Chad
2010 Article IV Consultation: Staff Report; Staff Supplements; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Chad
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
08 Jul 2010
eISBN:
9781455203321
Language:
English
Keywords:
ISCR; CR; consultation informational annex; consultation; food; Chad; relief effort; oil GDP; spending pressure; oil revenue; oil-revenue windfall; Chad--Staff-Monitored Program-Staff Report; Fiscal stance; Oil; Global
Download PDF (1.1 MB)

Chad’s chronic instability has hindered growth and poverty reduction. Chad remains among the poorest countries in the world, and has made little progress toward the Millennium Development Goals. The global financial crisis affected Chad mainly through the decline in oil prices. Prompt reaction to the pressing food shortage needs to be complemented by measures to increase agriculture productivity. The government should adopt a supplementary budget that reduces the non-oil primary deficit while accommodating priority spending. Improving public financial management is the key.

Abstract

Chad’s chronic instability has hindered growth and poverty reduction. Chad remains among the poorest countries in the world, and has made little progress toward the Millennium Development Goals. The global financial crisis affected Chad mainly through the decline in oil prices. Prompt reaction to the pressing food shortage needs to be complemented by measures to increase agriculture productivity. The government should adopt a supplementary budget that reduces the non-oil primary deficit while accommodating priority spending. Improving public financial management is the key.

I. Key Challenges

1. Chad’s chronically unstable security situation hinders growth and poverty reduction. Chad is among the poorest countries in the world and has, as yet, made little progress towards the MDGs (Figure 2 and Table 9). It has experienced conflict for most of the past thirty years. The Darfur crisis and instability in the Central African Republic have driven about 300,000 refugees into Chad, adding to some 180,000 internally displaced persons. The recent rapprochement between Chad and Sudan has improved security, but uncertainties remain. Legislative elections are scheduled for November 2010 and presidential elections for April 2011.

Figure 1.
Figure 1.

CEMAC: Oil Production Horizons

(thousands barrels per day)

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

Source: IMF staff estimates.
Figure 2.
Figure 2.

Chad: Progress Toward MDGs, 1990-2015

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

Source: World Bank, World Development Indicators database.
Table 1.

Chad: Selected Economic and Financial Indicators, 2008-13

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

IMF Country Report No. 09/206; Chad--Staff-Monitored Program--Staff Report.

Chadian oil price is WEO price minus quality discount.

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

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

Central government.

Table 2.

Chad: Real Sector and Demand Indicators, 2008-13

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

Share of 2007 GDP.

IMF Country Report No. 09/206; Chad-Staff-Monitored Program-Staff Report.

Manufacturing includes a new oil refinery starting production in 2012.

Electricity and water include a new power plant starting operation in 2012.

Gross; sum of government and private investment and change in inventories.

Table 3.

Chad: Fiscal Operations of the Central Government, 2008-13

(in billions of CFA francs, unless otherwise indicated)

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

IMF Country Report No. 09/206; Chad--Staff-Monitored Program-Staff Report. Revised budget.

Oil export price based on WEO assumptions minus quality discount.

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

Difference between committed and paid expenditure.

Spending in infrastructure, education, health, social programs, agriculture, cattle breeding, justice, and environment.

Table 4.

Chad: Fiscal Operations of the Central Government, 2008-13

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

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

IMF Country Report No. 09/206; Chad--Staff-Monitored Program-Staff Report.

Oil export price based on WEO assumptions minus quality discount.

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

Difference between committed and paid expenditure.

Spending in infrastructure, education, health, social programs, agriculture, cattle breeding, justice, and environment.

Table 5.

Chad: Balance of Payments, 2008-13

(in billions of CFA francs, unless otherwise indicated)

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

IMF Country Report No. 09/206; Chad--Staff-Monitored Program-Staff Report.

Table 6.

Chad: Monetary Survey, 2008-13

(in billions of CFA francs)

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

IMF Country Report No. 09/206; Chad--Staff-Monitored Program-Staff Report.

