Abstract
This Selected Issues paper aims at discussing the impact of the oil windfall on Chad, with a focus on growth, poverty, competitiveness, and fiscal policy challenges posed by the oil revenue outlook. The paper discusses the reforms needed to remove structural factors that constraints the non-oil sector growth, in particular on civil and military services and the microfinance sector. The paper argues that Chad’s current growth potential is seriously limited by low levels of both human and physical capitals and by weak institutions and governance.
II. Chad: Dimensions of Poverty and Distribution of Oil Revenue8
A. Introduction
1. The coming on-stream of oil revenue in 2004 has given Chad an unprecedented opportunity to make a lasting dent in poverty. To seize this opportunity, the authorities must implement well-designed policies to avoid the “natural resource curse.”9 This paper describes the main features of poverty in Chad and assesses alternative ways of using oil revenue to reduce poverty over time.
2. The main findings of the paper are as follows:
Despite its strategic location for trans-African trade and recent oil production, Chad remains one of the least developed countries in the world. Almost two-thirds of the population earns less than one U.S. dollar per day, and human development and living standard indicators are well below the averages for sub-Saharan Africa.
Poverty in Chad has complex economic and social dimensions. Food scarcity, the rural population’s vulnerability to climatic disturbances and natural disasters, lack of employment opportunities, and poor access to health care, education, and basic infrastructure all contribute to the country’s high poverty level.
The allocation of newfound oil resources to reduce poverty over time needs to be adjusted to Chad’s level of development and preferences. Given Chad’s limited economic development, there are strong arguments for spending a large part of the oil revenue rapidly—if macroeconomic and institutional absorptive capacity can be improved—through the implementation of appropriate public sector programs.
The implementation of a well-prepared Medium Term Expenditure Framework (MTEF) would help Chadian authorities use oil revenues to support poverty reduction. While ensuring fiscal sustainability, MTEF measures to improve infrastructure, access to credit, institutional environment and governance, human capital, and absorptive capacity would reinforce non-oil sector productivity.
3. This paper is organized as follows. Section B presents background information. Section C describes the dimensions of poverty in Chad. Section D discusses potential strategies to reduce poverty using oil revenue. Section E presents conclusions and recommendations.
B. Background
4. As Chad only recently began producing petroleum, the economy is still largely agricultural and pastoral. About 80 percent of the landlocked country’s population of 8.6 million live in rural areas and make their living from agriculture and animal husbandry. Approximately half the population resides in the southern belt, comprising about a fifth of the country’s territory and containing most of Chad’s major cities. Most other people live in the central belt (Sahelian zone), and only about 100,000 pastoralists live in the northern Saharan region. In the south, cotton is the principal cash crop, employing about 300,000 families, and investment in industry (including the new petroleum industry) is relatively high. Apart from the petroleum sector, Chad’s industries include the processing of cotton, meat products, and salt and the production of bottled beer, soap, cigarettes, construction materials, and cereal (though the production of cereals mostly supports domestic consumption). The country struggles with high underemployment, and the underdeveloped micro-credit system is available only to middle- and upper-income groups.
5. With the start of oil production, real GDP growth reached close to 30 percent in 2004 and 12 percent in 2005. After hovering around US$240 in 1994–2003, Chad’s real per capita GDP reached US$315 in 2004 and US$326 in 2005, boosted by the start of oil production and the expected stream of 1 billion barrels of crude oil over the next 25 to 30 years. Real non-oil GDP per capita, however, stayed fairly constant, reaching US$238 in 2004 and US$226 in 2005 (Figure V.1). The new oil fields have not provided significant work opportunities for unskilled laborers. Given the projected decline in oil production, further increases in Chad’s GDP will depend on non-oil sector growth and continued inflows of external support.
6. Chad ranks very low on most nonmonetary poverty indicators. According to the 2005 United Nations Development Program (UNDP) Human Development Report, Chad ranks 173 out of 177 countries (Figure 2).10 Chad also has a very high under-five mortality rate, ranking number 12 out of 192 countries on UNICEF’s index of such mortality rates.11 Chad also performs poorly against other nonmonetary measures of poverty. Indeed, access to basic services, such as health care, sanitation, sewage, electricity, and transportation, is severely lacking, especially in rural areas.
Real per capita GDP, US$
Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A002
Source: World Economic Outlook, IMF and IMF staff projections.Sub-Saharan Africa: Human development index (HDI)
Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A002
Source: UNDP, 2005 Human Development Report.7. In addition to contending with extreme domestic poverty, Chad has had to cope with large refugee inflows from neighboring countries. Besides impacting government spending, refugee inflows also tend to have a negative economic impact on the poor pastoral populations living near refugee camps. And though some internal migration brings additional income to the rural poor, Chad does not have significant emigration and limited remittances from abroad benefit the poor.
C. Dimensions of Poverty in Chad
Measuring the poverty line
8. Owing to a lack of reliable data, it is difficult to assess Chad’s poverty situation and trends. The latest available household consumption survey, ECOSIT I, was conducted in 1995–96.12 The analytical results of a new household survey taken in 2003 are not yet available. There are no data on Chad’s Gini coefficient or its unemployment rate.
