlights that despite some progress in macroeconomic stabilization and reform under IMF-supported programs during the 1990s, Chad’s indicators on business climate, governance, and socioeconomic conditions still remain among the lowest in the world. In 2006, real GDP is expected to grow by 1.3 percent, reflecting higher non-oil growth offsetting a somewhat larger fall in oil production than envisaged earlier. Executive Directors have noted Chad’s efforts in maintaining macroeconomic stability and in channeling resources to priority sectors despite a difficult political and security environment.

I. Background

1. Chad is one of the poorest countries in the world. Landlocked and largely desert with a low population density, it has suffered repeated periods of armed domestic conflict since independence in 1960. Weak institutions and a lack of infrastructure, have further hindered economic development. In the 1990s annual per capita GDP growth averaged only 0.4 percent,2 despite progress in macroeconomic stabilization and reform under Fund-supported reform programs. However, investment in the oil sector led to high growth rates in the early 2000s.3 Since the oil era began annual per capita GDP growth averaged almost 9 percent. Although oil production accounts for almost half of GDP, the bulk of the population depends on cotton, livestock, and small-scale agriculture and is vulnerable to external and climatic shocks. Chad ranks 173 of 177 countries in the United Nation’s 2005 Human Development Index.

Chad: Selected Economic Indicators, 1994–2006

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Sources: Chadian authorities; and IMF staff estimates and projections.

2. After a period of relative political stability beginning in the early 1990s, the last two years have seen several coup attempts.4 Attacks from across the Sudanese border occurred in late 2005 and early 2006. Chad harbors about 250,000 refugees and 50,000 internally displaced people from the Darfur conflict and about 40,000 refugees from the northern part of the Central African Republic. President Deby won in the elections on May 3, 2006, which were boycotted by the opposition, and was inaugurated for a third term on August 8; efforts to engage the opposition in forming a government of national unity were unsuccessful.

3. Rising oil revenue provides an opportunity to accelerate development, but also poses major challenges for Chad’s weak administration and political system. The management and use of oil revenue was therefore a central theme in the discussions for the Article IV consultation (Box 1).5 Expenditure overruns and uncertainty about the fiscal outlook—stemming from the differences between the authorities and the World Bank over petroleum revenue management—have also stalled the completion of the first review under the PRGF arrangement, approved in February 2005 (Box 2).

The Petroleum Sector and Petroleum Revenue Management

Chad is among the newest and smallest African oil producers. Construction of the Chad–Cameroon pipeline and the development of the Doba region oil fields began in 2001. Production started in 2003, and the pipeline reached its maximum capacity of 225,000 barrels per day by the end of 2004. Average daily production has since declined because of unexpected water flows, and, unless exploration identifies other economically viable reserves, production is expected to continue declining over the next 15–20 years. Doba oil trades at a US$10–12 discount from Brent crude. Oil revenue consists of exploration fees, signature bonuses, income tax on oil companies, dividends, and royalties; recently concluded exploration agreements in other areas also envisage payments in oil.

Oil sector in Sub-Saharan Africa 2005–10

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Sources: Chadian authorities, and IMF oil database.

The World Bank played a catalytic role in developing the oil sector; as a condition for its participation, the loan agreement on the pipeline project includes a petroleum revenue management plan (PRMP) to ensure transparent use of oil revenue for priority sectors. Under the PRMP, all revenue from the project should pass through an offshore escrow account. After deduction of debt service to the World Bank and the European Investment Bank, direct revenue (royalties and dividends) is earmarked as follows: (i) 10 percent for a Future Generations Fund (FGF); (ii) 72 percent of royalties and 76.5 percent of dividends for priority spending;1/ and (iii) 4.5 percent of royalties for the Doba region. The remainder—13.5 percent of royalties and dividends—is not earmarked. Furthermore, 42.6 percent of expenditure not financed by earmarked oil revenue needs to be allocated to priority spending to ensure additionality compared to the 2002 budget. An autonomous joint government-civil society oversight body (the Collège) authorizes and monitors oil-financed priority spending. Indirect oil revenue, mainly income taxes, was not earmarked under the PRMP. The PRMP was the basis for the Petroleum Revenue Management Law (PRML).

Chad modified the PRML in January 2006. The revision abolished the FGF, widened the definition of priority sectors (to include justice, territorial administration, and security), increased the share of non-earmarked oil revenue from 13½ to 30 percent, allowed the list of priority sectors to be changed by decree, and extended the law to all oil fields. The unilateral change contravened the loan agreement, and the World Bank suspended all disbursements in Chad and froze the flow of oil revenue from the escrow account.

The relations between the World Bank and Chad were normalized in July 2006. In April, an interim agreement focused on the use of oil revenue in a revised 2006 budget and on measures to strengthen public finance management and oversight. In July, the parties reached agreement on the use of oil revenue in the 2007 budget, including on allocating at least 70 percent of all budgetary resources (excluding oil revenue in excess of absorptive capacity) to an extended list of priority sectors, including governance. The list, as well as the design of a new PRMP, will be revised during an update of the PRSP in 2007.

