Chad: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
31 Jan 2007
eISBN:
9781451836462
Language:
English
Keywords:
ISCR; CR; Chad; wage; Microfinance institution; oil revenue; oil price; oil GDP; management program; oil sector; oil deposit; Oil prices; oil wealth
Download PDF (1.1 MB)

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.

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.

IV. Fiscal Policy and Oil revenues Management: The case of Chad38

A. Introduction

1. Oil revenue offers an unprecedented opportunity for Chad to reduce poverty, but it brings with it serious challenges. The main fiscal challenge is how to guarantee an efficient, transparent, and sustainable use of Chad’s short-lived and volatile oil revenue to finance poverty reduction programs, while striking the right balance between spending now and conserving some assets for the future. This paper proposes that Chad adopt a long-term fiscal strategy, nested within a medium-term fiscal framework, and discusses improvements in Chad’s institutional fiscal policies that could support the implementation of such a strategy.

2. The main findings of the paper are that

  • Chad is among the newest and smallest African oil producers, with a relative small, skewed and finite oil revenue path. Oil revenue is projected to rise from 22 percent of non-oil GDP in 2006 to 31 percent of non-oil GDP in 2007 and then gradually decline to insignificant levels after 2020.

  • Chad’s World Bank-supported Petroleum Revenue Management Program (PRMP) is an innovative attempt to render transparent the use of oil resources for priority spending. Since its implementation started in 2004, Chad has increased its spending in priority sector and improved transparency of oil revenue despite political instability. However, the PRML (Petroleum Revenue Management Law)39 has made heavy claims on Chad’s weak administrative capacity and complicated fiscal management. This, and a persistent lack of budget discipline have eroded PRMP efficacy and political acceptance, to the point that in early 2006 the authorities unilaterally modified it.

  • Chad’s fiscal policy should take on a forward-looking and long-term orientation to avoid stop-go fiscal policies. Reasonable long-term fiscal goals would be the sustainable and gradual transformation of oil wealth into other forms of physical and human capital, reduced budget dependence on oil revenue, and a stronger government’s financial position. This could be achieved by implementing medium-term fiscal plans to keep public expenditure in line with absorptive capacity, save some oil revenue to insure future financing of public spending as oil reserves are depleted or prices decline, and increase non-oil revenue.

  • A well-defined framework for fiscal policy management could support the implementation of a sound long-term fiscal strategy for Chad. The framework should be based on the principles of fiscal discipline, macroeconomic stability, transparency, best public finance management practices, and enforceability. However, its effectiveness ultimately would depend on the government’s political commitment and society’s support for a measured approach to the use of oil revenue.

3. The paper is organized as follows. Section B presents the historical and institutional background of Chad’s oil sector. Section C reviews lessons that can be drawn from Chad’s experience in managing oil revenue to date. Section D looks at prospects for the oil sector. Section E illustrates, with numerical examples, the challenges Chad faces in designing a viable long-term fiscal strategy. Section F outlines the main pillars of a comprehensive framework for the formulation and implementation of sound fiscal policies in Chad. Section G concludes. Annex I presents the PRMP’s legal framework and Annex II presents the results of applying a simplified version of the permanent income hypothesis to Chad.

B. Background

The oil sector operators

4. Civil war, political turmoil, and periodic low oil prices have hampered the growth of the Chadian oil sector until 1990s. Chad is home to seven petroleum basins (Doba, Doseo, Salamat, Bongor, Lake Chad, Logone Birni, and Erdis) near the border with the Central African Republic; Doba is so far the only site producing.40 Chad began to develop its oil resources as early as 1969. Although exploration wells revealed the existence of oil in 1975, the civil war that began in 1979 stalled exploration in 1981. Exploration resumed soon after the return of peace in early 1990s.

5. The current oil project began in 1988 when Chad signed a convention with a consortium of three oil companies. The convention, which permitted exploration until early in 2004, regulated the processes for environmental protection, land acquisition and compensation, and royalties and tax payments. It also granted a 30-year concession to develop and exploit the Doba oil fields and commercialize the oil. Following the discovery in 1996 of up to 1 billion barrels in proven reserves in the Doba basin, the Chadian National Assembly in 1997 enacted an amended convention to regulate exploitation of three oil fields in the Doba basin (Miandoum, Kome, and Bolobo, also known as the “Three-Fields”). Recently, operations have begun in two more fields (Nya and Moundouli) also in the Doba basin, and two additional fields, Maikeri and Timbre, are expected to start producing in 2007 and 2008 respectively. Soaring world prices are spurring explorations in other parts of Chad, although they have not yet yielded economically viable reserves. As in most African countries, Chad’s contractual arrangements with oil companies are not made public.41

6. In 1996 Chad and Cameroon signed a treaty to the construction and operation of a pipeline and other oil transportation facilities. Chad has no direct access to the ocean, which is the only practical way to move large quantities of crude oil from the interior of Africa to world markets. Therefore, the government of Chad joined the consortium that set up the Tchad Oil Transportation Company (TOTCO) to build and manage a 1,070 km. underground pipeline with a maximum capacity of 225,000 barrels per day (bdp) to carry oil from the 265 wells in the Doba basin to Kribi on the Atlantic coast of Cameroon. In 1998, Cameroon established the Cameroon Oil Transportation Company (COTCO) to operate its portion of the pipeline.42

7. In 2000, the operating consortium initiated the Chad-Cameroon Petroleum Development and Pipeline Project, which has an expected life of 25 to 30 years. This project—with a total investment of US$4.2 billion—is currently the single largest private sector investment in sub-Saharan Africa. It started with the construction of the oil pipeline, which was completed in July 2003, a full year ahead of schedule, and the development of the three fields in the Doba basin, whose production at the time of the project’s appraisal, was projected to peak at about 62 millions of barrels per year (bpy) in 2005-2009, decline gradually, and thereafter be exhausted in 2030.

Figure 1.
Figure 1.

Chad: Oil Production 2003-30

(million barrels per year)

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

Source: Chadian authorities

8. The Doba crude bears high transportation costs and is treaded at a high discount in international markets. Transportation costs reflect the operation and maintenance costs and return on investment on the pipeline, commercial debt servicing on the pipeline infrastructure (paid twice a year on a US$ 600 million loan), and a transit fee of US$0.41 per barrel paid to the government of Cameroon. The fact that the heavy and viscous Doba blend oil is high in acid and calcium drives up refinery costs and limits refinery production rates, decreasing the price that refineries are willing to pay compared to competing crudes.43

9. Under the current conventions, the government of Chad is entitled to payments of signature bonuses and exploration permits, indirect oil revenue, and direct oil revenue. Signature bonuses and exploration permits, which to date have been small,44 are upfront payments to the host government when a contract is signed for a concession granting exploration rights and the rental of acreage. Indirect oil revenue comprises the corporate income tax levied on TOTCO and the three oil companies and the personal income tax of TOTCO and oil company employees. Direct oil revenue is defined as dividends paid by TOTCO and COTCO, in which Chad is a shareholder, and royalties paid by the consortium at a 12.5 percent rate. Royalties are calculated on the basis of the average quarterly “implied well-head price,” which is equal to the average quarterly Doba sale market price after transportation costs are deducted. The quarterly implied well-head price is approved by the government at the end of each quarter, although with some delays. Provisional payments of royalties are made by consortium members every month based on the last approved quarterly implied well-head price. At the end of each quarter, royalty payments are adjusted through the payment of price settlements to reflect the actual implied well-head price received during that period, which then becomes the provisional price for next quarter.