9. According to the latest information available, almost two-thirds of the Chadian population is poor i.e. they live below the national poverty line (Table 1). The national poverty line defined by ECOSIT I is significantly lower. This poverty line, which conveys the proportion of households with daily spending below the level needed to meet minimal food and non-food needs, varies by region. The daily level at the time of the study was estimated at an average of CFAF 253—slightly more than one-third of a U.S. dollar. By this definition, 43 percent of the Chadian population was poor in 1995-96.
Chad: Poverty Measures
(in percent of population)
Chad: Poverty Measures
(in percent of population)
| 1996 | |
|---|---|
| Population below $1 a day | 64 |
| National poverty headcount, food related | 42 |
| National poverty headcount, food related, rural | 46 |
| National poverty headcount, overall | 43 |
| National poverty headcount, overall, rural | 49 |
Chad: Poverty Measures
(in percent of population)
| 1996 | |
|---|---|
| Population below $1 a day | 64 |
| National poverty headcount, food related | 42 |
| National poverty headcount, food related, rural | 46 |
| National poverty headcount, overall | 43 |
| National poverty headcount, overall, rural | 49 |
10. The highest poverty rates are in rural areas, where about four-fifths of the population resides. Rural areas also lag urban areas on most other measures of poverty. Access to education, health care, sanitation, and electricity are well below urban levels. The poverty rate in N’Djamena is an estimated 35 percent.
Food security and basic needs13
11. The rural population mainly lives on subsistence farming, fishing, and livestock herding. The country’s vulnerability to climatic disturbances and natural disasters, including droughts, floods, and locust invasions, make it subject to food shortages. In the arable south, roughly one of every three years is poor. Even though Chad has not experienced a major food crisis in recent years, serious food insecurity continues in certain areas, particularly in the Sahelian zone, which has a chronic food production deficit. In some areas, the government’s distribution of subsidized cereals has alleviated food shortages.
12. Most poor Chadians earn their living as laborers. Payment in kind is common, particularly during the pre-harvest hunger period, when food stocks are low and market prices are high. Throughout the country, cereal produced for own use is insufficient to meet poor households’ food needs, especially because the poor must sell some production to meet other needs and pay off pre-harvest debts. Poor households sometimes supplement their income by gathering and selling firewood and gum Arabic and by conducting petty trade.
13. Middle and higher income households tend to make a living by producing goods for the market, through such activities as farming, raising livestock, and fishing. Livestock also serves as the primary source of wealth and savings among middle and higher income households, who, unlike the poor, can afford to send their cattle to neighboring countries when local grazing land is scarce. Richer households can also transport their products to more lucrative markets (e.g., abroad or to N’Djamena). Many Chadian households also participate in cross-border trade, exchanging livestock for manufactured goods and fuel from Sudan, the Central African Republic (CAR), Cameroon, and Nigeria.
14. In the transhumant livestock zone, livestock herds provide both food and cash income, making herd size a primary determinant of wealth. This large zone, which divides the desert north from the arable south, is where the transhumant herders searching for grazing lands start and end their annual migration. During migration, herders raise money for cereal by providing transportation, manuring fields, and selling their animals. Desertification and land degradation have pushed nomad herders further south, sparking conflicts between settled farmers and pastoralists.
15. Refugees from Sudan and the CAR are exacerbating the country’s poverty and food insecurity. Though dire at first, food security among the more than 200,000 refugees from Sudan’s Darfur area has improved steadily. Food security in some host communities, however, is high, particularly in the north. Because these areas have limited grazing lands, frictions between the refugees and the local populations have arisen, disrupting certain income-generating activities, such as the gathering of fuel-wood, straw, and wild plant products. The total number of CAR refugees in Chad is about 40,000, most of whom have been in the town of Amboko since 2002. With the Amboko camp nearing full capacity, a new camp being established farther away is expected to relieve pressure on the original camp and on local communities.
Infrastructure
16. Chad’s infrastructure is extremely poor; there are no railways and very few paved roads outside N’Djamena. There are fewer than 5,000 kilometers of road for every 1 million inhabitants, and less than 1 percent of the roads are paved (compared with an average of more than 13 percent for the least developed countries). This lack of infrastructure makes it hard for many people to access food, and high rainfalls can isolate some areas for days, causing immediate spikes in local market prices. The cotton sector also lacks dependable access to infrastructure, creating low and unpredictable returns on investment among cotton farmers. In some cases, during heavy rains, large parts of the cotton harvest were left in the fields until the weather cleared, deteriorating the cotton’s quality, delaying production, and ultimately reducing farmer income. However, an improved road network that will serve the petroleum industry could benefit the surrounding areas.
Education
17. Only about one-fourth of Chadian adults are literate, and the primary school enrollment rate is low (Table 2 and Figure 3). In 2002, 46 percent of the total population was literate. The literacy rate for women was even lower—less than 38 percent—indicating that the educational system is not gender neutral, though the ratio of girls to boys in primary and secondary schools has improved. Moreover, the net primary enrollment ratio has almost doubled since 1990, and the primary completion rate is increasing. These positive developments mainly reflect the large increase in the number of community schools, which finance teacher salaries through community fees. The system is particularly common in poor communities, where the government has not been able to provide teachers. Recently, the government has tried to pay the salaries of teachers working in community schools to reduce the burden on poor families.
Chad: Millennium Development Goals, 1990-2004 1/
Figures in italics refer to periods other than those specified.
