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
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar
Close

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

article image
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

article image
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.

1

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)

article image
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

article image
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)

article image
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)

article image
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)

article image
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)

article image
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

article image
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.

Table 6.

Chad: Balance of Payments, 2002—06

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

Oil export price based on World Economic Outlook projection with a discount for quality.

After stock-of-debt operation.

Debt service due after HIPC Initiative assistance.

Table 7.

Chad: External Financing Requirements 2002—2006

(Billions of CFA francs)

article image
Source: Chadian authorities; and IMF staff estimates and projections.

Excluding the change in the net position vis-à-vis the IMF.

Table 8.

Chad: Public and Publicly Guaranteed External Debt Outstanding by Creditors at End-2005

article image
Source: Chadian authorities; and IMF staff estimates.

EDF, European Development Fund; EIB, European Investment Bank; BADEA, Arab Bank for Economic Development of Africa; and IFAD, International Fund for Agriculture Development.

Deferral of late payments was agreed with Taiwan, Province of China.

There were not arrears of principal by the end of 2005.

Table 9.

Chad: Millennium Development Goals

article image
article image
Sources: World Bank, World Development Indicators database April 2006; and UN Statistics Department, Millennium Indicators, May 2004.

Figures in italics refer to periods other than those specified.

Targets 12-15 and indicators 33-44 are excluded because they cannot be measured on a country-specific basis. These are related to official development assistance, market access, and the HIPC Initiative.

Table 10.

Chad: Social and Demographic Indicators

article image
Sources: World Bank, World Development Indicators Online, 2006; United Nations, Millenniun Indicators, 2004.
Table 11.

Chad: Quantitative Performance Criteria and Indicative Targets Under the PRGF for the Period January 01, 2005–December 31, 20051/

(Billions of CFA francs; cumulative changes from the beginning of the calendar year, unless otherwise indicated)

article image
Sources: Chadian authorities; and IMF staff estimations.

Performance criteria for program indicators under A and B; indicative targets otherwise.

The non-oil primary balance is the difference between total non-oil revenue, excluding grants, and total expenditure, excluding interest on domestic and external debt and externally financed investments.

Excluding revenue from the privatization of public enterprises and from the concession of exploitation or exploration permits of oil fields (CFAF 2 billion in 2005).

Conventional debt refers to BEAC, Contonchad, CNPS, CNRT, ASECNA, CBT, “France Cable et Radio”, Alcatel, subscriptions, contributions to international organizations, arrears on rents, and legal commitments. Estimates show payments, net of increase in the BEAC advances. Negative amounts indicate that increase in BEAC advance exceeded repayment on other restructured debt category. Because of weaknesses in PFM, the composition of payments on domestic debt is difficult to ascertain. The Debt Department and the Treasury have been working on procedures to improve information on domestic debt payments.

Excluding external payments arrears incurred pending debt rescheduling.

Excluding debt relief obtained in the form of rescheduling or refinancing.

Table 12.

Chad: Structural Performance Criteria and Structural Benchmarks Under the PRGF, January 1, 2005–December 31, 2005

article image

II. Recent Developments

4. Growth has slowed after an initial surge from development of the oil sector. Construction of the oil pipeline and exploitation infrastructure—financed by a temporary surge in foreign direct investment as the current account deficit widened sharply—and rising oil production pushed average total real GDP growth to over 16 percent during 2000–04 (Table 1 and Figure 1). In 2005 non-oil GDP rebounded sharply, reflecting more favorable weather conditions for agriculture following a drought in 2004 and recovery in cotton ginning, which benefited from an increase in cotton producer prices. However, overall growth slowed to 12 percent as oil production stagnated. Modest non-oil growth and a decline in oil output will likely leave real GDP unchanged in 2006 (Table 1).6

Figure 1.
Figure 1.

Chad: Selected Economic Indicators, 2000–06

Citation: IMF Staff Country Reports 2007, 021; 10.5089/9781451836455.002.A001

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

5. External sector developments were also dominated by the oil sector. Following the completion of the construction phase of the oil project, the current account deficit declined, as investment-related investment imports fell, and oil exports started (Table 6). The terms of trade improved by 112 percent during 2002-05 with a further gain of 24 percent projected for 2006 and the current account balance shifted from a deficit of 100 per cent of GDP in 2002 to a surplus of 1 percent of GDP in 2005 (Table 1 and Figure 1).

6. Inflation, which is very sensitive to developments in food prices, has been higher than in other members of CEMAC. A rise in inflation to an annual average of 8 percent in 2005 (double the CEMAC average), mostly reflected the impact of the 2004 drought on food prices during the first half of 2005 (Figure 2). However, the decline in prices that started in August-September 2005—reflecting the excellent harvest—was short-lived. Inflation rebounded again in the first half of 2006; very sharp price increases for a few items within the food category and charcoal in March appear to have reflected security concerns and related supply disruptions.

Figure 2.
Figure 2.

Chad: Inflation January 2004-June 2006

Citation: IMF Staff Country Reports 2007, 021; 10.5089/9781451836455.002.A001

7. The real effective exchange rate appreciated by 2 percent in 2004-2005 (Figure 3). Indications are that, during the last few years, drought-affected fluctuations in consumer prices had some impact on the appreciation, but the main factor was the depreciation of the US dollar against the Euro.7 The upward trend of the real effective exchange rate has eroded some of the competitiveness gains from the 1994 devaluation, although to a lesser extent than in the CEMAC region as a whole. Non-oil exports have remained relatively stable in percent of GDP; a decline in cotton exports through 2004 (reflecting financial problems of the state-owned cotton company) being offset by higher exports of livestock.

Figure 3:
Figure 3:

Chad’s Exchange Rates and Relative Prices, December 1993-May 2006

(Effective weightings as of 1990; December 1993=100)

Citation: IMF Staff Country Reports 2007, 021; 10.5089/9781451836455.002.A001

Source: IMF, Information Notice System.

8. After stagnating in 2003–04, broad money grew by 32 percent in 2005, well above the 18 percent increase seen in the CEMAC as a whole and four times the program rate. While the increase at the regional level was driven by oil-related liquidity, in Chad it largely reflected a sharp expansion in net domestic assets of the banking system, driven by a rebound in credit to the cotton sector (Table 5). However, during the 12 months to May 2006, broad money growth slowed to 19 percent.

9. Chad’s financial system is among the least developed in the CEMAC region.8 Commercial bank services are available only in the five largest cities; the microfinance sector, though still small, has been gaining importance in recent years.9 Of the six commercial banks, only two are rated “good” by the Banking Commission of Central Africa (COBAC); moreover, the system remains vulnerable because of overexposure to parastatals.

10. Public spending increased following the start of oil revenue, which reached almost 8 percent of GDP in 2005. Non-oil revenue also improved, bolstered by improved revenue administration and growth in the formal sector, stimulated by oil-related investment in recent years.10 However, a sharp drop in donor budget support—as reform momentum slowed and performance under the PRGF weakened—partly offset the higher domestic revenue.11 The net increase in resources financed higher spending, including investment, helping to offset a decline in donor-financed investment. The overall domestic surplus (on a commitment basis, excluding foreign-financed investment) was therefore only slightly higher than before oil revenue started.

Chad: Summary of Consolidated Fiscal Operations, 2002–06

(Percent of non-oil GDP)

article image
Source: Chadian authorities; and IMF staff estimates and projections.

Excluding foreign-financed development expenditure and interest payment on external debt.

Total revenue, including budgetary grants and loans, minus domestic expenditure (current primary expenditure, domestically financed investment and domestic interest, on a commitment basis).

Including IMF (net), included expected disbursement.

11. Despite the rise in revenue, domestic debt and arrears continued to accumulate. Expenditure control was complicated by poor budget discipline and weak public finance management (PFM), including:

  • failure to observe legal time limits for entering into commitments at the end of the fiscal year, resulting in payments being carried over to subsequent years;

  • excessive payments outside normal budgetary procedures, including automatic debits on treasury accounts with commercial banks; and

  • use of different budget codes by the Budget and Treasury Departments, which complicates budget monitoring, and focuses fiscal management on the day-to-day balances in the treasury accounts, without adequate attention to commitments.

12. Fiscal management was also complicated by segmentation of the budget and cash management resulting from earmarking provisions under the PRML (Box 3). Reflecting the earmarking provisions, the overall domestic surplus on the consolidated budget reflected widely divergent developments in sub-budgets:

  • The overall domestic surplus occurred entirely on the “oil budget.” Capacity constraints delayed priority sector investment and there were also delays in making payments on these projects. As a result, the balance in the oil revenue accounts at the BEAC rose to about 1.5 percent of GDP by the end of 2005.