The determination of the “implied well-headed oil price” in Chad

The procedure for determining the “implied well-headed” oil price is defined in the Convention Agreements between the government of Chad and the operating consortium. In accordance with the Conventions, government’s approval is required to determine the “implied well-headed” oil price for royalties calculation. The three companies that make up the consortium sell their entitlements independently; they are refining and selling 40 percent of Doba crude themselves. To guard against the possibility that consortium members would sell to their own refineries at below-market prices, the average quarterly sale price submitted to the government is taken from sales to nonconsortium refineries. In theory, government’s approval of the quarterly implied well-headed price could take up to three months from the end of the quarter; first, the consortium has up to a month to report to the government the actual implied well-head prices and transportation tariffs applied in the previous quarter; second, the government has another month to revise the reported prices and transport tariffs and request additional information; third, the government has another month to approve the final implied well-head price. In practice, government’s approval of the well-head price has taken longer. For example, until the authorities and the oil consortium agreed on a revised implied well-headed oil price in March 2005, provisional royalty payments were paid using the agreed 2003 well-head price of US$16.9 per barrel. Delays continued in 2006: the last price adjustment was made in February.

10. The lack of transparency and unpredictability of tax regime is a source of concern and volatility. The tax regime for the consortium is described in the 1988 Convention Agreement. The convention grants to the consortium members almost full tax exemption from the VAT and custom duties (Hernández Uriz, 2001).45 In addition, the government also granted some ad hoc tax credits to the consortium, which were not made available to the public and have given rise recently to a dispute between two of the oil companies and the government of Chad.46 Moreover, information on the tax regime incorporated in the recently agreed conventions to expand exploration beyond the Doba region is scarce. The most important tax payment made so far by the consortium has been the corporate income tax whose rate, under the 1988 Convention Agreement, is a function of oil prices, instead of the general corporate rate of 40 percent. Under the very favorable oil market in 2005 and 2006, the corporate tax rate for the consortium members has increased to 60 percent and given rise to substantial tax payments starting in 2006. However, this mechanism, which was built into the convention in order to pass much of the benefit of elevated oil prices to the government of Chad (see ExxonMobile, 2006), has also impeded the projections of oil revenue. As regards the personal income tax paid by TOTCO’s workers, it amounts only to 0.1 percent of GDP. It is classified as non-oil tax revenue in the fiscal accounts and deposited directly into a Treasury account.

The World Bank’s support

11. Although most of the financing for the Doba oil project came from the private sector, World Bank and International Finance Corporation (IFC) support has been critical to pave the way for private investment. Approximately 97 percent of the project funding came from the consortium and its lenders—60 percent from the consortium partners and 37 percent from market rate loans arranged through the IFC, export credit agencies, and commercial sources. The other 3 percent represents equity investments in the two pipeline operating companies by the governments of Chad and Cameroon, funded by about US$140 million in nonconcessional loans from the World Bank and the European Investment Bank (EIB).

12. The Bank’s support helped mitigate substantial domestic and international concerns, especially about environmental and governance issues. As a condition for participating in the project, the loan agreement with the World Bank calls for external scrutiny and transparency. First, the External Compliance Monitoring Group (ECMG), which is funded by the oil consortium, monitors compliance with the project’s environmental management plan; its reports are made public. Moreover, an International Advisory Group (IAG), independent of the World Bank and composed of “eminent persons” from academia, civil society, and government in Europe, the U.S., and Africa, oversees the adherence by the World Bank, the governments of Chad and Cameroon, and the oil companies to environmental and social safeguards.47 Monitoring and transparency have also been promoted by the World Bank’s Inspection Panel.

13. To ensure that oil revenue contributes to reducing poverty in Chad, the Bank conditioned its financial support on a Petroleum Revenue Management Program (PRMP). The PRMP includes provisions to (i) smooth oil-funded spending by stabilizing excess oil revenue and accumulate savings in a Fund for the Future Generations (FFG); (ii) allocate most oil revenue to increase priority spending in health, social welfare, education, infrastructure, energy, rural development, environment, and water resources above the pre-oil era budget allocations; (iii) promote the implementation of medium-term expenditure frameworks (MTEF) linked to the government’s Poverty Reduction Strategy Paper (PRSP); and (iv) establish oversight mechanisms.

The Petroleum Revenue Management Program

14. A separate banking procedure in the PRMP calls for specific accounts for each category of operations (Figure 2). It stipulates that a transit account opened in the name of the government of Chad with an international bank should be used first to collect direct oil revenue (royalties and dividends) and indirect oil revenue (mostly taxes) from the three fields in the Doba region. All interest and investment returns on the funds deposited at the international bank are also credited to this account. After the bank’s management fees are deducted, oil revenue should be transferred to an escrow account and used to provision payments due on loans from the World Bank and the EIB. After provision for debt service, indirect oil revenue can be directly transferred to a Treasury account, and 10 percent of direct oil revenue should be deposited in an off-shore savings account at the same international bank for the FFG. The rest of direct oil revenue should be deposited in an account at the Bank for the Central African States (BEAC) after a one-day transit through accounts opened in two domestic commercial banks, which deduct a commission amounting to 0.15 percent of the transferred funds.

Figure 2.
Figure 2.

Distribution of Oil Revenue in Chad according to the Petroleum Revenue Management Program

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

15. The PRMP also sets out mechanisms to ensure the transparent allocation of oil royalties and dividends to priority spending. It stipulates that direct oil revenue should be allocated as follows: 72 percent of royalties and 76.5 percent of dividends should be deposited in a stabilization account and transferred to accounts opened in domestic commercial banks to be used exclusively for priority sector programs; 13.5 percent of dividends and royalties should be allocated to the ordinary budget and deposited in the Treasury account at the BEAC; and, 4.5 percent of royalties should go into a separate account for the oil producing region. The PRMP also provides for a joint government/civil society, and autonomous Collegiums of Control and Surveillance (the Collège) to authorize and monitor the use of direct oil revenue. To strengthen Chad’s institutional capacity and contribute to successful implementation of the PRMP, the World Bank supported two technical assistance projects: the Management of the Petroleum Economy project and the Petroleum Sector Management Capacity Building Project.