Chad: Millennium Development Goals, 1990-2004 1/
| 1990 | 1994 | 1997 | 2000 | 2003 | ||
|---|---|---|---|---|---|---|
| Goal 1: Eradicate extreme poverty and hunger | ||||||
| Income share held by lowest 20% | -- | -- | -- | -- | ||
| Malnutrition prevalence, weight for age (% of children under 5) | -- | -- | 39 | 28 | ||
| Poverty gap at $1 a day (PPP) (%) | -- | -- | -- | -- | ||
| Poverty headcount ratio at $1 a day (PPP) (% of population) | -- | -- | -- | -- | ||
| Poverty headcount ratio at national poverty line (% of population) | -- | -- | 64 | -- | ||
| Prevalence of undernourishment (% of population) | -- | -- | 49 | -- | ||
| Goal 2: Achieve universal primary education | ||||||
| Literacy rate, youth total (% of people ages 15-24) | 48 | -- | -- | -- | ||
| Persistence to grade 5, total (% of cohort) | -- | -- | -- | 54 | ||
| Primary completion rate, total (% of relevant age group) | 16.6 | 18.4 | 15.8 | 22.9 | 2 | |
| School enrollment, primary (% net) | -- | -- | -- | 54 | ||
| Goal 3: Promote gender equality and empower women | ||||||
| Proportion of seats held by women in national parliament (%) | -- | -- | 17 | 2 | ||
| Ratio of girls to boys in primary and secondary education (%) | -- | -- | -- | 55.4 | ||
| Ratio of young literate females to males (% ages 15-24) | 64.5 | -- | -- | -- | ||
| Share of women employed in the nonagricultural sector (% of total nonagric empl) | 4 | -- | -- | -- | ||
| Goal 4: Reduce child mortality | ||||||
| Immunization, measles (% of children ages 12-23 months) | 32 | 24 | 30 | 42 | ||
| Mortality rate, infant (per 1,000 live births) | 117 | -- | -- | 117 | ||
| Mortality rate, under-5 (per 1,000) | 203 | -- | -- | 200 | ||
| Goal 5: Improve maternal health | ||||||
| Births attended by skilled health staff (% of total) | -- | -- | 15 | 16.3 | ||
| Maternal mortality ratio (modeled estimate, per 100,000 live births) | -- | -- | -- | 1100 | ||
| Goal 6: Combat HIV/AIDS, malaria, and other diseases | ||||||
| Children orphaned by HIV/AIDS | -- | -- | -- | -- | 960 | |
| Contraceptive prevalence (% of women ages 15-49) | -- | -- | 4 | 8 | ||
| Incidence of tuberculosis (per 100,000 people) | 101.3 | -- | -- | -- | ||
| Prevalence of HIV, female (% ages 15-24) | -- | -- | -- | -- | ||
| Prevalence of HIV, total (% of population ages 15-49) | -- | -- | -- | -- | ||
| Tuberculosis cases detected under DOTS (%) | -- | -- | 14.5 | 36.8 | ||
| Goal 7: Ensure environmental sustainability | ||||||
| CO2 emissions (metric tons per capita) | 0 | 0 | 0 | 0 | ||
| Forest area (% of land area) | 10 | -- | -- | 10 | ||
| GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) | -- | -- | -- | -- | ||
| Improved sanitation facilities (% of population with access) | 6 | -- | -- | -- | ||
| Improved water source (% of population with access) | 20 | -- | -- | -- | ||
| Nationally protected areas (% of total land area) | -- | -- | -- | -- | ||
| Goal 8: Develop a global partnership for development | ||||||
| Aid per capita (current US$) | 51.8 | 31.2 | 30.5 | 15.9 | ||
| Debt service (PPG and IMF only, % of exports of G&S, excl. workers’ remittances) | 4 | 9 | -- | 14 | ||
| Fixed line and mobile phone subscribers (per 1,000 people) | 0.7 | 0.7 | 1 | 1.9 | ||
| Internet users (per 1,000 people) | 0 | -- | 0 | 0.4 | ||
| Personal computers (per 1,000 people) | -- | -- | -- | 1.3 | ||
| Total debt service (% of exports of goods, services and income) | 4 | 9 | -- | -- | ||
| Unemployment, youth total (% of total labor force ages 15-24) | -- | -- | -- | -- | ||
| Other | ||||||
| Fertility rate, total (births per woman) | 6.7 | -- | 6.7 | -- | ||
| GNI per capita, Atlas method (current US$) | 260 | 220 | 210 | 180 | ||
| GNI, Atlas method (current US$) (billions) | 1.6 | 1.5 | 1.6 | 1.5 | ||
| Gross capital formation (% of GDP) | 6.8 | 16.6 | 14.8 | 22.4 | ||
| Life expectancy at birth, total (years) | 46 | -- | 44.7 | 44 | 4 | |
| Literacy rate, adult total (% of people ages 15 and above) | 27.7 | -- | -- | -- | ||
| Population, total (millions) | 6.1 | 6.8 | 7.5 | 8.2 | ||
| Trade (% of GDP) | 41.4 | 50.3 | 50.5 | 54.4 | 7 | |
Figures in italics refer to periods other than those specified.