  • Pressures arose on the ordinary budget. Although non-oil revenue rose and the ordinary budget received its 13.5 percent share of rising oil revenues, this was more than offset by the decline in budget support. Current expenditures rose, reflecting higher staffing and wage incentives in education and health. Military salaries also rose sharply in 2005 to levels prevailing in the civil service, while reductions in the excessive number of senior officers were delayed.12

  • Resources for debt service had to be found on the ordinary budget’s financing accounts. Thus, while deposits in the oil accounts increased, central bank advances also rose and the ordinary budget incurred substantial new arrears. These were largely cleared in early-2005. Despite the subsequent circumvention of the PRML’s earmarking rules, as the ordinary budget “borrowed” the equivalent of 2.4 percent of GDP from the oil accounts, new arrears were incurred and the stock of arrears increased.13

Figure 4.
Figure 4.

Chad: Expenditure Composition, 2002-05

(Percent of non-oil GDP)

Citation: IMF Staff Country Reports 2007, 021; 10.5089/9781451836455.002.A001

Sources: Chadian authorities; and IMF staff estimates.

Chad’s Budget Framework

Chad’s overall budget links different categories of resources to specific expenditure. These linked revenue and expenditure streams go through separate budgets and bank accounts, without adequate flexibility in transferring resources to allow optimal cash management. In addition to the self-financing “donor budget,” the “sub-budgets” are:

  • The “ordinary budget,” which consists mainly of the government’s operational expenditure, debt service, and some domestically financed investment. An important share of this budget covers priority spending, though usually less than the mandated 42.6 percent (see Box 1).

  • The “oil budget,” which consists of priority spending funded by earmarked oil revenue; these transactions are executed through separate commercial bank accounts. While the PRML allows earmarked oil resources to finance current priority spending, the government in 2004 and 2005 preferred to focus this budget on priority sector investment.

  • The “HIPC budget,” whose resources arise from the difference between debt service due before and after HIPC relief, is earmarked for priority spending. The government had accumulated 0.8 percent of GDP in arrears to the HIPC budget at end-2005—which had similar supplier arrears—but reduced this share to 0.4 percent of GDP by end-May 2006.

13. During January-May 2006, fiscal developments were again characterized by arrears and payments outside normal procedures. The revenue shortfall arising from the freezing of the oil escrow account was initially offset by the repatriation of resources in the FGF, revenue from exploration licenses, and initial income tax payments by the oil companies. The 2006 budget did not become operational until April; wages were paid and discretionary expenditure focused on clearing 2005 arrears. The intensification of rebel attacks in March and April prompted exceptional security spending of about 1.2 percent of GDP. In addition, payments outside regular procedures were substantial. External debt service was halted, but arrears of 0.4 percent of GDP at end-April, to the Fund, the World Bank, and the African Development Bank (AfDB), were cleared by mid-year.

Chad: Arrears and Expenditures Outside Normal Procedures, January–May 2006

(Percent of non-oil GDP)

article image
Source: Chadian authorities, Ministry of Finance.

Cash basis.

14. Progress in alleviating Chad’s serious growth constraints has been modest. Access to education, health, potable water, and agricultural inputs improved, and the length of paved roads increased from 600 km to 900 km during 2004–05. However, progress in World Bank–supported reforms in the electricity and cotton sectors remained limited, as did progress in civil service and military sector reform.14 Chad ranks as one of the lowest countries in both business climate and governance indicators, and there has been little follow-up on corruption cases.15 Completing the analysis of the 2004 household survey will allow a fuller assessment of progress toward the Millennium Development Goals; however, it will take time for oil-financed priority spending to be reflected in poverty indicators.

15. Poor fiscal performance in recent years, together with inflation pressures, have prevented Chad from meeting the convergence criteria established by the Central African Economic and Monetary Community (CEMAC).

Chad’s Compliance with CEMAC Convergence Criteria, 1999-2005 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: Chadian authorities and IMF staff estimates.

Revised criteria, valid from 2002 onward.

The basic fiscal balance and public debt criteria in 2004 and 2005 are affected by the increase in GDP on account of the start of oil production.

Overall budget balance on a commitment basis, excluding grants and foreign-financed investment.

insufficient information. External debt only. The CEMAC’s convergence criteria also include domestic debt, on which there is insufficient information.

External and domestic arrears.

Given the delay in reaching the completion point under the HIPC Initiative, debt relief is declining. Available IMF interim relief had been used by the end of 2005, while assistance from Paris Club creditors was suspended at end-September 2005, following the delay in completing the first review under the PRGF arrangement. The AfDB provided interim assistance until early-2006 and World Bank interim assistance will reach its ceiling in 2007. Chad’s external debt was equivalent to 47 percent of GDP at end-2005, and the NPV of debt-to-exports ratio is estimated at 37 percent after HIPC relief. External debt service after HIPC relief was more than 7 percent of non-oil revenue in 2005.

III. Report on the Discussions

16. The discussions were held against the backdrop of the authorities’ wish to amend the PRML and, more recently, a dramatic change in the medium-term outlook for oil revenue. Discussions on the PRML, initiated by the government in April 2005, ultimately led to Chad’s unilateral change in the law in early January 2006, followed by contractual remedies by the World Bank and subsequent discussions on how to address both sides’ concerns. At the start of the discussions, most revenue was expected to fall under the PRML earmarking system for several years to come. However, early in 2006, it became clear that the rapid increase in international oil prices during 2005 would lead to very high income tax receipts from oil companies, which are not earmarked under the PRML (Box 4). It was also recognized that strengthening public expenditure management and improving policy implementation would be essential to manage this unanticipated windfall and facilitate donor support.

The Petroleum Revenue Outlook

At the time of the preparation of the Doba oil project, the projected long-term “implied well-head oil price” was US$12–17 per barrel.1 Given the high upfront investment, corporate income tax revenue from the oil sector was not expected until well after 2010. However, in 2005, the price increased to US$33 per barrel, and profits soared. As a result, the oil companies are expected to pay income tax equivalent to almost 4 percent of GDP in 2006, comprising taxes on 2005 profits (paid on March 31), plus an equal advance on 2006 income tax (paid in equal quarterly installments).2

A01bx04fig01

Chad: Oil revenue 2003–09

(Percent of non-oil GDP)

Citation: IMF Staff Country Reports 2007, 021; 10.5089/9781451836455.002.A001

Sources: Chadian authorities and IMF staff projections.

Under current trends, total oil revenue could triple in 2007, before falling back in 2008–09. Oil company profits are expected to increase in 2006 in line with a higher average oil price, leading to much higher income tax payments in 2007, including the payment of a significant advance on 2008 income taxes. Assuming a moderate decline in oil prices and production, oil companies’ profits will decline in 2008-09. This would result in a small decline in oil royalties and dividends, but a sharp fall in net income tax payments, reflecting the regularization of the significant advances on income tax paid in previous years. Over the long term, production is expected to gradually decline from 63 million barrels in 2005 to about 10 million barrels around 2020, indicating that, based on current prices, the importance of oil revenue would also gradually decline.

A01bx04fig02

Chad: Oil Production 2003–30

(millions of barrels per year)

Citation: IMF Staff Country Reports 2007, 021; 10.5089/9781451836455.002.A001

Source: Chadian authorities and IMF staff projections.
1

The implied well-head price is the market price after deducting transportation costs.

2

Under Chad’s tax legislation, profit tax is paid in advance in equal quarterly installments. The advance is equal to income tax liabilities over the previous year and is netted against the actual tax liability to be paid on March 31 of the following year.

Petroleum revenue management

17. Faced with mounting financing needs on the ordinary budget, the authorities perceived the original PRML as overly rigid. They questioned the justification for the Future Generations Fund (FGF) given the country’s high current needs, pointing out that growing balances in the FGF were accompanied by new domestic borrowing. They further noted that the 2003 PRSP identified more priority areas than the PRML, including enhancing security (police and gendarmerie), de-mining, decentralization, and strengthening of the judiciary.16 Finally, they felt that the arrangements lacked flexibility to counter the impact of declining budget support or to accommodate new priority needs, such as those stemming from the large numbers of refugees, while the earmarking had led to a complex and difficult-to-manage system.

18. While recognizing the authorities’ concerns, the staff noted that the difficulties also reflected weaknesses in PFM and a failure to adhere to established budget execution procedures. Against this background, staff argued that PFM would need to be strengthened to protect priority spending before a possible revision of the PRML. Moreover, more time would be needed to assess the operation of the PRML, which had only become fully effective by mid-2004. In the meantime, staff recommended that the authorities use the full flexibility under the PRML to shift priority current expenditure to the oil budget to reduce pressure on the ordinary budget. When the authorities insisted on a rapid revision of the PRML, the World Bank and Fund staffs proposed an accelerated structured review of the law; however, by that time, preparations for amendments had already advanced, with the changes becoming effective in January 2006.

19. The subsequent discussions focused on addressing the fiscal problems, while ensuring the efficient and effective use of oil revenue for poverty reduction. At the time of a multidonor mission in April 2006, which included Fund staff, a broad range of external partners agreed that, given the high needs for security expenditure following the rebel attacks and for clearance of 2005 arrears, the 2006 budget could only be financed by allotting a larger share of oil revenue to general budget financing, as allowed under the amended PRML. Moreover, it was agreed that the list of priority sectors eligible for oil-revenue financing should be extended to better reflect the development needs identified in the PRSP.