16. In compliance with the loan agreement, the government of Chad enshrined the PRMP in the 1999 Petroleum Revenue Management Law (PRML) and related decrees issued in 2003 and 2004 (Annex I). The PRML’s legal framework contains additional provisions: the additionality provision mandates that 42.6 percent of the ordinary budget, which is partially funded with 13.5 percent of direct oil revenue, must be allocated to priority spending (to ensure additionality of the oil-funded spending compared to the 2002 budget allocations); the inter-generational equity provision mandates that deposits for the FFG may only be withdrawn if oil revenue is less than or equal to 10 percent of total government revenue for the preceding year, and in an amount that cannot exceed total funds deposited in the FFG for the preceding year; the stabilization provision mandates that all direct oil revenue in excess of budgeted (forecasted) revenue will be deposited in a “sterilization fund” that could be used if actual oil revenue fall below planned revenue by up to 20 percent. If the difference exceeds 20 percent, the budget must be revised. If the situation lasts for more than three months, the government must revise the macroeconomic framework.

17. Early in 2006, the authorities unilaterally modified the PRML, breaching agreements with the World Bank and the EIB. They justified abolishing the FFG on the grounds of higher long-term yields from investments to meet Chad’s high present needs; moreover, the growing balances in the FFG were largely offset in 2004 and 2005 by increasing domestic borrowing and arrears. They also argued that the list of priority sectors needed to be expanded to include security-related priorities identified by the 2003 PRSP, such as police and gendarmerie, demining, territorial administration, and the judiciary. Moreover, they justified an increase from 13.5 percent to 30 percent in the share of nonearmarked oil revenue by the need to facilitate execution of the ordinary budget as budget support declined and new expenditure needs arose. Last, they revised the PRML to cover all Chad’s oil fields. The Bank responded by suspending most Bank operations and freezing the government’s oil escrow account.

18. After several months of discussion, the resolution of the dispute between Chad and the World Bank opened the way for a new more comprehensive approach to oil revenue management. The April interim agreement focused on the use of oil revenue to finance increased priority spending in a revised 2006 budget and on measures to strengthen public finance management and oversight (the PAMFIP).48 The Memorandum of Understanding (MOU) reached on July 13, which lifted all contractual remedies and will be in place until the formulation of a new PRML, contains the following main provisions: (i) all oil revenue, not simply oil royalties and dividends, will be considered to finance Chad’s poverty-reduction strategy; (ii) spending will be limited to Chad’s absorptive capacity and excess oil revenue saved under a mechanism that will be put in place by the end of 2006; (iii) at least 70 percent of total budget resources will be allocated to agreed-upon priority sectors; (iv) the list of priority sectors is expanded to include land-mine removal and good governance including justice and anti-corruption; (v) the Collège will be provided with additional support and resources; and (vi) the 5 percent for development in the Doba region will remain in effect. The MOU also establishes that the list of priority sectors, as well as the design of a new PRMP, will be revised at the time of the PRSP update in late 2007.

C. Lessons from PRMP Implementation in Chad

Figure 3.
Figure 3.

Chad: Expenditure Composition, 2002-05

(Percent of non-oil GDP)

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

Sources: Chadian authorities; and IMF staff estimates

19. Under the PRMP implementation period, the share of priority spending in the budget increased and the transparency of oil revenue improved. Oil almost doubled government revenue, from 9 percent of non-oil GDP in 2003 to 17 percent in 2005. Primary current expenditure rose from 10 percent of non-oil GDP to 11 percent, and domestically financed investment from 2 percent of non-oil GDP to 4 percent, resulting in an increase of 3 percent of non-oil GDP in the non-oil primary deficit. Information on oil revenue is published routinely; the Collège publishes quarterly reports on the execution of oil-financed programs. In 2006, due to the deterioration of the security situation, exceptional military spending are estimated at 4.3 percent of non-oil GDP. However, priority sector expenditure is expected to increase by about 70 percent in nominal terms.

20. However, reflecting poor budget discipline and weak administrative capacity, actual priority sector spending, and its monitoring, have fallen short of expectations. Although allocations in the ordinary budget have been increased as stipulated by the additionality provisions, actual priority spending has accounted for less than the required 42.6 percent of expenditure in the ordinary budget. Under mounting cash-flow constraints in 2005, the government borrowed from oil budget accounts to finance the ordinary budget through loans from the stabilization account and “VAT advances” on future oil-financed procurement contracts that are collateralized by oil receipts. As a result, because fewer oil budget resources were available, oil-financed priority spending (mainly capital outlays) was lower than intended. This illustrates the limitations on the Collège’s ability to resist government’s pressure to circumvent the earmarking framework when social tensions arise. Moreover, execution of priority spending has been also hindered by procurement irregularities—a lack of competitive bidding and overpriced goods and services. Though the Collège highlighted these irregularities in its 2004 report, the government failed to address them, demonstrating the weaknesses in controls.

21. The PRMP experience shows the importance of designing frameworks that have comprehensive coverage. A significant share of oil revenue falls outside PRMP jurisdiction and oversight mechanisms. Strictly speaking the PRMP only covers the Three-Fields in the Doba region, although in practice the government has extended the PRMP application to the new satellite fields. In addition, the PRMP did not refer to certain oil-related revenue, such as exploration permits and signatures bonuses; moreover, the main PRMP principles apply only to direct oil revenue, not to indirect oil revenue. Furthermore, because the PRML’s does not recognize the PRMP’s obligation to deposit all oil revenue into the off-shore oil escrow account, oil income taxes are at present deposited directly into treasury accounts.

22. The PRMP complexity has laid a heavy burden on Chad’s weak administrative capacity that has hampered transparency and accountability. The complex separated banking procedures for oil revenue and the rigid earmarking mechanisms have hampered the integrated management of the government’s budget, assets, and cash operations. Budget execution system was not well adapted to monitor this fragmented system and the Collège has focused on monitoring ex-ante spending authorizations rather the execution of priority sector spending.

23. The implementation of the PRMP’s long-term saving and stabilization mechanisms has also posed important challenges. The absence of provisions to run regularly fiscal sustainability analysis has hampered the assessment of the FFG, which, under rigid CEMAC rules and the lack of an alternative investment strategy, has failed to generate a market-based remuneration as to compensate for the increased government borrowing costs and the foregone social returns of well-selected development projects. The PRML’s provisions for the elaboration of MTEFs to frame the elaboration of annual budget laws are very vague and have not been implemented; there was no oil revenue account for stabilization purposes (the stabilization account was also used to finance spending for priority sectors) and no oil revenue was stabilized in 2003-05; although never applied, the automatic authorization to withdraw from the oil accounts if the short-fall in oil revenue is below 20 percent, implies strong incentives to overestimate revenue.