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Priority sectors are health and social welfare, education, infrastructure (including energy), rural development (agriculture and livestock), environment, and water resources.

2005 Performance Under the PRGF Arrangement

Most quantitative performance criteria through June 2005 were not observed, owing to above programmed payments on wages and 2004 arrears (Table 11). However, the performance criterion on the non-oil primary balance and the indicative target for non-oil revenue were met. Despite some progress in the cotton sector, the structural agenda lagged. Performance improved during the second half of 2005, following a tighter supplementary budget, a revised cash-flow plan, transfer of the stock of arrears to the Debt Department, and the clearance of external arrears. By end-December 2005, the performance criteria on the non-oil primary balance, external arrears, and new external debt were met, but the criterion on the wage bill was exceeded by a large margin. Reflecting weaknesses in PFM, the composition of payments on domestic debt is difficult to ascertain, but there are indications that the performance criterion on repayment of conventional debt was not met as repayments were offset by the use of BEAC advances. The three measures constituting structural performance criteria for end-December 2005 were not observed, but two were implemented, at least partially, with delays (Table 12).

Chad: Selected Fiscal Operations, 2004–05

(Percent of non-oil GDP, unless otherwise indicated)

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Sources: Chadian authorities; and IMF staff estimates.

Royalties and dividends.

Including revenue from the oil share premium and exploration permit.

Including HIPC grants.

Table 1.

Chad: Selected Economic and Financial Indicators, 2002-06

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Sources: Chadian authorities; and IMF staff estimates and projections.

Changes as a percent of broad money stock at beginning of period.

Ratio of non-oil GDP to average broad money.

The non-oil primary balance is total non-oil revenue, excluding grants, minus total expenditure excluding debt-service payments and foreign-financed investment.

Table 2.

Chad: Consolidated Fiscal Operations, 2002–06

(Billions of CFA francs)

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Sources: Chadian authorities; and IMF staff estimates.

In the program, revenue from oil exploration permit was recorded under sale of assets. In this table, revenue from oil exploration is included in nontax revenue.

Oil export price per barrel used in the budget is US$3 dollar below current World Economic Outlook projection with a discount for quality.

Include revenue from oil exploration permit and share premium.

Defined as the total revenue, excluding grants and oil revenue, minus total expenditure, excluding interest payments and foreign-financed investment.

Fund for Future Generations, Stabilization, and Oil Producing Region.

For 2006, shown gross of Fund disbursement.

Includes restructured debt as specified in the technical memorandum of understanding under the PRGF-supported program (excluding BEAC (Bank of Central African States) and CBT (Commercial Bank of Chad)), as well as payment on new domestic debt conventions.

Table 2.

Concluded. Chad: Consolidated Fiscal Operations, 2002–06

(Percent of non-oil GDP, unless otherwise indicated)

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Sources: Chadian authorities; and IMF staff estimates.

In the program, revenue from oil exploration permit was recorded under sale of assets. In this table, revenue from oil exploration permit is included in non tax revenue.

Oil export price per barrel used in the budget is US$3 dollar below current World Economic Outlook projection with a discount for quality.

Include revenue from oil exploration permit and share premium.

Defined as the total revenue, excluding grants and oil revenue, minus total expenditure, excluding interest payments and foreign-financed investment.

Fund for Future Generations, Stabilization, and Oil Producing Region.

For 2006, shown gross of Fund disbursement.

Includes restructured debt as specified in the technical memorandum of understanding under the PRGF-supported program (excluding BEAC (Bank of Central African States) and CBT (Commercial Bank of Chad)), as well as payment on new domestic debt conventions.

Table 3.

Chad: Consolidated Government Operations, 2002–06

(Additional Information and Summary Indicators)

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Sources: Chadian authorities; and IMF staff estimates.

After debt service related to the financing of the pipeline. In 2003, 7.1 billion of royalties accrued to the governnent of Chad. Since the legal arrangements for the use of oil revenue were not finalized, revenue were accumulated in the offshore transit account and repatriated in 2004.

In 2006, it does not include the use of FGF deposits.

Includes earmarked oil revenue to the stabilization account, for priority sector expenditure and stabilization saving.

Income from exploration permits and the reimbursement of the share premium in the pipeline companies is included under nontax revenue.

Including transfer to the oil producing region, including financed by use of deposits accumulated in the special oil producing region account at the BEAC.

Defined as the total revenue excluding grants and oil revenue, minus total expenditure excluding interest payments and foreign-financed investment.

Grants excluding HIPC assistance grants.

Table 4.

Chad: Ordinary Budget Operations, 2002—06

(Billions of CFA francs)

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Sources: Chadian authorities; and IMF staff estimates.

In the program, revenue from oil exploration permit was recorded under sale of assets.

Include revenue from oil exploration permit and share premium.

Gross of IMF disbursement in 2006.

Table 5.

Chad: Monetary Survey, 2002—May 2006

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Sources: Bank of Central African States (BEAC); and IMF staff estimates and projections.

Including net use of IMF resources.

Data reflect the definition used by BEAC headquarters, which is not directly comparable to the definition used for program monitoring. It includes the Fund for Future Generations.