20. There was also broad agreement on the urgent need to strengthen PFM, including monitoring poverty-reducing expenditure. The authorities concurred that fiscal management capacity was inadequate. They felt that assistance to build capacity in preparation of the start of oil revenue had been less successful than expected, but agreed that frequent changes in senior civil service positions and weakening budget discipline had also played an important role. Based on technical assistance from a broad range of donors and the IMF, they had prepared an action plan to strengthen PFM (the PAMFIP), implementation of which would be accelerated.17 The plan would be supported with measures to reinforce budget discipline, including by enforcing the application of existing rules and regulations.

Medium-term policies

21. The medium-term fiscal policy discussions focused on the broad management challenges posed by the new oil revenue outlook. The key issue is how to ensure that the oil revenue leads to a lasting reduction in poverty and higher economic growth, while maintaining macroeconomic stability and fiscal sustainability in a politically difficult environment and given weak technical capacity. The projected profile of initially very high revenues falling to low levels over a relatively short time further complicates the policy challenges. The staff elaborated a number of key principles, which could serve as an input in the authorities’ deliberations in finalizing the 2007 update of the PRSP and in revising the PRML:

  • Expenditure should be kept within the economy’s absorption capacity. Therefore, the authorities and Chad’s development partners should include macroeconomic and administrative absorption capacity considerations in the formulation of projects and sectoral development plans in the context of a medium-term expenditure framework (MTEF). Although the World Bank has the lead in this area, Fund staff should participate in the elaboration of the 2007-09 MTEF, which should be finalized in the near future to allow adequate preparations for the 2007 budget. At a minimum the MTEF should include an envelop of expenditure and indicative targets for non-oil revenue for 2007-09 consistent with the main macroeconomic and fiscal aggregates and the government’s policy objectives.

  • Expenditure plans must be geared to long-term fiscal sustainability. That is, policies should aim at ensuring that, when oil revenue runs out, non-oil revenue is able to finance the recurrent costs of oil-financed investments. A crucial element would be raising the currently very low non-oil revenue-to-GDP ratio. In addition, expenditure levels should be carefully phased over the medium term and a buffer built against possible shortfalls.

  • Fiscal policy should be supported by sound PFM practices, through the adoption of a unified budget and asset management system that covers all government operations and that will be executed through a treasury single account at the BEAC.

  • Fiscal policy implementation should be transparent and accountable, through the routine dissemination of fiscal policies and outcomes; the strengthening of oversight institutions and audits, including an enhanced ex-post oversight role for the Collège; and corrective actions to address detected irregularities.

  • The poverty reduction strategy, including the determination of the priority sectors, should be based on the PRSP. However, the 2003 PRSP needs to be updated, including for the revised revenue outlook.

  • Finally, reforms to promote development of the non-oil sector should continue, so that the non-oil sector can generate the resources needed for poverty reduction policies once the oil revenue runs out. Key elements include improving the efficiency of basic utilities, reforming the cotton sector, building a modern infrastructure in the finance sector and other areas, and removing barriers to trade.

22. The authorities agreed with the broad outlines of the medium-term strategy. They pointed out that a full assessment of development priorities and policies to promote private sector development would be undertaken as part of the PRSP update, which is expected to be completed in the second half of 2007. However, they felt that is was premature to discuss a quantitative medium-term macroeconomic framework ahead of detailed discussions about the petroleum revenue outlook, the 2007-09 medium-term expenditure framework, and the design of a stabilization policy which, under the July agreement with the World Bank, are planned for September 2006.18 While stressing Chad’s extensive social needs and the population’s expectations of immediate benefits from oil revenue, they recognized the danger of exceeding technical and macroeconomic absorption capacity and the need to ensure long-term fiscal sustainability. The authorities agreed that oil revenues in excess of immediate needs and absorptive capacity should be saved for future use, but stressed that any such policy should be flexible to allow for unexpected emergencies and other needs.

23. The authorities concurred with the conclusion of the first regional CEMAC Article IV consultation that the regional monetary union and the exchange rate peg had served Chad and the other CEMAC countries well in the context of weak domestic institutional arrangements for monetary management and a fragile domestic banking system. The authorities and staff agreed that, taking into account recent export performance, there were no indications that the present level of the exchange rate was hampering development of the non-oil sector;19 however, political instability, poor infrastructure, slow progress in structural reform and an image of weak governance remain critical impediments to private sector development.

24. The authorities agreed on the need to promote development of the non-oil sector. Discussions focused on the key areas for reform identified in the PRSP and the Fund-supported program:

  • On trade reform, the staff recommended that the authorities be guided by recommendations of the recent Diagnostic Trade Integration Study (DTIS), including on overhauling customs administration, the removal of tariff exemptions and temporary surcharges on imports, and the elimination of export taxes.20

  • There has been little progress toward reform of the cotton sector and the privatization of the state-owned cotton company. The authorities are looking forward to donor assistance with the preparation of a poverty and social impact analysis, which, together with a broad review of previous studies, would form the basis of a resumption of reform.

  • The electricity sector continues to be characterized by supply shortfalls and high costs and the state-owned electricity company depends on budget subsidies. The authorities indicated that they intend to accelerate discussions with the World Bank on reforms, which will also include the telephone company. Further expanding the road network will also have priority.

  • On the financial sector, the authorities agreed with the main recommendations of the recent regional FSAP and shared the staff’s concern about the fragility of the system; they intend to cooperate with the COBAC in seeking improvements. In the short-run, they intend to discuss the implications of moving toward a single treasury account with the banks, with a view to avoid liquidity problems.

Short-term policies

25. The discussions on short-term policies focused on a revised 2006 budget. The supplementary budget, approved by parliament in July, incorporates oil revenues of 14 percent of GDP, with the increase of 6 percent of GDP from 2005 largely reflecting income tax receipts. Expenditures would rise correspondingly so that the non-oil primary deficit (on a commitment basis) would increase from 5 percent of GDP in 2005 to 11 percent of GDP in 2006. The staff and the authorities agreed that there was little room to accommodate additional expenditure needs identified by the multidonor mission in April 2006. However, the budget allows for a significant acceleration of domestically-financed investment in the second half of the year, especially in road building where absorption capacity is felt to be less constraining. The bulk of the increase in spending for the year as a whole reflects (i) exceptional military expenditure (almost 2 percent of GDP), most of which has already taken place; (ii) subsidies to the electricity and cotton parastatals (1.4 percent of GDP) which would be eliminated by 2008 under World Bank-supported reform programs; and (iii) more accurate budgeting of utility costs to avoid arrears. The budget also provides for clearance of 2005 domestic arrears; financing would include advances from the BEAC (1 percent of GDP), use of the end-2005 balances in the oil revenue accounts (mainly from the FGF—1.3 percent of GDP) and budget support from the AfDB (almost 1 percent of GDP).

26. Taming inflation in the rest of 2006 is a concern. The authorities agreed that inflation developments should be monitored closely and that macroeconomic statistics must be strengthened to identify possible absorption and competitiveness problems as expenditure rises. However, they agreed with staff that the increase in prices in the first-half of 2006 reflected primarily supply side developments and security concerns, with only a minor contribution from the growth of non-oil GDP and the recovery in private sector credit:

  • Higher inflation largely stemmed from higher prices for a small number of foods and charcoal, whose distribution appears to have been hampered by rising insecurity.

  • Total public expenditure has been largely unchanged from 2003, despite a shift from foreign–financed projects to domestic spending.

  • While monetary expansion was rapid in 2005, this followed stagnation in previous years, and velocity was only slightly lower in 2005 than in 2002. Moreover, the rise in broad money was driven by an increase in net domestic assets, which in turn reflected financing of the cotton sector. In addition, broad money growth slowed in the first half of 2006 (Table 5).

Technical assistance

27. Chad urgently needs technical assistance in PFM and other areas to ensure adequate management of the expected oil resources. The authorities appreciated the Fund’s extensive assistance to improve PFM. However, further assistance is urgently needed to implement the PAMFIP—for which there is broad local ownership—strengthen customs, and effect other improvements. The staff also recommended that the authorities react promptly to the draft data ROSC report with a view to develop a plan to strengthen the statistical database.

Resumption of the PRGF-supported program

28. The authorities requested a rapid resumption of the PRGF-supported program after the resolution of the dispute with the World Bank. The staff agreed on the need for a continued close relationship, particularly given the complicated challenges facing the authorities and the temporary nature of high oil revenue. Satisfactory implementation of the revised 2006 budget and measures to improve PFM, as well as implementation of key structural reforms, could facilitate the resumption of the discussions on the first review in the near future. The authorities agreed with this approach and invited the staff to closely monitor budget execution and the efforts to strengthen PFM in the coming months.21 The HIPC completion point could be reached after at least six months of satisfactory performance under the PRGF-supported program.