24. Poor planning and design are also apparent in terms of the allocation percentage for the producing region. There is not justification neither any targeted study for the determination of the 5 percent of royalties (net of debt service and FFG) assigned to the Doba’s region. In addition, as the PRML allows the alteration by decree of this percentage, Chad risks to experience a reduction in the amount of oil revenue allocated to the producing region. In absence of a comprehensive map of local needs and priorities, the recently finished development plan remains unclear about the principles that will guide the use of the oil revenue ear-marked to the oil-producing region.49

D. Chad’s Oil Sector Developments and Prospects

Chad is among the newest and smallest African oil-producing countries (Box 2) and its oil production is expected to be very short-lived. Some countries, like Angola and Nigeria, have been producing significant amounts of oil for decades and are expected to continue doing so for a considerable time. Others, like Cameroon, are nearing the end of their oil booms. Chad only began producing oil in July 2003;50 its production is comparatively small for an African oil state and it is not expected to last long. Nonetheless, Chad’s economy is dominated by the oil sector, which in 2005 accounted for over 40 percent of GDP at current prices, about 50 percent of government revenue (excluding grants), and almost 80 percent of merchandise exports.

The Oil Sector in Chad in Regional Perspective

Chad’s oil production is the lowest among African oil producers, except for Cameroon, where production has been declining since 1991. Also, as in the case of Cameroon and Congo, Chad’s oil is traded on the international markets at a heavy discount.

Like other African oil producers, Chad has had to attract foreign direct investment to develop its oil deposits, given the high technological and financial requirements and risks involved. Like other African countries, Chad has not made its contractual arrangements with foreign oil companies available to the public.

Unlike many other African countries, where production-sharing contracts (PSA) are the standard operating procedure, Chad mostly uses a concession contract system. In a PSA foreign oil companies act as a contractor for the government, finance all investment costs, recoup the investment with “cost oil,” and share “profit oil” with the government. Under a PSA, governments usually sell their shares of oil on the international markets through national oil companies or traders or sell directly to the foreign oil company. Chad, which as yet has no national oil company so far, allows the production consortium to sell on the international market and derives revenue mostly from royalties and income tax. The National Assembly approved in mid-2006 a law for the creation of a National Oil Company, but no step has been taken so far for its creation. New agreements for exploration outside the Doba region also envisaged payments in oil.

Oil sector in Sub-Saharan Africa 2005-10

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Sources: Chadian authorities, and IMF oil data base.

25. Chad’s oil production has proven difficult to project. Initial projections were for oil production to increase steadily from the 18,000 barrels per day (bpd) produced in July 2003 to 225,000 bpd by 2004 and plateau there through 2009 (Figure 4). In late 2004 oil production did reach the 225,000 bpd maximum capacity of the pipeline, and total annual production totaled 61 million barrels (Table 1). However, early in 2005, unexpected problems with the porosity of the subsoil led to excessive mixing of water with the oil deposits. The need to separate out the water reduced Doba oil production from 225,000 bpd in December 2004 to around 164,000 bpd in June 2005. Application of reinjection techniques to increase the yield of the Doba fields and the coming on-line of new two oil fields (Nya and Moundouli) helped to maintain oil production at around 173,000 bpd in 2005, though it is likely to be reduced to 152,000 bpd in 2006 and 138,000 bpd through 2009, despite the expected coming on stream of two new satellite fields (Maikeri and Timbre). The three main Doba fields (Miandoum, Kome, and Bolobo) are expected to be depleted by the early 2030s.

Figure 4.
Figure 4.

Chad: Monthly Oil Production July 2003-December 2009

(thousand of barrels per day)

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

Table 1.

Chad: Oil sector projections (in millions of US$)

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Source: Chadian authorities; and Fund staff estimates

Brent blend

Budget 2006 projections.

The corporate income taxes paid by TOTCO in April 2005 (US$ 3.4 million) are classified as non-oil tax revenues in the fiscal accounts.

26. Uncertainty over oil prices facing Chad is amplified by the volatility in the discount with respect to Brent crude and transportation costs. In early projections, the discount and transportation cost were projected to stay at about US$10 per barrel (pb) over the medium term (Table 1).51 In 2004 markets forces pushed the discount up to US$14 pb as refineries tended to choose light crude over heavy in a context of high demand for light refined petroleum products. The unexpectedly low volume of production also increased pb transportation costs. However, late in 2005 the discount narrowed to about US$9 pb in the expectation of rising demand for heating fuel (heavy) during the peak-demand northern hemisphere winter; a slow recovery of production of other heavy oils in the Gulf of Mexico; and the fact that the Doba blend is becoming better known in international markets (Figure 5). Over the medium term, characteristics of the Doba blend are expected to improve slightly with production from the Moundouli field; the discount and the transportation cost are expected both to hold steady at about US$8 over the medium-term.

Figure 5.
Figure 5.

Chad: Monthly Doba and Well-Head Oil Price October 2003-December 2009

(in US$ per barrel)

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

27. The revenue impact of the reduced production will be more than offset by oil prices that are about twice as high as were projected. Under the implied well-head price per barrel assumed in early projections and given high initial investments, oil income taxes were not expected until well after 2009. However, in early 2006 oil companies confirmed that the high well-head price, which reached US$33 a barrel in 2005, allowed them to recover part of the upstream investment. As a result, in 2006 oil companies are expected to pay income tax equivalent of about 13 percent of non-oil GDP on 2005 profits, part of which was already paid on March 31, plus an equal advance on 2006 income tax, paid in equal quarterly installments (Table 2).

Table 2.

Chad: Income Tax of the Oil Sector

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Source: Chadian authorities; oil consortium, and Fund staff estimates

About 60 percent of previous-year taxable profit.

Paid as quarterly installments in March, June, September, and December, in the case of the consortium and on three installments in the case of TOTCO.

28. Over the medium-term, total oil revenue is expected to increase sharply in 2007, before falling in 2008-09. In 2007 oil revenue will reflect: (a) high income taxes on 2006 profits and the corresponding advance; and (b) a relatively low deduction on account of the advance paid in 2006. Assuming a moderate decline in production and a reduction in oil prices,52 oil companies’ profits will decline in 2008-09. This will lead to a decline in oil royalties and dividends, and a more accentuated decline in net income tax payments, reflecting the regularization of the advances on income tax paid in previous years. Consequently, starting in 2008, oil revenue would cease contributing significantly to government revenue (Figure 6).

Figure 6:
Figure 6:

Chad: Oil revenue 2003-09

(Percent of non-oil GDP)

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

29. Over the long-term, after a slight recovery around 2015, oil revenue will decline to insignificant levels by 2030. Oil production is expected to decline from 59 million barrels in 2009 to about 30 million barrels in 2015 and remain around 15-10 million barrels afterwards, before the complete depletion of the fields by 2030. On the basis of prudent oil prices projections, which assume that the Brent oil prices would remain constant in real terms over 2009-30, oil revenue is expected to recover slightly around 2012, reflecting the expected reduction in the transportation cost, before declining to below 1 percent of non-oil GDP in 2030. (Figure 7).

Figure 7.
Figure 7.

Chad: Doba and Well-Head Oil Price 2003-2030

(in US$ per barrel)

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

30. Chad’s oil sector perspectives hinge on the results of the ongoing negotiations of the oil convention and the creation of a National Oil Company (NOC). The establishment of the NOC was approved by the National Assembly in August 2006 and followed by the nomination of a committee to renegotiate the 1998 Convention Agreements on oil production, with a view to introducing production-sharing arrangements between the NOC and the existing consortium, and also in line with new agreements for exploration outside the Doba region, which also envisage payments in oil. The creation of a NOC in Chad is difficult to justify, given the limited time horizon for oil production, capacity constraints, meager financial resources, and problems in managing other public enterprises. To pursue legitimate objectives, such as acquisition of sector-specific techniques, and management skills, Chad should use other means.

