I. Introduction and Background

On behalf of my Chadian authorities, I would like to thank the staff for the frank and constructive discussions held in N'Djamena, as well as for the well-written set of reports on Chad. The reports provide a candid assessment of the country's economic situation and the challenges ahead. My Chadian authorities are fully committed to pursuing sound economic and financial policies and to implementing structural reforms aimed at strengthening the country's economy, improving growth and reducing poverty in a sustained manner. Notably, my authorities would like to assure that the coming oil wealth contributes effectively to reducing poverty. They are hopeful that they can count on the continued support of the international community, both at the financial and technical levels, to carry out successfully the needed reforms.

Chad is a vast, landlocked country, with large arid and semi-arid zones, which has faced extremely difficult conditions since its independence in 1960, including repetitive periods of domestic armed conflict. The combined effects of poverty-related problems and frequent droughts have contributed to make this country one of the most impoverished countries in the world. As shown in the United Nations’ 2005 Human Development Index, Chad ranks 173 among the 177 countries considered.

After experiencing a period of relative political stability in the 1990s, Chad's security situation deteriorated in the last two years, with spillover effects from the neighboring Darfur (Sudan) Crisis which has caused displacement of thousands of refugees into the Chadian territory. More recent attacks from across the Sudanese border occurred in late 2005 and in early 2006, then escalated in August, leading the government of Chad to declare a State of Emergency and the UN to declare security phase IV for Eastern Chad and Phase III for N'Djamena. It is also worth noting that the Darfur situation continues to have humanitarian consequences and budgetary implications for Chad. During this difficult period, support from some development partners has been critical to helping contain the conflict and its humanitarian and economic implications, and avoid that it becomes more regional in scope. Chad has held successfully Presidential elections in May 2006. Subsequently, efforts to engage the opposition in forming a government of national unity have been made though unsuccessfully.

The petroleum era has created high expectations amongst the population for a rapid economic development and for provision of adequate social services. Driven by the oil pipeline construction from 2001 and the initiation of oil production in 2003, real GDP growth averaged 11 percent in 2001-03 and reached a record level of 30 percent in 2004. Despite this recent period of rapid growth, my authorities are fully aware that the petroleum era may be short-lived based on current proven reserves, and the contribution of oil revenue to the government budget is expected to remain relatively small.

The decision of the authorities to amend the Petroleum Revenue Management Law early this year was not an expression on their part to oppose to the principle of transparency which they had proven to be committed to, nor was it a rejection of the principle agreed-upon with the Word Bank to make use of oil resources mainly for priority spending. They have clearly explained the need to adjust the mechanism that governs the management of these resources - notably with the elimination of the Fund for Future Generations (FFG)–on the grounds of required high long-term investment yields to meet Chad's daunting economic and social infrastructure needs. Moreover, faced with issues out of their control, notably the recent deterioration of the security situation, they sought merit to have the list of priority sectors to be expanded to include security-related areas identified in the 2003 PRSP. These actions not only led to the World Bank's decision to suspend its operations with Chad and to the freezing of the Chadian government's oil escrow account, but also contributed to delaying the execution of the 2006 budget. With agreements reached in April and July 2006 between the government and the World Bank, my authorities are committed to using the oil resources wisely and to strengthening the public financial management.

Despite the progress made by Chad in many economic areas under Fund-supported programs, the country still has to address considerable challenges to achieving sustainable and lasting poverty reduction. Among them is the need to consolidate security, enhance budget and cash management, increase access to financial services, and cope with exogenous shocks such as droughts and low international prices of agricultural products. Infrastructure remains deficient in many areas, including social sectors, transportation, energy and telecommunications, leading to difficulties in sustaining appropriate policy and structural reform implementation.

My authorities are cognizant of the fact that Chad's economic and financial situation remains fragile and vulnerable to external shocks. They also recognize the importance of following prudent macroeconomic policies and implementing structural reforms that can help improve the absorptive capacity of the economy. To address the numerous problems facing the country, assistance from the international community remains critical. Such renewed support will help the country achieve highly needed sustained growth required to meet the MDGs.

II. Economic Developments in 2006

In the real sector, economic developments in 2006 have been largely driven by buoyant non-oil sector activity, which is growing at an annual pace of 5.1%, while oil production declined from 63.3 in 2005 to 55.4 million of barrels in 2006 because much more water was found in the wells than expected. The oil production decline was more than offset by broad-based non-oil sector activity reflecting the recovery of grain production following the previous year drought, and strong activity in manufacturing and transportation. While real GDP has grown by 1.3% percent, the 12-month point-to-point CPI in October 2006 stood at 15 percent, resulting from an increase in meat and other food products. For a few food categories and charcoal, security concerns and related supply disruptions appeared to have played a role in the increase of inflation.