IV. Staff Appraisal

29. Chad faces daunting challenges in taking full advantage of the opportunities provided by oil revenue. Political stability will be essential to allow oil wealth to be used effectively for poverty reduction and growth and to enable the authorities to focus on policy implementation, including sound fiscal management. In this regard, the staff welcomes the authorities’ intention to complete a comprehensive update of the PRSP during 2007.

30. Public financial management is in urgent need of strengthening to allow the transparent, efficient, and effective use of public sector resources. The staff supports the authorities’ program of action in this area, which warrants strong assistance from the international community. The government, in turn, should commit to steady enforcement of laws and regulations and continuity in key administrative positions to promote lasting capacity.

31. While recognizing the population’s extensive needs and high expectations, the staff urges the authorities to take full account of the existing absorptive capacity in managing the anticipated oil revenue windfall. It is essential that the government reorient budget formulation and implementation away from annual targets and more towards long-term fiscal goals, and develop a medium-term expenditure framework consistent with macroeconomic stability and administrative constraints. The staff welcomes the government’s intention to save oil revenues for future years consistent with these principles and stands ready to provide assistance in developing the appropriate policies. The 2007-09 medium-term expenditure frameworks should be elaborated in time for the formulation of the 2007 budget.

32. A key element in the PRSP should be a new PRMP, incorporating the revised revenue outlook and aimed at supporting lasting poverty reduction and growth. The new PRMP, which would be in place for the 2008 budget, should promote long-term fiscal sustainability and macroeconomic stability, by keeping expenditure in line with Chad’s absorptive capacity, and saving a share of oil revenue to insure some future financing of public spending as oil would be exhausted over time. It should also contribute to the implementation of the PRSP and include provisions for monitoring an effective execution of expenditure. Moreover, the new PRMP should promote best PFM practices through the implementation of a unified and sound budget and assets management system. In addition, the new PRMP should foster transparency and accountability.

33. Despite the expected reductions in fiscal and financing pressures, there is no room for complacency; the implementation of ambitious structural reforms remains critical. Chad’s temporary oil windfall should be used to develop a non-oil sector that can support the continuation of the poverty reduction strategy when oil runs out. In the public sector, such efforts should include strengthening non-oil revenue as well as pursuing civil service, military, and public enterprise reform. The staff urges the authorities to intensify their efforts, in close cooperation with the World Bank and other partners, to implement the needed reforms in the electricity and the cotton parastatals quickly, also with a view to eliminating budgetary subsidies. The staff also encourages the authorities to implement the reforms in the trade system recommended by the recent DTIS. Finally, to improve the business climate and Chad’s external standing, it will be important to strengthen judiciary and anticorruption efforts, including pursuing corruption cases identified by oversight institutions.

34. Chad’s membership in the CEMAC and its fixed exchange rate regime has provided an important nominal anchor for macroeconomic policies. However, the risks that the oil windfall could lead to some real appreciation of the exchange rate give additional urgency to structural reforms to improve competitiveness. The rebound in inflation in the first half of 2006 was concentrated in food prices and may have been driven by security concerns. Nevertheless, the staff recommends that the authorities closely monitor price developments and improve statistical information on prices and wages.

35. Chad’s macroeconomic statistics are in urgent need of upgrading. The staff urges the authorities to quickly follow-up on the recommendations of the recent data ROSC. A key element in this regard is to provide adequate resources to the statistics institute. The staff recommends that the authorities seek technical assistance in strengthening the statistics, especially with regard to national accounts and prices.

36. Satisfactory execution of the revised 2006 budget and implementation of measures to strengthen PFM would help bring the PRGF-supported program back on track. Progress in these areas would facilitate a resumption of discussions on the first review under the PRGF arrangement and on a new medium-term macroeconomic program and a convincing structural reform agenda later in the year.

37. It is expected that the next Article IV consultation with Chad will be held in 24 months in accordance with the provisions applying to countries under Fund arrangements.

Table 13.

Chad: Progress in Achieving the HIPC Initiative Completion Point Point Conditions, December 2005 Update

This matrix indicates progress that has been made thus far in reaching the floating completion point conditions for the Heavily Indebted Poor Countries (HIPC) Initiative

article image
article image
article image

For each indicator, understanding was reached on how to measure progress.

Annex I: Short- and Long-Term Measures to Strengthen Public Finance Management (PFM)

The mission assisted the authorities in forming a comprehensive and operational action plan for improving PFM over the next three years.22 The mission cooperated with Bank staff and donor-financed experts. The plan is expected to form the basis of an update of the PAMFIP, for which several donors have committed support and whose short-term measures allow the authorities to establish the track record in PFM that would allow discussions on completing the first review under the PRGF arrangement to begin. This plan draws from (i) the PFM action plan presented by the government during the recent multidonor mission; (ii) the “discussions framework” agreed by Chad and the World Bank in the context of the interim agreement; and (iii) discussions with the Chadian authorities during this mission.

I. Short-Term PFM Measures

The implementation of the PFM measures would require significant and coordinated technical assistance, and most of them can only be completed over the medium term. In the short term, reform progress could be through the following actions:

Restore budget discipline
  • Before the end of June 2006, prepare a revised budget for 2006 that incorporates all indirect oil revenue and additional expenditure needs identified by the Multi-donor Mission (MDM) (M1, O1, A1.b23). Status of implementation: Law 025/PR/2006 signed by President Deby on July 19 together with implementing decree 611/PR/PM/MF/06.

  • By early June 2006, issue a ministerial order by the prime minister with a realistic timetable for 2007 budget preparation, giving the sector ministries sufficient time to adapt their budget programs to available budget envelopes. For the 2008 budget, a similar ministerial order should be issued by the end of December 2006, including adequate deadlines for macroeconomic framework completion, budget circulars dissemination, and medium-term expenditure framework (MTEF) and program budgets updates (M3, O2, A2.a,b). Status of implementation: Circular 843/PM/06 signed by Primer Minister Yoadimnadji on June 13, 2006.

  • To limit budget overruns, restrict exceptional expenditure procedures (PSOP) to transportation and mission costs, external debt and wage payments, and exceptional cases (July 2006) (M7, O4, A4.a). A circular issued by the prime minister should remind the administration of this issue. Status of implementation: Circular 006/PM/CAB/06 signed by Prime Minister Yoadimnadji on June 30, 2006.

  • Engage external auditors with EU financing to audit treasury-verified domestic payment arrears, with the aim of finalizing a settlement plan for arrears and domestic debt by the end of September 2006 (M8, O1, A1.a,b). Status of implementation: Bid received from an audit house on August 3. The EC Delegation is checking that the bid complies with EU rules, but the contract should be approved shortly. The auditing team is expected to arrive in late August.

  • Adopt a MTEF for 2007–09, consistent with both Chad’s absorptive capacity and the 2007 budget, to be presented to parliament along with the 2007 budget (October 2006) (M1, O1, A1). Status of implementation: First version provided with the June 16, 2006 Lettre de Cadrage. Refinement expected following refinement of ministerial program budgets provided on July 20, 2006.

  • Put in place the opening of credits for the 2007 budget on January 1, 2007, to start budget execution at the beginning of the fiscal year (M3, O2, A2.c).

Improve cash management
  • Prepare and implement a monthly cash-flow plan, based on monthly commitment plans for at least the health, education, and infrastructure ministries. The Treasury Committee will be responsible for updating the plan regularly and prepare the minutes of its weekly meetings, to be submitted to the minister of finance within 48 hours (June 2006) (M7, O1, A1.a,b). Status of implementation: The cash-flow plan was completed on June 15, 2006, and updated on June 29, July 25, and August 4.

  • Gradually reestablish the treasury single account at the BEAC by (i) the disbursing all indirect petroleum revenue in the current account at the BEAC, from June 2006; (ii) stopping the opening of new treasury accounts with the commercial banks in N’Djamena as of end-July 2006; (iii) close all treasury accounts with the commercial banks that have a positive balance or that are not subject to a convention on debt repayment (or other binding contract for treasury transactions), by end-September 2006; (4) sign a plan by end-December 2006, to suspend transactions through accounts with the commercial banks and pay off credit balances, with the aim of closing all accounts with the commercial banks before end-June 2007. In addition, an updated list of all government accounts in commercial banks, and the respective reconciliation statements, should be made available no later than end-September 2006 (M7, O2, A2.a-d). Status of implementation: The June 30 payment of income tax by the oil consortium has been deposited to the BEAC; the General Directorate of the Treasury has instructed the consortium that future payments must be deposited into the BEAC.

Limit the use of uncompetitive biddings and streamline procurement
  • Get procurement plans, prepared by priority line ministries, approved by the general public procurement office (end-June 2006) (M14, O1, A1.e). Status of implementation: Procurements plans have been provided for four ministries. Priority sector ministries are said to have provided plans for oil-financed contracts to the College, which have not yet received by staff.