E. Long-term Fiscal Strategy Options for Chad

31. Chad’s primary long-term challenge is to strike the right balance between spending some of the oil windfall and conserving some for the future. This decision involves trade-offs. For example, addressing poverty and infrastructure needs quickly may alleviate poverty in the short run and contribute to foster non-oil GDP but may undermine macroeconomic stability, damage the long-term growth potential of the non-oil sector, and give rise to waste given Chad’s low administrative capacity. In addition, a high frontloaded expenditure profile would not allow the government to build a buffer of oil deposits that could be used in case of a shortfall in oil revenue or to finance the budget when oil production is exhausted. However, saving oil revenue for the future or for precautionary reasons will require a strong political will and civil consensus to fend off pressures to increase spending. It could be hard to justify in the face of undeniable substantial needs.

32. Separating this decision into a two-step process reduces its complexity. In the first step, the government would design a long-term fiscal strategy to transform oil wealth into other forms of capital, while conserving some for future fiscal years. It should also reduce the exposure of the budget to oil revenue changes and ensure a sound fiscal position when oil revenue fall off. The long-term strategy would determine the size and path of the non-oil primary deficit based on purely long-term considerations, including targets for non-oil revenue, expenditure, and net financial wealth. In the second step, the government would design medium-term fiscal plans based on the long-term fiscal strategy, setting medium-term targets for expenditure and non-oil revenue. A viable fiscal strategy for Chad, as outlined in Table 3, would respond to both medium-term and long-term considerations.

Table 3.

The Design of a Long-Term Fiscal Strategy for Chad

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First Step: The Long-Term Fiscal Strategy

33. One option to determine the long-term fiscal path could be the Permanent Income Hypothesis (PIH), which given Chad’s small and short-lived oil production, would lead to a too low sustainable non-oil primary deficit. The PIH has been adopted by several countries. 53 Under this policy rule the government would use in fiscal year t only the sustainable (permanent) annual income, which is the maximum amount that can be appropriated from oil savings in that fiscal year and still leave enough savings for an amount equal to the real value to be appropriated in all later fiscal years (see Annex II). However, given that unmet social needs and absorptive capacity considerations are not taken into account in the calculation of the standard sustainable income, the resulting level of primary expenditure under the PIH could need to be adjusted to the country’s specific features. For instance, in the case of Saõ Tomé and Príncipe, applying the PIH gives rise to an expenditure path that is well above national administrative absorptive capacity (see Segura, 2006). For Chad, applying a standard PIH framework based on keeping the oil wealth constant in real terms for all future generations would lead to a very low sustainable non-oil primary deficit path and, given Chad’s low tax ratio, to a very low level of primary expenditure, which would be difficult to justify on political and social grounds. In addition, the PIH could also need to be adjusted to take into account countries’ initial fiscal position, in order to avoid a sharp adjustment to the sustainable non-oil primary balance. For example Leigh and Olters (2006) proposed a smoothing mechanism rule for consolidating the non-oil primary deficit to the sustainable PIH level, which as Gabon has already a relative high tax ratio, focuses on gradually reducing expenditure. In the case of Chad, the application of the PIH would require a very sharp adjustment in the non-oil primary deficit, starting in 2007, by reducing primary expenditure from the 26 percent of non-oil GDP registered in 2006 to the sustainable level of 11 percent (see Table 4 and Annex II).

Table 4.

Chad: Long-Term Fiscal Policy under a Permanent Income Hypothesis 2006-2030

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Sources: Fund staff estimates.

Percentage of non-oil GDP.

Average.

34. A long-term fiscal plan for the gradual and judicious transformation of the oil wealth into other forms of capital could be a better option for Chad, as outlined in Table 5. This paper proposes a modified PIH criterion based on smoothing the consumption of oil wealth during the period of production and reducing the exposure of the budget to oil revenue. For this option to succeed in leaving Chad in a sound fiscal and financial position when oil revenue is completed exhausted, the country must adopt expenditure and non-oil revenue policies conducive to ensuring the government has sound solvency and liquidity positions by the end of the period of oil production. To that end, fiscal policy should aim at ensuring that by the end of the period the non-oil balance is sufficient to cover debt service and other financing items, the government’s stock of debt is manageable, and there is a reasonable volume of oil saving in the oil account to be used in the post-oil era. Table 5 outlines a baseline fiscal strategy for Chad, by 2030, to (i) gradually transform its oil wealth into physical, human and financial capital; (ii) implement a credible strategy to raise non-oil tax revenue to the CEMAC country average (16 percent of non-oil GDP); (iii) hold expenditure increases somewhat below the nominal non-oil GDP rate of growth (on average); and (iv) uses accumulated oil savings as the main financing item in the budget.54

Table 5.

Chad: A Viable Long-Term Fiscal Strategy for 2007-2030 - Baseline scenario

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Sources: Fund staff estimates.

Average.

Percentage of non-oil GDP.

Yearly flow from the oil saving accounts.

The oil wealth OWt is defined as the stock of oil saving in t plus the NPV of future projected oil revenues.

The stock of capital Kt is defined as Kt=Kt-1.(1-∂)+It, where ∂=0.3 is the depreciation rate, and It the government’s gross capital formation.

The net financial wealth is defined as the oil wealth minus the NPV of the external debt.

The exploration permits and share premiums are included in oil revenues.

Second Step: Medium-Term Fiscal Plans

35. While allowing sufficient flexibility to counter the volatility of the non-oil economy and increasing capital expenditure, Chad’s medium-term fiscal plans should be geared to build up oil deposits in good times. Table 5 presents a proposed medium-term baseline fiscal policy. Given Chad’s narrow and volatile tax base and inadequate tax administration, non-oil revenue is assumed to increase gradually (about 1 percent) over the medium term. After the expected phasing out of the high level of subsidies to public entities currently needed, fiscal consolidation should start in 2008 and continue afterwards, with Chad’s total primary expenditure growing slightly less than nominal non-oil GDP over the long run. This fiscal policy will allow for the building up of a fiscal buffer during good times that would be used only in bad times, especially, when oil revenue starts to decline, so that the government can sustain its expenditure without having to resort to procyclical cuts or unexpected and costly borrowing. With this fiscal policy, during the “good years” 2006-07 and 2012-17, and 2026-30, the government would deposit on average 3 percent of non-oil GDP into the oil accounts and draw down 1 percent during the “bad years” 2008-11 and 2018-25. At the end of the period, Chad’s non-oil primary balance would be positive at 0.8 percent of non-oil GDP, covering debt service and other financing items; expenditure would have been financed mostly by oil savings; the stock of capital accumulated would reach about 90 percent of non-oil GDP; and Chad would have built a long-term saving of about 7 percent of non-oil GDP in the oil account. Figure 8 illustrates the medium-term dynamics of main fiscal indicators in the baseline fiscal policy.