Chad: Millennium Development Goals, 1990-2004 1/
| 1990 | 1994 | 1997 | 2000 | 2003 | ||
|---|---|---|---|---|---|---|
| Goal 1: Eradicate extreme poverty and hunger | ||||||
| Income share held by lowest 20% | -- | -- | -- | -- | ||
| Malnutrition prevalence, weight for age (% of children under 5) | -- | -- | 39 | 28 | ||
| Poverty gap at $1 a day (PPP) (%) | -- | -- | -- | -- | ||
| Poverty headcount ratio at $1 a day (PPP) (% of population) | -- | -- | -- | -- | ||
| Poverty headcount ratio at national poverty line (% of population) | -- | -- | 64 | -- | ||
| Prevalence of undernourishment (% of population) | -- | -- | 49 | -- | ||
| Goal 2: Achieve universal primary education | ||||||
| Literacy rate, youth total (% of people ages 15-24) | 48 | -- | -- | -- | ||
| Persistence to grade 5, total (% of cohort) | -- | -- | -- | 54 | ||
| Primary completion rate, total (% of relevant age group) | 16.6 | 18.4 | 15.8 | 22.9 | 2 | |
| School enrollment, primary (% net) | -- | -- | -- | 54 | ||
| Goal 3: Promote gender equality and empower women | ||||||
| Proportion of seats held by women in national parliament (%) | -- | -- | 17 | 2 | ||
| Ratio of girls to boys in primary and secondary education (%) | -- | -- | -- | 55.4 | ||
| Ratio of young literate females to males (% ages 15-24) | 64.5 | -- | -- | -- | ||
| Share of women employed in the nonagricultural sector (% of total nonagric empl) | 4 | -- | -- | -- | ||
| Goal 4: Reduce child mortality | ||||||
| Immunization, measles (% of children ages 12-23 months) | 32 | 24 | 30 | 42 | ||
| Mortality rate, infant (per 1,000 live births) | 117 | -- | -- | 117 | ||
| Mortality rate, under-5 (per 1,000) | 203 | -- | -- | 200 | ||
| Goal 5: Improve maternal health | ||||||
| Births attended by skilled health staff (% of total) | -- | -- | 15 | 16.3 | ||
| Maternal mortality ratio (modeled estimate, per 100,000 live births) | -- | -- | -- | 1100 | ||
| Goal 6: Combat HIV/AIDS, malaria, and other diseases | ||||||
| Children orphaned by HIV/AIDS | -- | -- | -- | -- | 960 | |
| Contraceptive prevalence (% of women ages 15-49) | -- | -- | 4 | 8 | ||
| Incidence of tuberculosis (per 100,000 people) | 101.3 | -- | -- | -- | ||
| Prevalence of HIV, female (% ages 15-24) | -- | -- | -- | -- | ||
| Prevalence of HIV, total (% of population ages 15-49) | -- | -- | -- | -- | ||
| Tuberculosis cases detected under DOTS (%) | -- | -- | 14.5 | 36.8 | ||
| Goal 7: Ensure environmental sustainability | ||||||
| CO2 emissions (metric tons per capita) | 0 | 0 | 0 | 0 | ||
| Forest area (% of land area) | 10 | -- | -- | 10 | ||
| GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) | -- | -- | -- | -- | ||
| Improved sanitation facilities (% of population with access) | 6 | -- | -- | -- | ||
| Improved water source (% of population with access) | 20 | -- | -- | -- | ||
| Nationally protected areas (% of total land area) | -- | -- | -- | -- | ||
| Goal 8: Develop a global partnership for development | ||||||
| Aid per capita (current US$) | 51.8 | 31.2 | 30.5 | 15.9 | ||
| Debt service (PPG and IMF only, % of exports of G&S, excl. workers’ remittances) | 4 | 9 | -- | 14 | ||
| Fixed line and mobile phone subscribers (per 1,000 people) | 0.7 | 0.7 | 1 | 1.9 | ||
| Internet users (per 1,000 people) | 0 | -- | 0 | 0.4 | ||
| Personal computers (per 1,000 people) | -- | -- | -- | 1.3 | ||
| Total debt service (% of exports of goods, services and income) | 4 | 9 | -- | -- | ||
| Unemployment, youth total (% of total labor force ages 15-24) | -- | -- | -- | -- | ||
| Other | ||||||
| Fertility rate, total (births per woman) | 6.7 | -- | 6.7 | -- | ||
| GNI per capita, Atlas method (current US$) | 260 | 220 | 210 | 180 | ||
| GNI, Atlas method (current US$) (billions) | 1.6 | 1.5 | 1.6 | 1.5 | ||
| Gross capital formation (% of GDP) | 6.8 | 16.6 | 14.8 | 22.4 | ||
| Life expectancy at birth, total (years) | 46 | -- | 44.7 | 44 | 4 | |
| Literacy rate, adult total (% of people ages 15 and above) | 27.7 | -- | -- | -- | ||
| Population, total (millions) | 6.1 | 6.8 | 7.5 | 8.2 | ||
| Trade (% of GDP) | 41.4 | 50.3 | 50.5 | 54.4 | 7 | |
Figures in italics refer to periods other than those specified.
Sub-Saharan Africa: Adult literacy rate ages 15 and above, in percent
Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A002
Source: UNDP, 2005 Human Development Report. Data mainly refer to national literacy estimates from censuses or surveys conducted between 2000 and 2004.18. The goal of universal primary education established in 1960 requires children to attend school until age 12. Nevertheless, the limited number of schools has hampered the development of standard curricula. The primary-school student-teacher ratio is about 70 and education expenditure is about half the Sub-Saharan-Africa average (Table 3). Only a small percentage of primary school children are enrolled in private schools.