  • Issue an instruction by the prime minister restating that all noncompetitive bidding not in compliance with the procurement code is forbidden and should stop immediately (M14, O1, A1.a). Status of implementation: Circular 008/PR/SGG/OCMP/) signed by Primer Minister Yoadimnadji on August 1, 2006.

Monitoring budget execution
  • By September 2006, audit government oil bank accounts transactions (escrow accounts and commercial bank accounts), and check the 2005 tax returns filed by oil companies by end-December 2006 (M12, O1, A1; M10, O1, A1.d).

  • Review the budget nomenclature and its codification–including a fully fledged functional classification—to ensure consistency with a consolidated budget, and identify functions and subfunctions linked to the poverty reduction priorities defined in the Poverty Reduction Strategy Paper. A decree with the revised nomenclature should be issued by end-December 2006. (M3, O3, A3.a-g).

  • Expand the computerized system (SYDONIA++) for custom administration—at least on the operations conducted in N’Djamena customs offices, which represent 90 percent of customs activities—to produce monthly statistics on imports and exports using harmonized code, on a detailed and consolidated basis, and by type of tax. The customs directorate should also prepare, and submit to the minister of finance, monthly reports showing reconciliation with treasury data (December 2006) (M3, O6, A6.a).

  • Establish a computerized mapping table to reconcile the current treasury accounting system with the budget integrated system of expenditure (CID) in order to track spending from commitments to payments and facilitate producing the four-phase tables (December 2006) (M3, O5, A5.c(i)).

II. Long-Term PFM Measures

The main medium-/long-term objective agreed to with authorities is updating and modernizing the current framework for preparing, executing, and monitoring a consolidated public sector budget by end-December 2008, so as to reduce budget fragmentation and optimize budget allocations.

This objective will require in particular to:

Budget preparation, execution and monitoring
  • Entrust the Ministry of Finance (MOF) with full responsibility for preparing and implementing a unified budget management system through the consolidation of the ordinary, oil, HIPC, and, when possible, donor budgets. Finance decisions on donorfinanced projects should move from the Ministry of Planning to the MOF (2007).

  • Improve tax and customs revenue collections. Although efforts have been made to collect tax and customs revenue, there is still some untapped tax revenue that could raise the level of receipts (only about 50 percent of local enterprises are taxed) (2007).

  • By end-December 2007, have an established mechanism for better forecasting, accounting and controlling wages, pensions, and utility charges for each ministry that represents a large fraction of public expenditure.

  • In addition to short-term measures on the “exceptional expenditure” procedures and the cash management plan, develop a strategy to gradually reduce the causes of payments arrears by regulating the use of budget appropriations; introducing mandatory mid-year budget review, limiting appropriation carryovers from year to year; and meeting, then shortening, the additional authorized accounting period (2007).

  • Expand the treasury’s accounting system to include all government finance transactions. In particular, it should be expanded to reflect all operations related to the oil revenue offshore account and donor-financed project funds, in a timely and reliable manner (2007).

  • Streamline the ex ante control chain, by removing redundant controls exercised by finance comptrollers and the Collège, and strengthen ex post controls, especially on-site audits, by (i) coordinating the activities of agencies responsible for these controls, (ii) developing methodologies based on risk analysis, (iii) giving preference to auditing delivery of goods and services and combating corruption, and (iii) ensuring the sequencing, quality, and usefulness of reports and the effective application of sanctions (2007).

  • In addition to closing the treasury accounts in the commercial banks, finalize the reestablishment of the Treasury Single Account (TSA) at BEAC, by integrating oil revenue bank accounts (2007) and, if possible, donors project accounts in TSA subaccounts at the BEAC (2008).

  • Develop a new fully computerized treasury accounting system compatible with the CID and other Ministry of Finance applications, so as to be able to prepare comprehensive, reliable and timely budgets and finance reports tracking expenditure from commitment to payment (December 2008).

  • Review the legal and accounting framework for PFM, setting a new budget organic law and public accounting regulations, including, for example, strict budget preparation rules and a timetable, harmonized budget and accounting classifications, responsibilities for expenditure and revenue forecasting, and responsibilities and processes for budget execution, control, and audit (December 2008).

  • By end-December 2007, update the current computerized system for registering commitments and payment orders (CID), including the new budget classification component, and by end-December 2008, develop interfaces with the payroll, pensions, and external and internal debt management systems.

Budget execution oversight and audits
  • Establish control and audit procedures for tracking, at each stage of the expenditure cycle, a well-defined sample of poverty reduction spending. The sample would be defined on a risk-analysis basis. The controls and audits embedded in the tracking system could be performed by internal control bodies and, if necessary, with the assistance of reputed external auditors. The civil society participation would be ensured through Collège involvement in the audits, and the organization of regular meetings for presenting and discussing the results of the initiative, with the participation of line ministries and donors (2007).

  • Publish the annual reports prepared by the audit bodies (Collège, Inspection Generale des Finance, Ministry of State Control, and National Audit Office), and include in all control and audit reports an assessment on the implementation of previous recommendations (2007).

Oil revenue management
  • Strengthen fiscal transparency, including through the Collège’s enhanced role in assessing the implementation of priority sector programs as a whole and in increasing public awareness on the use of oil revenue (2007).

  • Review the PRML to implement a simpler and transparent oil revenue management system, covering indirect oil revenue (2007).

Annex II. Letter from Minister of Finance Tolli to the Managing Director

REPUBLIC OF CHAD

OFFICE OF THE PRESIDENT OF THE REPUBLIC

OFFICE OF THE PRIME MINISTER

MINISTRY OF FINANCE

GENERAL SECRETARIAT

No. 206/MF/SG/06

N’Djamena, July 31, 2006

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund (IMF)

Washington, D.C. 20431

Dear Mr. de Rato:

I am pleased to confirm Chad’s intention to cooperate with the International Monetary Fund in the area of economic policy.

The first review of the program supported by the Poverty Reduction and Growth Facility (PRGF) could not be held at the end of September 2005 as planned because of expenditure overruns and delays in concluding discussions on the 2006 budget law. These delays stemmed from uncertainty surrounding the revision of the Petroleum Revenue Management Law (PRML) and the ensuing difference of opinion with the World Bank. The World Bank and the government of Chad have now concluded a memorandum of understanding concerning the management of oil revenue.

On July 19, 2006, the National Assembly approved the supplementary budget for fiscal 2006 (Table 1). This budget law takes into account the provisions agreed to with the IMF and the World Bank, as well as the conclusions and recommendations contained in the aide-mémoire of June 20, 2006 prepared by the visiting Fund mission. The policies and measures underpinning the budget are described in the cover letter to the budget law when it was submitted to parliament. The budget law also takes into account the memorandum of understanding concluded with the World Bank. Moreover, for 2007, that memorandum calls for the allocation of 70 percent of budgetary resources to the sectors it identifies. The revised PRSP now being prepared, which is expected to be completed in 2007, will provide a new framework for the management of oil revenue based on the projected revenue trend.

Management of the windfall in oil revenue expected in coming years poses a major challenge; it will be necessary to craft a mechanism for including in expenditure an amount sufficient to make a lasting contribution to poverty reduction in Chad. Accordingly, it will be necessary to build the technical capacities of the staff of the government of Chad to ensure that the additional resources are used efficiently and rationally, because exceptional revenue raises complex macroeconomic and fiscal management issues.

The government of Chad requests IMF support to meet the challenges it faces in carrying out this program. The government hopes that discussions on the PRGF-supported program will resume as soon as possible. Chad’s economic policy incorporates the fundamentals of the Memorandum of Economic and Financial Policies attached to the government’s letter of February 4, 2005. Moreover, the government agrees fully with the conclusions and recommendations stated in the aide-mémoire of June 20, 2006. It will request IMF assistance for implementation and assessment of this policy, as reflected in the supplementary budget for 2006 and the general agreement concluded July 13, 2006, and is taking due account of the objectives and structural measures set out in the attached Tables 2 and 3.

Speaking on behalf of Chad, I am convinced that the policies and measures contained in the Fund missions aide-mémoire and incorporated into our supplementary budget are sufficient for the rapid resumption of discussions on the PRGF-supported program. However, in the first half of this year it has become clear that considerable doubts remain, particularly about the security situation and spending on security and other needs. Should the situation take a very different turn from the one adopted as a basic assumption in our discussions with recent missions, the IMF will be consulted on any macroeconomic and fiscal measures that may prove necessary. It will also be consulted concerning any other measure that may substantially alter Chad’s economic performance in 2006, and will be given periodic updates of the cash flow plan. Data required for assessing the progress of implementation of the economic and financial policy will be reported to the IMF regularly.

Sincerely yours,

/s/

Abbas Mahamat Tolli

Minister of Finance

Attachments

Table 1: Consolidated Government Operations 2002–06

Table 2: Quantitative Targets for September, 30, 2006–December, 31, 2006

Table 3: Key Structural Measures for 2006

Table 1.