Figure 8.
Figure 8.

Chad: Long-Term Outlook 2007-30 Baseline scenario

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

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

36. In principle it would be possible to define different combinations of expenditure and non-oil revenue from the one proposed in Table 5 that would comply with the proposed government’s long-term fiscal goals. Overtime several allocations between spending and taxes are compatible with the targeted long-term non-oil primary deficit, for instance when the marginal benefit of spending equals the marginal cost of taxation. Arguments in favor of a front-loaded spending approach might be (1) the need for a critical mass of human and physical capital before economic takeoff can occur (Azariadis and Drazen, 1990); (2) political factors, such as unmet social needs; and (3) the positive impact of public spending on current and future economic growth (Takizawa, Gardner, and Ueda, 2004). In addition, if government spending has a high import content, such as infrastructure investment, public spending would yield a better supply response and will offset some of the adverse macroeconomic consequences of front-loading spending.55

37. The government’s current medium-term expenditure framework (MTEF) for 2007-09 calls for a more pronounced frontloaded expenditure profile than in the medium-term fiscal plan proposed in Table 5. As presented in Table 6, the government current MTEF calls for a declining non-oil primary deficit that on average is 3½ percent of non-oil GDP larger than in the baseline scenario proposed in Table 5. The authorities argued that the country’s immense development needs, and the population’s expectations of immediate benefits from oil revenue, called for a frontloaded use of resources, especially in building the country’s infrastructure, which would promote higher growth in the future. The authorities’ approach would not necessarily jeopardize fiscal sustainability, although it may require implementing sharper fiscal adjustments after 2009. Such a frontloading entails some serious risks and vigilance will be required to monitor the implementation of the government’s strategy. First, a frontloaded expenditure profile can exert upward pressure on inflation and real exchange rate, with all its negative consequences for the non-oil sector and poverty reduction. Second, it can strain the government’s institutional capacity for planning, executing, and monitoring expenditure, creating substantial waste. Third, political and social constraints may make it difficult to reduce spending programs once they are in place. Moreover, large swings reduce the quality and efficiency of expenditure; they could be particularly costly for Chad’s ill-diversified non-oil economy.

Table 6.

Chad: MTEF paths for long term fiscal sustainability

(In percent of non-oil GDP)

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Sources: Chadian authorities; and IMF staff projections.

Domestically financed.

After debt service.

Exploration permits and share premiums are included in oil revenue.

Sensitivity analysis

38. Simple sensitivity analyses show how lower oil prices and alternative fiscal policy strategies impact the baseline fiscal path over the lung-run. Using the macroeconomic assumptions in Table 5, the following alternative scenarios were run (see Figure 9 and Table 7):

Figure 9.
Figure 9.

Chad: Sensitivity Analysis of the Long-Term Fiscal Outlook 2006-30

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

Source: Chadian authorities; and IMF staff estimates and projections.
Table 7.

Chad: Sensitivity Analysis of the Long-Term Fiscal Policy for 2006-2030 1/

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Sources: Fund staff estimates.

Percent of non-oil GDP, unless otherwise indicated.

Average

The oil wealth OWt is defined as the stock of oil saving in t plus the NPV of future projected oil revenues.

The net financial wealth is defined as the oil wealth minus the NPV of the external debt.

  • Low Non-Oil Tax Ratio. If Chad fails to increase the non-oil tax ratio and keep it at about the current 8-9 percent of non-oil GD and maintain the domestically financed expenditure level of the baseline scenario, the non-oil primary deficit will increase by 5 percent of non-oil GDP above the baseline scenario. This would imply lower accumulation of oil deposits in “good years” and larger oil withdrawals in “bad years”; oil deposits would be completely depleted by 2019 after some consecutive savings/withdrawal periods; as oil revenue will not be sufficient to finance the expenditure plans, the NPV of the stock of debt would increase,56 and the government’s net wealth (NW)57 would deteriorate with respect to the baseline scenario.

  • High Spending. A policy in which the domestically financed expenditure began to rise more quickly than non-oil revenue will increase non-oil primary deficits, which will require large withdrawals from the oil accounts. In this scenario the stock of accumulated oil deposits will be depleted by 2009. If at that point expenditure is difficult to adjust, the government would have to find financing of about 10 percent of non-oil GDP on average over the long term, which will explode debt NPV and significantly undermine the government’s NW.

  • Low Oil Price. In this scenario oil prices are assumed to be 10 percent below baseline and non-oil revenue and expenditure hold at baseline levels. Here the dynamics of the non-oil primary deficit is the same as in the baseline scenario, but with lower oil revenue, the deficit will need to be financed with larger and earlier withdrawals from the oil account. Though NPV of the debt would not explode, it would increase substantially after oil deposits are depleted in 2009, which would deteriorate the government NW path compared to the baseline scenario.

  • Combined scenarios. This scenario assumed not only lower oil prices but also government failure to increase non-oil tax revenue and control expenditure growth. The oil deposits accumulated during 2006-07 would then be used to finance the non-oil primary deficit of 16 percent of non-oil GDP, therefore be fully depleted, in 2008. Afterwards, the government would be forced to look for new loans, which would lead to an explosive path for the debt NPV and a highly negative value of the government’s NW.

F. A Sound Institutional Framework for Chad Long-Term Fiscal Policy

Rationale and General Principles

39. The establishment of a well-conceived framework for fiscal policy formulation and implementation can help governments achieve their fiscal targets over both the medium and the long term. Most countries find it difficult to build up public savings when they have a large oil windfall, especially nonindustrialized and natural resource-rich economies where traditional budgetary resources are highly volatile—exacerbated by volatile commodity prices—and shaky political institutions foster shortsighted policies by giving policymakers unchecked discretion (Talvi and Végh, 2000).

40. However, cross-country experiences with such frameworks have been mixed, particularly in resources-rich economies. Several countries have implemented frameworks to help fiscal management including fiscal rules, fiscal responsibilities laws, and in the specific case of oil producing countries, oil funds and budgetary oil prices rules. Lessons from country experience highlight that for these special frameworks to improve fiscal management they should cover all relevant fiscal (and quasi-fiscal) operations of the public sector, be based on well-defined procedural and transparency rules, and promote the strengthening of public expenditure management systems, which ultimately need to be sufficiently developed to monitor and enforce the requirements and sanctions of the fiscal framework58

41. Chad could benefit from the introduction of well-defined and tailored fiscal framework to support its long-term fiscal strategy, so that budgeting can be oriented away from annual targets and toward attainment of long-term fiscal goals. The main guiding principles of a fiscal framework for Chad should be (Table 8) long-term fiscal sustainability and macroeconomic stability, keeping public expenditure in line with Chad’s absorptive capacity and saving some oil revenue to finance public spending after the oil is exhausted; poverty reduction and promotion of non-oil sector growth, responding to the government’s PRSP; best public finance management practices, such as a unified and sound budgeting and assets management system; transparency, with regular explanations to the public of governments fiscal policy and outcomes, and strategy changes, especially as they relate to the use of oil revenue; and credibility, building enforcement mechanisms and contingency clauses that reduce discretion to circumvent the objectives stated in the medium-and long-term fiscal strategy.