Chad: Government Spending on Education
(latest available observations)
Chad: Government Spending on Education
(latest available observations)
| Chad | SSA | |
|---|---|---|
| Expenditure per student, primary (% of GDP per capita) | 9.7 | … |
| Expenditure, total (% of GDP) | 2.0 | 4.0 |
| Expenditure, primary education (% of total education expenditure) | 57.5 | … |
Chad: Government Spending on Education
(latest available observations)
| Chad | SSA | |
|---|---|---|
| Expenditure per student, primary (% of GDP per capita) | 9.7 | … |
| Expenditure, total (% of GDP) | 2.0 | 4.0 |
| Expenditure, primary education (% of total education expenditure) | 57.5 | … |
Health
19. Life expectancy in Chad—48 years—has not increased since the mid-1990s. The population has grown at about 3 percent per year since 1990 and close to half of the population is under age 15. Important health indicators are dismal and not improving. The population per physician is about 30,000, and the under-five and infant mortality rates have not fallen since 1990 (Table 2). Recent government efforts, however, have improved some other indicators. For example, the immunization rate against measles more than doubled from 1997 and 2003, child malnutrition has decreased markedly, and the prevalence of below-minimum dietary energy consumption has decreased from one-half to one-third of the population. Per capita expenditure on health was US$14 in 2002, less than half the average for Sub-Saharan Africa (Table 4).
Chad: Health Expenditures, 2003
Chad: Health Expenditures, 2003
| Chad | SSA | |
|---|---|---|
| Expenditure per capita (current US$) | 16.0 | 36.0 |
| Expenditure, total (% of GDP) | 6.5 | 6.1 |
| Expenditure, public (% of total health expenditure) | 39.9 | 41.2 |
Chad: Health Expenditures, 2003
| Chad | SSA | |
|---|---|---|
| Expenditure per capita (current US$) | 16.0 | 36.0 |
| Expenditure, total (% of GDP) | 6.5 | 6.1 |
| Expenditure, public (% of total health expenditure) | 39.9 | 41.2 |
20. The prevalence of HIV/AIDS is relatively low, though its human, social, and economic consequences cannot be ignored. The adult infection rate is 4.8 percent, compared with 6.4 percent for sub-Saharan Africa on average. This lower rate may reflect Chad’s limited infrastructure, which makes it difficult for people to travel.
D. Oil Revenue Inflows: Impact on the Poor
21. With the coming on-stream of oil, the Chadian authorities must decide how they will allocate the newfound resources. First, they must decide whether to save or spend the bulk of the revenue. Any spending would need to be properly allocated between private and public spending. If opting for the private alternative, direct transfers to the population could be either conditional or unconditional, targeted or untargeted. This section explores several options that would allow the Chadian authorities to use oil revenues to reduce poverty and enhance economic growth. It then assesses the risks associated with such upfront spending.
Saving for future spending
22. Several oil exporting countries have established nonrenewable resources funds. Such resource funds put a share of government oil revenue away for possible use once oil revenues decline, owing to falling prices and/or depleted reserves (Davis et al., 2003). By contrast, a stabilization fund aims to reduce the impact of volatile revenue on the economy, and a savings fund seeks to preserve at least some wealth derived from nonrenewable resources for future generations (consistent with intergenerational welfare maximization models, savings funds can enable the government to keep real per capita spending constant by transforming oil wealth into financial assets). Both stabilization and savings funds, however, are often governed by overly rigid rules that do not reflect the fungible nature of budgetary resources: that is, by putting some money aside, on the one hand, while borrowing, on the other hand, does not increase the country’s net wealth. Financing Funds (e.g., the Norwegian Oil Fund or the East Timor Oil Fund), while promoting transparency, fiscal sustainability, and macroeconomic stability, aim at overcoming this issue: oil resources finance the nonoil deficit, a goal stated in Chad’s budget law and the MTEF.
23. Assuming that government spending contains both an investment and a consumption component, it could ultimately benefit the current generation as well as future generations. Taking into account the investment impact on productivity and the incentives it creates for private capital accumulation, Takizawa, Gardner, and Ueda (2004) show that countries with low capital stocks, such as Chad, benefit most if the government spends the bulk of accruing oil revenues with the aim of increasing the return to private investment and raising the country’s growth rate. This result does not simply follow from the fact that marginal return on investment spending in Chad would be higher than the return on external financial assets. When the initial capital stock is low and government spending has positive externalities on production, the country would be better off spending more of its oil revenue upfront by increasing both the return to private investment and the country’s rate of growth. Hence, if oil revenue investments lead to long-term benefits (e.g., health and education investments), then spending can permanently raise income, thus minimizing the tradeoff between current and future generations.