Chad: Consolidated Fiscal Operations, 2002-06

(in billions of CFA francs)

article image
Sources: Chadian authorities; and IMF staff estimates.

In the program, revenue from oil exploration permit was recorded under sale of assets. Presentation of is now corrected to include revenue from oil exploration permit 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.

Include 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 1.

Concluded. Chad: Consolidated Fiscal Operations, 2002-06

(In percent of non-oil GDP, unless otherwise indicated)

article image
Sources: Chadian authorities; and IMF staff estimates.

In the program, revenue from oil exploration permit was recorded under sale of assets. Presentation of is now corrected to include revenue from oil exploration permit 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.

Include 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.

Chad: Quantitative Targets for the Period September 30, 2006–December 31, 2006 1/

(In billions of CFA francs; cumulative changes from the beginning of the calendar year, unless otherwise indicated)

article image
Sources: Chadian authorities; and IMF staff projections.

Correspond to the definition of the performance criteria under the PRGF under A and B and indicative targets otherwise.

The primary base balance is the difference between total revenue and total expenditure, excluding interest on domestic and external debt and externally financed investment.

Excluding revenue from the privatization of public enterprises and from the concession of exploitation or exploration permits of oil fields (CFAF 12.5 billion projected in 2006).

Conventional debt refers to BEAC, Contonchad, CNPS, CNRT, ASECNA, CBT, “France Cable et Radio”, Alcatel, subscriptions, contributions to international organizations, arrears on rents, and legal commitments.

Excluding external payments arrears incurred pending debt rescheduling.

Excluding debt relief obtained in the form of rescheduling or refinancing.

Table 3.

Chad: Key Structural Measures for 2006

article image
article image

Column added by staff upon the reception of the letter to report on the status of implementation.

These performance criteria under the PRGF arrangement were implemented, but should continue to be implemented.

APPENDIX I: Chad: Relations with the Fund

(As of June 30, 2006)

I. Membership Status: Joined 7/10/63; Article VIII

article image

V. Finance Arrangements:

article image

VI. Projected Obligations to the Fund

(Without HIPC Initiative assistance, in SDR millions; based on existing use of resources and present holdings of SDRs):

article image

VII. Implementation of HIPC Initiative

article image

VIII. Safeguards Assessments

The Bank of the Central African States (BEAC) is the regional central bank of the Central African States, of which Chad is a member. A safeguards assessment of the BEAC completed on August 30, 2004, found that the BEAC had implemented a number of measures to strengthen its safeguard framework since the 2001 safeguards assessment, but that further progress needs to be made in key areas.

The main recommendations of the assessment, applicable to the BEAC as an institution, include (i) preparation of finance statements in full accordance with an internationally recognized accounting framework, initially the European Central Bank guidelines; (ii) publication of the BEAC’s full finance statements, together with the auditor’s report, starting with the 2003 finance statements; (iii) formulation of Board-approved formal guidelines under which the BEAC governor is authorized to make exceptional advances to BEAC member countries; (iv) annual review by the BEAC internal audit department of the process of program data reporting of member countries to the IMF; (v) implementation of a risk-based audit approach, and finalization of a charter, for the internal audit function; and (vi) systematic follow-up of all recommendations pertaining to the BEAC’s system of internal controls to be coordinated by the internal audit department, with regular reporting to the Audit Committee and the BEAC governor.

Other priority recommendations of the assessment, but of a country-specific nature, were: (i) the BEAC should clarify with its member countries that hold foreign reserves outside the BEAC the statutory basis and circumstances for doing so, to avoid an apparent conflict with the BEAC statutes and to ensure full transparency of reporting of reserves by the member country; (ii) the BEAC and its member states are encouraged to establish a mechanism to prevent overdue payment to the Fund and facilitate timely payments through advance acquisitions of SDRs and an authorization to debit the SDR account of the member; and (iii) the BEAC should cooperate with its members to reconcile and confirm the treasury balances to ensure that the balances reported by the BEAC in respect to credit to government, as reflected in the accounts of the treasuries, are in agreement with the BEAC.

IX. Exchange Rate Arrangement

Chad is a member of the BEAC. The exchange system common to all members of the BEAC has been free of restrictions on payments and transfers for current international transactions. The BEAC common currency is the CFA franc, which was formerly pegged to the French franc. Repurchase of the CFA franc banknotes exported outside the BEAC was suspended on August 2, 1993. Effective January 12, 1994, the CFA franc was devalued by 50 percent in foreign currency terms, and the exchange rate was adjusted from F 1 = CFAF 50 to F 1 = CFAF 100. Since January 1, 1999, the CFA franc has been pegged to the euro at the fixed rate of EUR 1 = CFAF 655.97. On June 5, 2006, the rate of the CFA franc, in terms of the SDR, was CFAF 440.25 = SDR 1.

X. Article IV Consultations

Chad is on the standard 12-month cycle. The last discussions for the 2003 Article IV consultation were held in N’Djamena during October 29-November 11, 2003. The staff report (IMF Country Report No. 04/115) was discussed by the Executive Board on March 19, 2004.

XI. Technical Assistance

1988: FAD mission to prepare a tax reform program

1989: FAD mission to prepare a tax reform program

1990: FAD mission to review implementation of the tax reform program

1991: FAD mission to review implementation of the tax reform program 1994: FAD mission to assess weaknesses in customs administration and recruit an expert responsible for strengthening customs administration

October 1994-October 1995: FAD resident expert to strengthen customs administration 1996: FAD mission to review the tax reform program (introduction of the turnover tax and strengthening of tax administration)

August 1997: FAD mission to follow up on the tax reform program initiated in 1996

November–December 1997: FAD mission to assess weaknesses in customs administration and prepare a rehabilitation program for strengthening the Customs Directorate

May–June 1998: FAD mission to assess the need for long-term assistance in tax and customs administration, treasury operations, and budget preparation and execution

November 1998: FAD expert to begin a series of missions to strengthen customs administration

March 1999–December 2001: FAD resident expert to assist the tax administration, in particular, with introducing a value-added tax

October 1999: FAD mission to assess tax administration

November 1999–December 2001: FAD resident expert to serve as public expenditure management advisor to the Minister of Finance

May 2000: STA multisector statistics mission

June 2001–December 2001: FAD resident expert to assist the tax administration with, in particular, strengthening tax collection and implementing the VAT

May 2002: FAD mission to assess the implementation of fiscal reforms and investigate the possible need for further Fund technical assistance

July 2002: STA mission to evaluate the status of national accounts statistics and to provide recommendations for their improvement

April 2003: FAD mission to provide technical advice to the authorities on the implementation of the customs action plan

October 2004: FAD mission to provide technical advice to the authorities on the consolidation of budget management.

May–June 2005: FAD mission to provide technical advice to the authorities on the mechanisms to strengthen the transparency and integrity of government budget and accounting

XII. Finance Sector Assessment Program (FSAP) Participation, Report on the Observances of Standards and Codes (ROSCs), and Offshore Finance Center (OFC) Assessments:

A ROSC Data Module Mission visited Chad during May 26-June 8, 2005. A joint IMF- World Bank mission conducted an FSAP for CEMAC countries during January 30- February 9, 2006.

XIII. Resident Representative

Mr. Camard is the Fund resident representative in N’Djamena since September 2004.

APPENDIX II: Chad: Relations with the World Bank Group

I. Partnership in Chad’s Development Strategy

1. Oil provides a major opportunity for Chad to diversify its economy and break free of poverty, as long as the additional resources from oil are well managed, in particular, to avoid the “paradox of abundance” in which large inflows of oil revenue weaken the government’s incentive to control its spending and undertake reforms, to the detriment of long-term growth and poverty reduction. To ensure that petroleum revenue support rapid poverty reduction, Chad, with assistance from the Bank, set up a unique regulatory and institutional framework for checks and balances in the use of petroleum revenue. The National Assembly adopted on December 30, 1998, a Petroleum Revenue Management Law (PRML) to regulate the use of the government revenue from the exploitation of the oil fields of Miandoum, Komé, and Bolobo, which started in July 2003.

2. Under the PRML, the bulk of direct oil revenue (royalties and dividends) would be allocated to road construction, health, education, rural development, and water and environment (priority sectors), with activities deemed to enhance poverty reduction. The PRML established an oversight committee, the Collège de Contrôle et de Surveillance des Ressources Pétrolières (CCSRP), with representatives of the government, Parliament, and civil society, to monitor the use of petroleum revenue. In addition, the law established a fund for future generations (FFG), which received 10 percent of the direct revenue, to be saved for the future. This regulatory approach was regarded as very innovative, and provided the framework under which the Bank and other donors continued to provide significant finance and technical support to Chad.

3. In late December 2005, the Government of Chad, without consultations with the Bank and other donors, revised the PRML and specifically (i) abolished the FFG and the provided for the repatriation of its balance by decree; (ii) expanded the list of priority sectors financed by earmarked oil revenue to include energy, justice, territorial administration, and domestic security, and entrusted the Government with the authority to revise the list of priority sectors; (iii) increased the share of oil revenue allocated to the general budget from 13½ percent (the original 15 percent net of the FFG) to 30 percent; (iv) extended the coverage of the PRML to all oil fields to be developed in Chad; and (v) extended the mandate of the members of the Collège from three to nine years.