Table 8.

Proposed Guiding Principles and General Provisions for a Fiscal Framework for Chad

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Main features of a reformed fiscal framework for Chad

42. Fiscal policy should be grounded in routine assessment of long-term fiscal sustainability. The government should base its fiscal policy strategy on long-term projections, under baseline and alternative scenarios, of revenue and expenditure, including estimates of how present policy decisions will affect future spending. The budget should incorporate all gross oil revenue the government receives directly or indirectly from any petroleum operations; they would be projected using realistic assumptions for oil prices and production. Because oil prices are so volatile and oil production will eventually be exhausted, a transparent “prudence” factor should then be applied and due considerations should also be given to ensuring some long-term savings. Loans should be sought only in amounts and on terms that future debt service does not jeopardize the accumulation of oil deposits. Whenever there is new information, the long-term fiscal sustainability assessment should be revised.

43. The annual budget law should be formulated in a medium-term fiscal framework (MTFF) with a three-year rolling spending ceiling (in CFA francs) that recognizes Chad’s absorptive capacity and more pressing social needs; the ceiling would be consistent with the PRSP and the non-oil primary deficit defined by the sustainability assessment. The MTEF should be drafted using a top-down approach in which the central government sets spending ceilings for line ministries and guides them on how to prioritize their requests. The central MTFF and those for line ministries should be updated each year just before the budget for the following year is drafted so that its allocations correspond to the first year of the rolling three-year spending ceiling. Because oil revenue is highly uncertain, they might be used only to finance the part of the non-oil primary deficit not covered by budget support and other sources of financing.

44. The annual budget and the MTEFs should be pro-poor. An important share of spending would be allocated to priority sectors, as defined in the PRSP, such as spending on health and education, infrastructure, rural and agricultural development, energy, security (police), justice, and specific programs for producing regions. Any revision of the priorities should be based on a predictable, structured, PRSP-based review. The annual budget and the MTEFs might include numerical targets such as floors (in CFA francs) or percentages of total expenditure for selected priority programs, but only to serve as indicative targets. Each priority sector ministry should draft a medium-term budget that sets priorities for public investment in terms of the spending ceiling established for each ministry in the three-year MTFF, and draw up a list of eligible projects that gives the highest-yielding ones the highest priority.

45. Chad’s fiscal framework should reinforce transparency to create an environment that binds both current and future governments to a sound and pro-poor use of oil revenue. It would call for comprehensive disclosure not just of oil revenue data and projections but also of other operations of the oil sector and the main characteristics of conventions and tax exceptions granted to oil companies. Oil companies should also be expected to comply with international accounting principles and transparency standards. The framework would also commit the government to adhere to best international practices on dissemination of information on oil revenue (e.g. EITI). It would also mandate the submission of the MTFFs to the National Assembly together with the budget; both documents will (i) detail information on how the non-oil primary deficit will be covered by the use of oil revenue; (ii) be explained in presentations to local leaders, trade unions, and other representatives of civil society and the public. In disseminating information on the execution of the annual budget, deviations from targets should be explained. To detect waste and leakage, a public expenditure tracking system for priority spending should be adopted. While effective government accounting, reporting and audit systems are being developed in Chad as part of the government’s action plan to strengthen public financial management,59 budget programs in priority sectors could be assigned codes and monitored by the Collège, especially in the last stage of actual delivery. Moreover, the framework would stipulate that budget documents should include information on the government’s consolidated net wealth. The Ministry of Finance would produce an annual report describing transactions in the oil saving accounts (deposits, withdrawals, balance, financial return on the oil investment account and financial instruments in which it is invested).

46. The fiscal framework could include carefully defined contingency clauses and provisions to strengthen oversight and accountability. Contingency clauses (e.g., defining the circumstances when transfers from the oil saving account to the Treasury Single Account (TSA) might be higher than budgeted, or elaborating a budget in which allocations to priority sectors may be smaller than usual) should be reduced to a minimum to ensure that the rules-based fiscal framework and the annual budget stay credible. Contingency clauses should be only evoked in truly exceptional circumstances that are clearly defined (e.g., a fall in oil prices or production that is faster or larger than expected, natural disaster, severe recession, or armed conflict) and triggered only with the approval of the legislature. The framework would also extend the Collège’s oversight role to all priority spending programs and shift from the current ex-ante control within the expenditure cycle to ex-post controls. The Collège would also publish an annual report reflecting its assessment to be presented and explained to the National Assembly, and the public, along with the draft annual budget law. Moreover, the oil saving and investment accounts will be audited annually by an independent auditor of international reputation; audits will include audited and reconciled data on oil production, sales, and prices and will be promptly posted on the government’s web side and published in domestic and international newspapers.

47. The framework will make explicit commitments to correct detected irregularities. It would stipulate that, in response to irregularities reported by the Collège or other oversight institutions, the Ministry of Finance would submit to the National Assembly along with the draft budget law a plan of corrective actions to be taken in the following fiscal year. The ministry would also report on progress made in addressing irregularities previously reported.

G. Conclusions

48. Chad’s long-term fiscal sustainability could be assessed with a simple yet consistent accounting framework for projecting the government’s non oil primary balance and net wealth. Given the limitations of Chad’s statistical system and the technical difficulties of applying a full-fledged macroeconomic this paper proposed to assess long-term fiscal sustainability by using a consistent accounting framework within which projections of the balance sheet of the public sector can be made. Despite its obvious limitations, the framework does give useful insights about alternative long-term fiscal paths and the impact of external shocks that may have advantages for operational work.

49. A sound long-term fiscal strategy for Chad would aim to manage non-oil revenue and expenditure so as to compensate for depletion of oil revenue. The strategy implies the adoption of (i) a sustainable long-term fiscal strategy that, given Chad’s relatively small and finite oil reserves, could entail the gradual yet full transformation of oil wealth into other forms of capital using responsible medium-term expenditure programs and measures to progressively increase non-oil revenue; (ii) a new institutional framework to reorient budgeting away from annual targets toward long-term fiscal goals, and guarantee efficient and transparent execution of oil revenue-financed spending. The new framework will include a unified budget and cash management system, under which all oil, and non-oil resources will be managed jointly, a simplified stabilization mechanism, according to which oil revenue would be allocated to finance the non-oil deficit, through transparent, but flexible management rules, and a simplified, yet fully transparent, banking circuit consistent with a TSA.

50. Successful implementation of a viable long-term fiscal strategy would require broad political consensus, significant capacity building, and better system for public financial management. It ultimately would depend on (i) government political commitment and society consensus and support for a measured approach to the use of oil revenue; (ii) government will to increase its ability in fiscal policy analysis and project appraisals; and (iii) progress on strengthening public financial management.