24. Given immediate development needs, the rationale for Chad to accumulate a savings fund is unclear. The financial return on a savings fund could fall far short of the social rate of return on well-selected infrastructure and human development projects. If borrowing costs exceed investment returns, oil-related revenues might also be better allocated to debt reduction. However, given Chad’s high rate of corruption, authorities must make considerable efforts to improve governance.14
Saving for stabilization purposes
25. Stabilization policy would aim to insulate the economy from short-term volatility in oil prices and revenues. Such a policy attempts to define a fiscal stance for a given medium-term projection of oil prices and revenues (Katz et. al, 2004). This gives policymakers a fiscal anchor and promotes avoiding erratic policies following oil price shocks. A carefully designed MTEF would cushion the economy from unexpected oil price fluctuations over the medium term, while maximizing long-term growth and poverty reduction.15
Public expenditure, efficiency, and absorptive capacity
26. Market failures and social justice validate the public responsibility to provide services that have a direct link to human development—education, health, water, sanitation, and electricity. Because growth alone will not be enough to support Chad’s achievement of the Millennium Development Goals (MDGs), and given the lack of a well-established tax system, the Chadian government should allocate a large share of the oil revenue to public expenditure, both at the central and local levels. The current government plan is to increase the provision of public services by increasing public expenditures in priority sectors: health and social affairs, education, infrastructure, rural development, and governance. The MTEF for the nine priority sector ministries for 2007-09 envisages significantly higher spending over the next few years compared with pre-oil 2003 levels.16 The MTEF objectives include:
Ensure minimum access to all regions of the country—particularly during the rainy season. Linking major towns through a sufficient number of roads should improve access to food and trade, especially among the rural poor. The cost of transportation should also fall as efficiency improves. These measures should improve livelihoods of the rural poor, who suffer the most from the temporary lack of access to markets because of impassable roads. It is estimated that public investment in infrastructure should absorb one third of the resources allocated to priority sectors.
Increase agricultural production through efforts to improve credit, research, and input supply. These instruments to raise agriculture productivity, increase cattle production, and achieve agricultural-led growth should also support efforts to increase caloric intake by more than 25 percent, an objective stated in the Poverty Reduction Strategy Paper (PRSP).
Improve human capital by increasing education access (particularly among girls), improving primary education, and reducing illiteracy. The MTEF’s human capital objectives are to reach a net primary enrollment ratio of 95 percent in 2007 and to expand literacy-program coverage from 120,000 people in 2005 to 160,000 in 2007. The budgetary allocations for the education sector are expected to double from their 2000-03 levels.17
Provide 80 percent of the population an adequate and accessible basic health care system by 2007. Specific goals include reducing the maternal and child mortality, the HIV/AIDS rate, and the incidence of tuberculosis and malaria. The program also aims to reduce unequal access to health services across regions, increase the number of doctors and pharmacists, and raise the availability of drugs to sufficient levels. In addition, 4 new hospitals and 80 health centers will be constructed, and about 40 existing health centers will be rehabilitated.
27. The mere scaling up of services will not be sufficient to significantly reduce poverty; a well-functioning public sector is a crucial foundation for service delivery reform. A considerable problem for scaling up spending in Chad is the lack of absorptive capacity, particularly in priority sectors. Even before the inflow of oil revenue, budget execution in priority sectors was consistently lower than in nonpriority sectors. In using the additional resources, the government must further emphasize capacity building measures to keep up a higher level of spending while increasing the quality of such spending. Thus, sectoral reforms must be linked to ongoing capacity building and public sector reforms in such areas as budget management, decentralization, and public administration reforms. To avoid corruption, safeguards against banditry must also be enforced.
28. The ultimate goal of such efforts—to build up to, and maintain, higher levels of consumption—may not be achievable through public spending alone, mainly because of physical capacity constraints. In the short and medium term, shortages of skilled personnel and entrepreneurial capacity may hamper efforts to raise private consumption. Accordingly, providing direct transfers to individuals might thus be a viable complement to other program components.
Cash transfers
29. Some analysts support distributing oil revenues directly to the population through the implementation of a direct cash transfer system. They believe this system is advantageous in that it provides beneficiaries with additional income that can be optimized according to personal preference.18 Compared with in-kind transfers, cash transfers do not cause price distortions or create secondary markets. Such transfers could reduce cash constraints among the poor and smooth consumption during the pre-harvest hunger gap. Studies have shown that cash transfer programs in several developing countries have resulted in higher consumption levels, particularly for food, and helped protect the poor in times of crises (Rawlings and Rubio, 2005). The additional income may also lift some people out of the poverty trap, allowing them to engage in private sector activities beyond subsistence level.19 Hence, a cash transfer may lead to increased savings by the poor, most likely in the form of livestock, given Chad’s lack of financial services.20 Combined with structural reforms to improve the business climate, cash transfers may thus boost economic performance. In the longer term, increased demand for financial intermediation may contribute to the development of Chad’s financial sector.
30. Conditional cash transfer programs (CCT), recently introduced in Latin America, are an innovative and increasingly popular approach to social assistance delivery (Box V.1.).21 By making cash assistance to poor families contingent on certain actions, usually investment in human capital, the programs represent a new approach to long-term social assistance and have helped alleviate poverty. To be efficient, however, program management must be rooted in strong government agencies, a foundation that Chad is currently lacking. Moreover, the programs require sufficient investment in the supply and quality of social services to satisfy increased demand—conditions that are hard to meet in most sub-Saharan African countries. In a country without sufficient services, CCT programs risk mandating that the poor use low-quality health and education services, thus undermining the programs’ potential impact on long-term welfare (World Bank, 2004). In sub-Saharan Africa, given the weak government institutions and poor quality of health and education services, unconditional cash transfer programs that are finely targeted to the poor might have more success (Save the Children UK et al., 2005).
Conditional Cash Transfer (CCT) Programs1
Recently developed CCT programs are an innovative way to deliver social services. Such programs provide money to the poor conditional on investments in human capital. By design, they address both future poverty, by fostering the buildup of human capital over time, and current poverty, by providing direct income support. These programs are meant to address the failures of traditional supply-side interventions, such as the provision of schools and health clinics, which the poor often underuse owing to cash constraints, high opportunity costs, difficult access, and lack of incentives.