Regarding the fiscal area, Chad has registered a revenue shortfall arising from the freezing of oil escrow account, which 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 release of oil revenue from the World Bank-controlled escrow account later this year, coupled with income tax revenue from the settlement of a dispute with two foreign oil companies has improved the government's cash position. Since then, public sector wages were paid on time and the implementation of oil-financed projects has resumed. The non-oil primary deficit implied in the supplementary 2006 budget mainly reflects additional expenditures warranted by the new exceptional security situation, as well as increases in capital spending. Nevertheless, my authorities remain committed to improving the execution of prioritized expenditures.

On the financial sector front, Chad's financial system is among the least developed in the region. However, the microfinance sector, though still small, has been gaining importance in recent years. The emergence of microfinance contributed to the improvement in the population's access to financial services. The authorities attach a great importance to its development and consider it as a key tool for the implementation of their poverty reduction strategy. In compliance with the CEMAC regulations, which are now being applied to microfinance institutions, my Chadian authorities have set up a professional association for these institutions as well as a department for microfinance issues within the Ministry of Finance. The related licenses issued by this department are being verified and validated by the regional banking commission, COBAC.

Concerning petroleum management, the economic and security situation has prompted my authorities to revise the mechanism initially established regarding the allocation of oil resources. They are committed to put in place an oil-revenue stabilization mechanism which is consistent with the medium-term expenditure needs of the country. For the reasons laid out above, these expenditures are frontloaded. The mechanism would be lodged at the BEAC and would include an oil account that is fully integrated to the budget process. The College that oversees the management of oil resources will pursue its tasks. The arrangement could be reviewed and simplified following discussions on a new oil revenue management program, including a revised role of the College.

As regards structural reforms, while progress in alleviating growth constraints—especially in the electricity and cotton sectors—has been modest, access to education, health, water, and agricultural inputs has improved, and the length of paved roads increased from 600 km to 900 km during 2004-05. The modest progress in growth-enhancing structural reforms is due to the fact that the country has to address the security problem as a matter of greater priority. Indeed, my authorities are of the view that an improved security situation is essential to allow oil wealth to be channeled to growth-supporting and priority sectors.

The cotton sector, an important non-oil segment of the Chadian economy, continues to experience difficulties. The financial situation of the publicly-owned cotton company, Cotontchad, has continued to deteriorate further, owing to the decline in world prices, the weakening of the US dollar, the increase in producer prices decided to support this vulnerable segment of the population, and decreased financial support to the company on the part of the state, which itself lacks resources.

My authorities recognize that, despite achievements, much remains to be done, especially on the structural front, to improve non-oil sector growth prospects and significantly reduce poverty. They are appreciative of the technical assistance received from the Fund, and they expect to benefit from additional support, especially in public financial management, customs and other areas, to ensure adequate management of the expected oil and non-oil resources.

III. The Medium-Term Macroeconomic Framework

Building on the progress achieved thus far, my authorities are determined to cope with the many challenges ahead, including those related to the petroleum era. In so doing, they are hopeful that the international community will be supportive of their efforts.

Regarding the outlook for 2007, based on prudent oil price projections and expectations of gradual decline in oil production, my authorities reached an agreement with the World Bank on three pillars, namely a medium-term framework, a public finance management, and an oil revenue stabilization mechanism. My authorities agreed with the Fund on the broad principles of the approach to promote long-term fiscal sustainability, which allows time to raise the currently low non-oil revenues, improve public financial management, and ensure that spending is in line with absorptive capacity.

To this end, the 2007 budget was formulated in line with the medium-term framework. The initial budget for 2007 entailed higher spending, but the authorities agreed on the need to plan expenditures in line with the agreed principles. They also agree that the absorptive capacity and the maintenance of macroeconomic stability are key to the successful execution of the 2007 budget. Thus, they will pursue efforts to contain current spending, notably the wage bill. My authorities have also expressed the desire to improve the composition of expenditures, effectively continuing to give more weight to the priority sectors, with the view to reduce poverty.

With regard to the macroeconomic objectives set over the medium-term, real non-oil growth is estimated to be robust over the medium term, reflecting in part the higher level of government expenditure. Inflation is expected to decline in line with the CEMAC target by end-2007. Government savings, driven by the oil windfall, would substantially increase in 2007, then decrease in subsequent years due to the decline in oil revenues. Government investment is also expected to increase over the medium-term, in line with the medium-term expenditure framework. The latter will be fully financed through 2009, assuming the projected aid inflows to remain important. As savings from the exceptional oil revenue in 2007 is anticipated to be gradually used up and additional oil revenues above the present estimates to be saved, the authorities intend to implement policies aimed at strengthening non-oil revenue.

IV. Conclusion

As the joint Bank-Fund DSA shows, Chad's debt situation remains unsustainable. The baseline scenario, although seemingly sustainable, entails significant risks well highlighted in the exercise. Therefore, skillful debt management on the part of my authorities is necessary. The authorities expect to repay some domestic debt as well as the 2005 exceptional advances from the BEAC, which are interest-costly. However, support from the international community in the form of debt relief will remain critical. In this regard, my authorities look forward to the Board support of their efforts, so as to enable the resumption of the PRGF program as soon as possible and, hence, lay the ground for efforts towards the HIPC completion point and qualification to the MDRI.