References

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Annex I. Legal Framework for Petroleum Revenue Management in Chad

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Annex II. Applying a Permanent Income Hypothesis (PIH) to Chad

51. The permanent income hypothesis (PIH) postulates that total oil wealth—the sum of both oil wealth underground and financial wealth—has to remain constant in real terms over time. Using this policy rule, the government would use in fiscal year t only the sustainable income (SIt), which is the maximum amount that can be appropriated from oil savings in that fiscal year and still leave enough savings for an amount equal to the real value to be appropriated in all later fiscal years.

SIt=rt.OWt[1]

where rt is the estimated average real rate of return (the real interest rate) on investment of oil deposits in the future, and OWt is the oil wealth, which is estimated as:

OWt=OSt+NPV(OR0,OR1…OR2030)[2]

where OSt is the stock of oil savings at the end of the fiscal year t, and ORt the projected oil revenue.

Chad: Long-Term Fiscal Policy under a Permanent Income Hypothesis 2006-2030

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Sources: Fund staff estimates.

Percentage of non-oil GDP.

Average.

52. Because Chad’s oil wealth is relatively small, applying the PIH would allow for only a very low expenditure ratio over time. Under the PIH, oil wealth will be gradually transformed into financial wealth, which in turn will make it possible to derive an income stream to keep government spending stable over the long term. As oil resources are exploited and the value of oil in the ground declines, a fraction of the oil wealth needs to be saved and turned into financial wealth so as to keep total oil wealth constant. The advantage of this rule is that it captures the full value of oil wealth—oil in the ground as well as financial wealth—and it enables society to benefit permanently from its use. Assuming that non-oil revenue remains at about the current 8 to 9 percent of non-oil GDP, the PIH would require that the expenditure ratio be reduced from the current 26 percent of non-oil GDP to 11 percent starting in 2007.

uapp02fig01

Chad: Long-Term Fiscal Policy under a Permanent Income Rule 2007-2030

Citation: IMF Staff Country Reports 2007, 028; 10.5089/9781451836462.002.A004

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

38

Prepared by Teresa Dabán and Sarah Lacoche.

39

The PRML is the main piece of legislation transposing the PRMP into the Chadian legal system. For more details, see to Annex I.

40

Chad also has an estimated 150 million barrels of reserves in the Sedigi field in the Lake Chad Basin, which includes the Kanem and Kumia fields. Development of the Segidi field was planned in conjunction with proposals for a petroleum refinery to fuel a power plant in N’Djamena. The firm in charge built a conduit from Segidi to N’Djamena that is of such poor quality that it is unable to transport oil. As result, accessing Segidi reserves to reduce Chad’s domestic petroleum costs have been postponed.

41

They are only available to a small circle of officials. Some details on the 1988 Convention Agreements can be found in Gary and Reisch (2005).

42

Eighty-five percent of the pipeline is located in Cameroon. Export facilities in Kribi include an onshore-pressure reducing station and a subsea pipeline connected to a floating production storage and offloading vessel.

43

Without sophisticated equipment, a refinery can only turn about one-fourth of a barrel of Chad’s Doba oil into high value light products such as gasoline, jet fuel, and diesel. However, at least two-thirds of a Brent barrel of crude oil can be refined into light products. Heavier crude oils like Doba’s, are refined into lower value products such as asphalt and bunker oil. See ExxonMobil (2004a).

44

Their use has, however, attracted attention, for example when it was reported in 2000 that the government had spent the first US$4.5 million of a US$25 million signing bonus on military spending rather on priority sectors (Gary and Reisch (2005)).

45

The government claims that these tax exemptions only apply to the consortium and its direct oil-related transactions, and not to subcontractors or the consortium’s non-oil-related purchases. The consortium’s current tax obligations claimed by the government amount to about CFAF 10 billion (0.3 percent of non-oil GDP). See ExxonMobil, (2004b).

46

In mid 2006 two of the oil companies disputed the payment of the income taxe corresponding to their 2005 profits from their operation on the Doba Three-Fields on the base of an alleged tax credit granted in 2000 by the authorities. The authorities claimed that the alleged tax credit was not valid as it was granted by the then-Minister of Petroleum acting beyond his authority. After several months of negotiations the two oil companies finally agreed to pay their income tax, which amounted to about 8 percent of non-oil GDP.

47

The IAG makes regular field visits and reports directly to the World Bank president and the public. Its function is purely diagnostic and advisory; it has no authority to implement its recommendations. See www.gic-iag.org.

48

It refers to the government’s Plan d’Action pour la Modernization des Finances Publiques (PAMFIP).

49

On September 2, 2004, the government of Chad issued a decree proposing the creation of an interim committee to manage the use of oil revenues in the producing region. However, the committee is not yet functional.

50

Although the first sales on international markets were in October 2003, as the first oil was used to fill the pipeline, for which royalties are not due until production ceases. The first royalty payment was due in October 2003, but no oil revenue was transferred to Chad until July 2004 because of delays in finalizing contracts between the government and the BEAC on setting up the stabilization and oil-producing region accounts.

51

The discount was projected about US$10 a barrel, although early shipments commanded a relatively lower discount (about US$2 per barrel) because at first the consortium shipped oil only from the Miandoum field, which contains the lightest oil in the Doba area.

52

Oil revenue projections are in line with the updated Level I scenario of the Government Petroleum Revenue Forecast for 2006-33 prepared jointly by the World Bnak and the authorities, which were updated in early October 2006. The baseline oil price projection remains cautious, with an average well-head price of US$29 pb for 2007-09 that is roughly US$17 pb lower than the implied well-head price based on current WEO projections.

53

Timor-Leste and Saõ Tomé and Príncipe have adopted legislation that implements a PIH (see Segura, 2006, and Kim, 2005), and the rule has been proposed for Gabon (Leigh and Olters, 2006), and Trinidad and Tobago (Velculescu and Rizavi, 2005).

54

If government borrowing is cheaper than drawing on the accumulated oil deposits, it could make sense to take advantage of it; however, in the baseline scenario it will be assumed that the government does not contract new borrowing to finance the deficit, in order to compare with alternative scenarios under which the government will need to do so. Regarding foreign-financed investment, it is assumed to remain around the current 6 percent of non-oil GDP, in all of the scenarios considered, with about half projects financed by grants and half by concessional loans.

55

In line with Bevan (2005) and Adam (2005)’s conclusions in the context of scaling up aid, if oil revenue is assimilated to external aid flows.

56

Assumptions for new disbursements are as follow: a 10 year period of grace, a 30 year period for repayment, interest of 1 percent, resulting in about 50 percent of concesionality.

57

Defined as the oil wealth minus the NPV of the external debt.

59

It refers to the Plan d’Action pour la Modernization des Finances Publiques, PAMFIP recently adopted by the government.

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Chad: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2007: Issue 028
Publisher:
International Monetary Fund
ISBN:
9781451836462
ISSN:
1934-7685
Pages:
148
DOI:
https://doi.org/10.5089/9781451836462.002