4. While there were some positive aspects of the revision (the extension of the coverage of the PRML to all oil fields), the modifications and the process of the revision largely compromised the original objectives of the PRML. Thus, in response, on January 6, 2006, World Bank management suspended disbursements on Bank projects and froze transfers from the off-shore oil revenue escrow account. Subsequently, the Bank and the Government entered into a dialogue to resolve the impasse, and during January 29–February 1, 2006, delegations of the World Bank and the Government met in Paris to discuss options for reengagement. Following these meetings, a multipartner mission (March 24–April 6, 2006), with the participation of key partners (France, Germany, and the United States and AfDB, EU, IMF, UNHCR, UNDP, and the World Bank), enabled Chad and its partners to share views and reach a common understanding on the major challenges in the implementation of the poverty reduction strategy, including the refugee situation in Darfur and security concerns. This prepared the groundwork for further high-level discussions the Bank and the Government of Chad. On April 25, 2006, the two parties signed an interim agreement that paved the way for a series of phased actions by both parties for the resumption of cooperation. The World Bank lifted the suspension of disbursements on its portfolio in Chad. On its side, the Government agreed to (i) adopt a 2006 revised budget law that will specify that 70 percent of oil revenue will be used for priority poverty programs (excluding security); and (ii) take parallel actions to strengthen the monitoring, transparency, and accountability of oil revenue as well as public finance resources and development assistance more broadly. The two parties also agreed to prepare a comprehensive agreement to guide the management of oil resources in Chad.

II. World Bank Country Assistance Strategy

5. Chad’s Poverty Reduction Strategy Paper (PRSP) was formally endorsed by the Boards of the World Bank and the Fund on November 13, 2003, and November 17, 2003, respectively. Good governance, sound macroeconomic management, and rapid economic growth are among the five strategic axes of the PRSP. The strategy underlines the need for strong and sustained growth in the non-oil sector, improved human capital, improved living conditions for vulnerable groups, and preservation of the environment. The World Bank’s assistance program in Chad is laid out in the Country Assistance Strategy (CAS), which was endorsed by the World Bank Board on December 11, 2003. The CAS supports two key strategic objectives in line with Chad’s PRSP: (i) strengthening governance, including public resource management; and (ii) ensuring inclusive, broad-based growth as the country embarks on oil production.

The IDA Portfolio of Projects

6. The current IDA portfolio of projects (Annex 1) supports investments in key sectors for social and economic services (health, education, energy, rural development, and transport). Recently closed projects have supported capacity building for public expenditure management, management of the petroleum sector, local development, and environmental management; and the exploitation of Chad’s petroleum resources.

7. Support to the reform program: The Bank provided three quick-disbursing policy reform operations for a total of US$85 million from 1996 to 1999 in support of the government’s reform program. These reforms have largely focused on transparency and accountability in expenditure management, public procurement system, and promoting sustainable growth and reducing rural poverty. The last adjustment credit, the Institutional Reform Support Credit (IRSC) of US$25 million, was approved by the Board on November 30, 2004, and closed in December 2005. The IRSC, building on the previous credits (SAC IV and SAC V), supported reforms to (i) improve public sector governance through enhanced transparency, rule of law, and participation; (ii) promote a more efficient use of resources through better management, improved procurement, and civil service reform; and (iii) promote sustainable growth in the rural sector by reforming the cotton sector. The implementation of these reforms benefited from the Management of the Petroleum Economy Project (GEEP), an IDA-supported capacity building and technical assistance project that closed in 2005.

8. Contribution to the Petroleum Sector: The Bank Group has made a substantial contribution to the development of the oil sector in Chad. On June 6, 2000, the Executive Board of the World Bank approved the Petroleum Development and Pipeline Project, for which it provided an IBRD loan equivalent to US$39.5 million to the Republic of Chad, as well as US$14.2 million in A-Loans and up to US$42.7 million in B-Loans from the International Finance Corporation to the oil transportation company in Chad. A complementary IDA-funded Petroleum Sector Management Capacity-Building Project, aimed at promoting environmentally and socially sound management of the petroleum sector, was approved simultaneously for US$23.7 million. In complement, the Management of the Petroleum Economy Project, in the amount of US$17.5 million, aimed at building capacity for public finance management, was approved in January 2000. The IBRD and IDA projects associated with the pipeline construction closed in June 2005. Successor capacity-building projects have been under preparation.

9. Projects under preparation: Two capacity-building projects are under preparation to further strengthen the management of public finance and the petroleum sector, which are scheduled for presentation to the Board of Executive Directors in FY07. The FY06–07 lending program also includes an Urban Development Project. Support to the cotton sector reform program, a budget support operation, and the demobilization and reintegration of armed rebels and soldiers are also under consideration.

Non-Lending Activities

10. In addition to these lending activities, the World Bank has been carrying out nonlending activities, including (i) annual public expenditure reviews since 2002, a Country Finance Accountability Assessment (2004) and, jointly with the IMF, the HIPC monitoring of progress in public finance management (PFM), which laid the ground for the preparation by the Government, in 2004, of a comprehensive action plan for the reform of PFM; (ii) technical support for the implementation of a medium-term expenditure framework and program budgets in the priority sectors; (iii) the preparation of an education status report; (iv) a Poverty and Social Impact Analysis of the consequences of the reforms in the cotton sector; and (v) a Diagnostic Trade Integration Study finalized and disseminated in November 2005. The Bank is also providing technical assistance to the PRSP Steering Committee for PRSP implementation and monitoring, jointly with other donors, and has launched a Development Policy Review/Poverty Assessment to be completed in FY07. This work will provide an in-depth assessment of economic and policy issues and strategic choices for promoting growth and poverty reduction over the medium-term. The Bank will produce a CAS progress report in FY07.

III. Bank-Fund Collaboration

11. The IMF takes the lead in the dialogue on the macroeconomic framework, the setting of macroeconomic objectives and targets, and revenue mobilization, notably tax polices. The Bank leads the policy dialogue in critical sectors such as education, health, electricity, water, rural development and transport. The Bank also leads the dialogue in cotton sector and energy sector reforms, in close collaboration with the Fund. The Fund focuses, in particular, on monitoring the fiscal impact of some key reform measures, for example, the increase in the wage bill and government subsidies to Cotontchad and the electricity company. In addition, the Bank has taken the lead in assessing the poverty and social impact of reforms undertaken in the cotton sector, as mentioned above. The dialogue pertaining to many areas of policy reforms, including on governance, oil revenue management, and public finance management is shared by the Bank and the Fund. In all these areas, the Bank and the Fund maintain close dialogue, with each institution focusing on specific components.

12. The Bank and the Fund share the responsibility on the monitoring of HIPC Initiative completion point triggers, with the Bank taking the lead on triggers in the health, education, rural development, and infrastructure sectors, and the IMF taking the lead on macroeconomic performance, with shared responsibility for monitoring governance-related triggers. The Bank and the Fund also collaborate closely on the dialogue pertaining to the PRSP.

13. Contact person: Mr. Ali M. Khadr, Country Director for Chad

Africa Region

(202) 458-7860

Annex 1: Chad: IDA Portfolio

article image

APPENDIX III: Chad: Statistical Issues

While data provision for surveillance is still adequate overall, staff’s analysis was affected by shortcomings in balance of payments, government finance, and monetary statistics. A ROSC data module mission that visited N’Djamena during May–June 2005, found that Chad’s statistical system continues to be weak and suffers from a shortage of both finance and human resources. More specifically, the ROSC mission identified a number of weaknesses, such as inadequate funding for the INSEED, weak source data for national accounts, insufficient coverage of government finance and monetary statistics, improper sectorization of public entities in all datasets, absence of dissemination of government finance statistics by the Ministry of Economy and Finance, and generally limited data and metadata accessibility.

The compilation of macroeconomic statistics is decentralized, involving several government ministries and the national directorate of the BEAC. The statistics directorate at the National Institute of Statistics, Economic, and Demographic Studies (INSEED) is in charge of the national accounts and the consumer price index (CPI), as well as the production and dissemination of statistics on the population and certain social indicators. The Ministry of Finance is responsible for compiling fiscal data. The BEAC is responsible for monetary statistics and the balance of payments statistics. The CPI is published biweekly, and other data are disseminated by the authorities on a periodic basis. Each month, the BEAC disseminates Chad’s available monetary and finance statistics through its website (www.beac.org) and re-disseminates other macroeconomic statistics on a regular basis.

During the recent ROSC mission, the authorities expressed a strong interest in reforming the statistical system but said they lacked the resources—both human and finance—to do so. An important step in this direction was the implementation of a new set of national accounts in line with the System of National Accounts 1993 (1993 SNA) in 1998. The adoption in 1999 by the government of a law to regulate and enhance statistical activity provides a new impetus for collecting and disseminating statistical data.