CCT programs typically make children the primary group for human capital investments and monitor compliance with conditions. The programs typically include (i) a cash grant conditional on school enrollment and regular school attendance, covering direct and/or opportunity costs for primary and secondary education, and/or (ii) a cash grant targeted to the following groups: children ages two to three or up to primary school age, lactating and pregnant mothers, and other adult household members (for health center visits, health and nutrition workshops, yearly check-ups, prenatal health care, child growth monitoring, and vaccinations).
By some measures, CCT programs have increased school enrollment rates, improved preventive health care, and raised household consumption. In addition, successive governments have both continued and expanded program coverage, suggesting that the stated goals are being met and are politically feasible. The programs, which are targeted according to geographic and/or household information, have been implemented gradually and with close monitoring to address logistical complexities, fiscal constraints, uncertainty about the magnitude of program impacts, and concerns about corruption and mismanagement. Program eligibility is reviewed periodically. In general, total costs have been below 1 percent of GDP, and administrative costs appear to be small.
This box draws on Das, Do, and Özler, (2005); Rawlings and Rubio (2005); and World Bank (2004).
31. To increase Chad’s current social spending, a program using oil revenue to finance a cash transfer conditional on school enrollment was deemed premature. By some arguments, spending resources on today’s schoolchildren would help reduce poverty over time as well as improve several MDG indicators.22 However, given the low standards of Chad’s current education sector, such a proposal is likely to have limited success. Instead, a cash transfer conditional on the use of more basic social services (e.g. participation in immunization drives or in HIV/AIDS awareness and nutritional education programs) might be more appropriate.
Risks associated with upfront spending
32. Counteracting the obvious positive effects of spending the oil revenue upfront, there are several risks associated with such spending:
Institutional capacity is weak and corruption widespread, which may lead to wasted resources.
Inflation may pick up, given that absorptive capacity is low.
As spending increases, people may become accustomed to higher consumption, both in terms of services and public sector wages, and may find it difficult to adjust to lower consumption once oil revenues start to decline.23 This could jeopardize macroeconomic stability and fiscal sustainability.
Unless some precautionary savings are maintained, highly volatile oil prices and production levels could disrupt spending allocations.
However, institutional capacity should improve as capacity-building measures and public sector reforms are implemented. And while absorptive capacity improvements must guide spending increases, spending should be allocated to growth-enhancing investments that in turn raise absorptive capacity.24 Finally, given Chad’s low life expectancy, high child mortality, and high poverty rate (two-thirds of the population are poor), the opportunity horizon in Chad is short. Thus, the cost of habit formation may be small compared with the cost of postponing spending. In addition, arguments to save the oil revenue until it can be spent more productively assume that the funds would be better spent in the future. In sum, there is a strong argument for increasing oil revenue-related spending today if the social discount rate is higher than the sum of the return on savings and the rate of improvement in public spending efficiency.
E. Conclusions and Recommendations
33. Cutting poverty in half by 2015 through the efficient redistribution and utilization of oil revenue will be a challenge for Chad. Given Chad’s low development level, there are persuasive arguments for spending most of the oil revenue upfront, within the parameters of a carefully designed MTEF. Although the current plan to increase the provision of public services and scale up public expenditures in priority sectors seems appropriate, the MTEF would at the same time cushion the economy against unexpected oil price fluctuations.25 However, given the economy’s lack of absorptive capacity, sectoral reforms must be linked to ongoing capacity building.
34. Through the implementation of a well-prepared MTEF, the Chadian authorities would have an unprecedented opportunity to alleviate poverty. Primarily, food security must be reinforced and agricultural and cotton sector productivity improved through the development of infrastructure, agricultural credits, irrigation, and other improvements. To improve Chad’s human capital, investment in health and education must also be increased. One of the greatest challenges of Chad’s public sector is its lack of trained personnel. Resources should also be targeted to institutional development and improved governance, factors that will be crucial to creating a more efficient and attractive private sector. Such improvements should also help raise productivity levels, improve absorptive capacity, and boost growth rates in the years to come.
35. With the bulk of oil revenues being used to further increase capacity building—through the efficient development of the MTEF for the priority sectors—a certain share of the oil revenue could arguably finance direct transfers to the Chadian population to alleviate immediate poverty. Given Chad’s high poverty rate, short life expectancy, and low level of education, well-targeted transfers to the poor, conditional on investment in human capital, would address both efficiency and equity arguments. However, to make such conditional transfers successful in eradicating future poverty, they must be complemented by an important scaling up of the supply and quality of social services (e.g., schools, teachers, health clinics, doctors, and nurses). Until such staffing and services reach an appropriate scale, a medium-term solution could be to introduce an unconditional cash grant targeted at vulnerable groups (e.g. children and pregnant women in rural areas) or make it conditional on the provision of more basic social services.
References
Agénor, P., N. Bayraktar, E. Pinto Moreira, and K. El Aynaoui, 2005, “Achieving the Millennium Deveoplment Goals in Sub-Saharan Africa: A Macroeconomic Monitoring Framework,” World Bank Policy Research Working Paper 3750 (Washington: World Bank), October.