Chad has also adopted the General Data Dissemination System (GDDS) as its statistical development framework; statistical metadata have been posted on the Fund’s Dissemination Standards Bulletin Board since September 2002. However, Chad has not made annual updates to the metadata and, as a result, plans for improvements are outdated.

Real Sector

In early 1998, the authorities started compiling a new set of national accounts, conforming with the methodological requirements of the 1993 SNA, and retained 1995 as a base year. Notable improvements include the compilation of an input-output table that incorporates nonmarket household production and improved coverage of informal activities. However, there remains a need to refine the data-updating process, notably to account for structural changes in the economy. According to the ROSC assessment, source data for national accounts compilation remain a weak area, which is related to inadequate funding for the compiling agency. In addition, dissemination of data and metadata to the public could be improved by more timely releases and more detailed information. The only price index available is the CPI, which is based on outdated 1972 weights. It is therefore important that efforts aimed at producing a harmonized consumer price index for the Central African Economic and Monetary Community countries be continued with the assistance of the regional statistical office (AFRISTAT), and that the planned household consumption survey be completed.

Public finance

Chad has not yet been able to resume reporting of detailed data for publication in the Government Finance Statistics Yearbook. Annual fiscal data to 2001 have been reported and published in the International Finance Statistics (IFS) but include significant discrepancies between the deficit and total financing. The 2000 multisector mission noted that there was no comprehensive and systematic compilation of government finance statistics. The quarterly Tableau des Opérations Financières de l’état, compiled by a working group, mainly for the purpose of the Fund-supported program, is based on several disparate sources. The mission recommended that systematic procedures be established for the compilation of government finance statistics, based, to the extent possible, on a unified set of accounting and administrative records that would be implemented only after a comprehensive review of the public accounting system.

Monetary sector

The BEAC regularly reports monetary, interest rates, and exchange rate statistics for publication in IFS, but their timelines needs to be improved. There are significant delays in the compilation of data by the national agency of the BEAC, and its communication to the headquarters of the BEAC. In addition, the coverage of monetary statistics for Chad is limited to the central bank and active commercial banks. Microfinance corporations, a growing source of finance in Chad, are excluded, together with other units in the finance sector. The monetary and fiscal indicators on net credit to government cannot be reconciled, owing to differences in the institutional coverage of units in general government and the public sector. In addition, accuracy is affected by large cross-border movements of currency among CEMAC member countries. About 34 percent of banknotes issued in Chad by the national BEAC directorate circulate in Cameroon, while currency in circulation in Chad includes some 15 percent of banknotes from Cameroon and 6 percent of notes from the Central African Republic.

In addition to the recent ROSC data module and the May 2005 multisector statistics missions to Chad, STA has provided technical assistance in monetary statistics on a regional basis to the BEAC, including support of the BEAC’s migration path to the Monetary and Finance Statistics Manual. The migration will involve an expansion in both the institutional coverage and the availability of detailed information by instrument. STA has participated in regional BEAC monetary statistics workshops and offered its regional training seminars in monetary and finance statistics biannually in French at the Joint Africa Institute.

Balance of payments

As in other CEMAC countries, the national agency of the BEAC is responsible for the compilation of the balance of payments statistics for Chad. The poor quality of the balance of payments statistics appears to be related to inadequate staffing and provision of finance and physical resources dedicated to balance of payments compilation. The foreign trade data, compiled by the DSEED on the basis of customs declarations, are known to be unreliable, and to suffer from coverage problems; in addition, they are believed to be inconsistent with those used in the compilation of national accounts. Consequently, they are not fully used by the BEAC in the compilation of balance of payments data. Data on exports are estimated based on data provided by line ministers. Even considering the difficulty of collecting data on informal border trade between Chad and its neighboring countries, many improvements could be made on such items as imports, cotton and cattle exports, freight, and public transfers. Tighter coordination among the CEMAC, DSEED, and other agencies is required in order to improve the data coverage. The 2000 multisector technical assistance mission, the first STA mission to Chad in 10 years, provided a thorough assessment of requirements in the area of balance of payments statistics. It found the compilation system and procedures for balance of payments statistics, recently revised to conform to the Balance of Payments Manual (fifth edition) (BPM5), to be conceptually sound but flawed in their application, owing to the absence of documented sources and methods, understaffing, and lack of training. In all of these areas, the mission made specific recommendations. This situation implies that the authorities’ commitment to strengthen the human and technical resources needs to be reconfirmed

Poverty indicators

In early 2003, with assistance from the World Bank, the government launched a household survey on income and expenditure. The results of the survey will provide definitions of a poverty line and the main poverty indicators (incidence, depth, and severity).

Country Chad: Table of Common Indicators R equired for Surveillance

(As of July 27, 2006)

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

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available (NA).

1

All ratios to GDP in this report concern non-oil GDP, unless otherwise stated.

2

See the accompanying paper “Chad: Selected Issues and Statistical Appendix,” Section “Sources of Economic Growth.”

3

See “Chad: 2003 Article IV Consultation; and Ex Post Assessment of Performance Under ESAF/PRGF Programs,” April 2004 (http://imf.org/external/pubs).

4

For a detailed discussion on recent political developments and their background, see, for example, International Crisis Group, “Chad—A Return to War?,” Africa Report no. 111, June 1, 2006 (http://www.crisisgroup.org).

5

“Selected Issues,” op. cit. provides further information on Chad’s petroleum sector.

6

Data provision for surveillance purposes is still adequate overall, although severe weaknesses and shortcomings in most macroeconomic statistics affected staff’s analysis; a recent ROSC data module made recommendations for improvements (Appendix III).

7

“Selected Issues”, op. cit., Section on Assessing Competitiveness in Chad in Light of Oil.

8

The state of Chad’s banking system and banking supervision broadly reflects those of the CEMAC region as discussed in the recent staff report on the regional Financial System Stability Assessment (Country Report No. 06/320, June 15, 2006).

9

Selected Issues, op. cit.

10

The increase in non-oil revenue, as a percent of non-oil GDP, in 2004 reflected the impact of the drought on the informal agriculture sector, which lowered non-oil GDP but had little impact on tax collections in the formal sector. The increase was largely reversed in 2005, as the excellent harvest and a rebound in the cotton sector increased non-oil GDP.

11

Total external assistance, including project assistance, declined from 15 percent of GDP in 2003 to less than 10 percent of GDP in 2005.

12

Reflecting the integration of many past rebel movements in the army, there is now one senior officer for each middle-ranking officer and each soldier.

13

Arrears are defined as nonpaid commitments on other-than-the-current year’s budget, which does not necessarily imply that payment is legally overdue.

14

Selected Issues, op. cit.

15

See the World Bank–IFC joint report “Doing Business in 2006: Creating Jobs” (http://publications.worldbank.org/ecommerce) and the 2005 Transparency International report (http://ww1.transparency.org/).

16

“Chad: Poverty Reduction Strategy Paper,” IMF Country Report No. 03/209, July 2003 (http://www.imf.org/external/pubs/cat/longres.cfm?sk=16720.0).

17

Annex I provides a summary of the short- and long-term measures to strengthen PFM as discussed and agreed between Chad and donor representatives, led by the World Bank and including Fund staff, in May 2006. Key short-term elements are reinforcing cash-flow management, moving toward a single treasury account at the BEAC, preparing a single budget nomenclature, and strengthening customs administration.

18

At that time, the staff will, jointly with the World Bank, also update the debt-sustainability analysis.

19

The staff analysis underlying the staff report on the regional discussions with the CEMAC indicated that the current CAF franc exchange rate was close to its equilibrium level. The large terms of trade gains for Chad since 2002 and the development of the oil sector tend to suggest an appreciation of the equilibrium exchange rate for Chad, but a definitive conclusion is premature and an assessment would need to take into account existing structural weaknesses.

20

“Chad: Diagnostic Trade Integration Study, World Bank,” Draft, November 2005.

21

Letter of the Minister of Finance of July 31, 2006—see Annex II.

22

This comprehensive action plan has been provided to the authorities separately. This Annex summarizes the main actions.

23

This codification refers to the comprehensive action plan, “M” meaning “measure”; “O,” “objective”; and “A,” “action.”

  • Collapse
  • Expand
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
Author:
International Monetary Fund
  • Figure 1.

    Chad: Selected Economic Indicators, 2000–06

  • Figure 2.

    Chad: Inflation January 2004-June 2006

  • Figure 3:

    Chad’s Exchange Rates and Relative Prices, December 1993-May 2006

    (Effective weightings as of 1990; December 1993=100)

  • Figure 4.

    Chad: Expenditure Composition, 2002-05

    (Percent of non-oil GDP)

  • Chad: Oil revenue 2003–09

    (Percent of non-oil GDP)

  • Chad: Oil Production 2003–30

    (millions of barrels per year)