Das, J., Q.-T. Do, and B. Özler, 2005, “Reassessing Conditional Cash Transfer Programs,” The World Bank Research Observer, Vol. 20, No. 1 (spring).
Davis, J., R. Ossowski, J. A. Daniel, and S. Barnett, 2003, “Stabilization and Savings Funds for Nonrenewable Resources,” in Fiscal Policy Formulation and Implementation in Oil-Producing Countries, ed. by J.M. Davis, R. Ossowski, and A. Fedelino (Washington: International Monetary Fund).
Hausmann, R., and R. Rigobon, 2003, “An Alternative Interpretation of the ‘Resource Curse’: Theory and Policy Implications,” in Fiscal Policy Formulation and Implementation in Oil-Producing Countries, ed. By J.M. Davis, R. Ossowski, and A. Fedelino (Washington: International Monetary Fund).
International Monetary Fund, 2006, Namibia: Selected Issues and Statistical Appendix, Country Report No. 05/153 (Washington: International Monetary Fund).
Katz, M., U. Bartsch, H. Malothra, and M. Cuc, 2004, “Lifting the Oil Curse: Improving Petroleum Revenue Management in Sub-Saharan Africa,” (Washington: International Monetary Fund).
Rawlings, L. B., and G. M. Rubio, 2005, “Evaluating the Impact of Conditional Cash Transfer Programs,” The World Bank Research Observer, Vol. 20, No. 1 (spring).
Sachs, J., J. McArthur, G. Schmidt-Traub, M. Kruk, C. Bahadur, M. Faye, and G. McCord 2004, “Ending Africa’s Poverty Trap,” Brookings Papers on Economic Activity 1.
Sala-i-Martin, X., and A. Subramanian, 2004, “Addressing the Natural Resource Curse: An Illustration from Nigeria,” NBER Working Paper No. 9804 (June).
Save the Children UK, HelpAid International, and Institute of Development Studies, 2005, “Making Cash Count: Lessons from Cash Transfer Schemes in East and Southern Africa for Supporting the Most Vulnerable Children and Households.”
Takizawa, H., E. H. Gardner, and K. Ueda, 2004, “Are Developing Countries Better Off Spending Their Oil Wealth Upfront?,” IMF Working Paper WP/04/141 (Washington D.C., International Monetary Fund).
World Bank, 2004, “A New Approach to Social Assistance: Latin America’s Experience with Conditional Cash Transfer Programs,” Social Safety Nets Primer Notes, No. 15.
Prepared by Tove Strauss.
In many resource-based economies, lackluster economic development typically reflects increased rent-seeking behavior, an appreciated domestic currency, and volatile revenue performance (Hausmann and Rigobon, 2003).
The Human Development Index (HDI) ranges from 0 to1 and measures achievements in terms of life expectancy, educational attainment, and adjusted real income.
A high ranking signifies a relatively high under-five mortality rate.
The ECOSIT I collected data only in Chad’s four major cities and some of these cities’ surrounding. ECOSIT II, a more comprehensive study expected to be available later this year, will inform the revision of the Poverty Reduction Strategy Paper.
This subsection draws on information from the Famine Early Warning Systems (FEWS) network.
Out of 159 countries, Chad ranks last on Transparency International’s 2005 Corruption Perceptions Index.
Although established under Chad’s oil revenue management law, a stabilization mechanism that offsets the effect of an oil revenue shock has never been used.
Because the 2006 MTEF is still in draft form, this chapter refers to the 2005 MTEF adopted by the Council of Ministers. Because actual oil revenue was lower than projected, 2005 priority sector spending was scaled down significantly from the budgeted amount.
Although the overall increase for primary education is substantial and appears adequate, the increase for tertiary education is offset by keeping the allocation for secondary education stable, most likely resulting in negligible effects on poverty reduction.
Some analysts argue the consumption pattern of one-time cash transfers, which is similar to winning a lottery, may not be optimal over time. However, cash transfers of oil revenues to individuals, carried out on a regular basis, could help raise income levels for longer periods. Although consumption patterns may be erratic in the short term, but they would likely normalize over the medium term.
A poverty trap is defined as a vicious circle of low savings and few investment opportunities. According to Sachs et al. (2004), Africa is stuck in such a trap, unless it gets a “big push” lasting some two decades.
In their cross-country study, Sala-i-Martin and Subramanian (2003) found that the private, versus the public, sector uses savings more efficiently.
For further discussion of CCT programs, see Country Report No. 05/153 for Namibia.
A transfer tied to number of children may result in unintended fertility increases. In Brazil, this externality has been addressed by limiting the transfer to three children per family.
Habit formation was developed in the consumption literature to capture the idea that consumption is addictive—the amount of utility derived from consumption today depends negatively on how much was consumed yesterday. Habit formation can also be seen in terms of the institutional and political economy adjustment costs facing policymakers (e.g., cutting the public sector wage bill abruptly may not be politically feasible).
In fact, Agénor et al. (2005) show that, for Niger, the initial inflationary effect of higher aggregate demand from higher foreign capital inflows is dampened over time. An increase in foreign capital that leads to higher (more efficient) public investment in infrastructure, health, and education improves the quality of labor used in production. This supply-side effect lowers inflation. In addition, a high import component of spending reduces inflationary risks.
The purpose of this exercise is to explore the options in maximizing growth and poverty reduction over time, not to identify an optimal long-term fiscal policy rule for Chad.