The CFAF 14.2 billion discrepancy with the corresponding number in the fiscal accounts (Table 3, Bank financing, 329.4) corresponds to an accumulation of government deposits in commercial banks not recorded in the fiscal operations of the central government.

Table 7.

Chad: Financial Soundness Indicators, 2003-09

(Ratios in Percent)

article image
Sources: BEAC/COBAC

Tier 1 capital.

Net of provisions on non performing loans.

Core liquid assets.

Table 8.

Chad: Selected Economic and Financial Indicators, 2008-15

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

Chadian oil price is WEO price minus quality discount.

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

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

Central government.

Table 9.

Chad: Millennium Development Goals, 1990-2008 1

article image
Source: World Development Indicators database (The World Bank)

Figures in italics refer to periods other than those specified.

2. Chad’s key medium term challenge is to seize the opportunity provided by oil revenues to increase growth of the non-oil sector and reduce poverty. Seizing this opportunity requires prudent fiscal policy, anchored in a medium term framework, and strong public financial management. Rapid progress is needed because oil revenue is temporary, as production from the Doba basin is expected to diminish gradually until it becomes negligible by 2032 (Figure 1).

3. So far, the oil-revenue windfall has set public expenditure on an unsustainable path (Figure 3). Annual public expenditure has doubled (in percent of non-oil GDP) since 2003, reaching 46 percent of non-oil GDP in 2009. Oil revenue has fueled an increase not only in priority spending highlighted in the Poverty Reduction Strategy (PRS) but also in security outlays. The non-oil primary deficit has reached a level (28 percent of non-oil GDP in 2009) that is much higher than the long-run sustainable level (estimated in the low single digits) that would allow the transformation of the remaining oil bonanza of the next two decades into a permanent income stream.1

Figure 3.
Figure 3.

Chad: Impact of Oil Production on Fiscal Policy and Public Financial Management, 2002-09

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

Sources: Chadian authorities and staff estimates.

4. This fiscal expansion has strained absorptive capacity and public financial management (PFM) and raised governance concerns. Concerns over absorptive capacity are prompted by the conjunction of fast growth of investment spending and the insufficient attention given to the multi-year implications of investment decisions, including allocations for recurrent spending in health and education. Concerns over PFM relate to weak links between annual budgets and the PRS, and the limited role of line ministries in elaborating their budgets. Concerns over governance are due to weak procurement practices and the frequent bypassing of normal budget procedures (Figure 3).

5. In recent years, Chad’s performance under Fund-supported programs has been weak, while relations with some important development partners have been difficult. The last arrangement under the Poverty Reduction and Growth Facility (now Extended Credit Facility), which covered the period February 2005-May 2008, expired without the completion of any review, reflecting recurring fiscal slippages and poor performance in strengthening PFM. A Staff-Monitored Program (SMP) covering April-October 2009 went off-track because of large spending overruns(¶11). Following differences on the scale and quality of spending financed by oil revenues, the World Bank asked Chad to prepay all oil pipeline-related loans in September 2008. The Bank has begun to re-engage with the authorities outside the oil sector.2 Weak macroeconomic policy performance and limited progress towards other triggers have prevented Chad from reaching the completion point under the Enhanced Heavily Indebted Poor Country (HIPC) Initiative.

6. The financial system is shallow. Compared to other African low-income countries, monetization is low and credit to the private sector is small, both of which constrain the development of the private sector (Figure 4).

Figure 4.
Figure 4.

Chad: The Financial Sector is Underdeveloped Compared With African Low-income Countries (LIC)

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

Sources: Chadian authorities and staff estimates.

7. Chad’s overall business environment is very difficult. In international rankings, Chad persistently ranks among the bottom 10 percent of countries (Text Table 1).

Text Table 1.

Chad: Competitiveness Rankings, 2010

article image
Source: World Economic Forum. Source: World Bank.

8. The government adopted a new PRS in April 2008. The PRS highlights the importance of restoring security, fiscal sustainability, sound public financial management, and high-quality spending to promote diversification of the economy and reduce poverty. 3

II. Recent Economic Developments

9. Output dropped in 2009 and inflation has started to decline (Tables 1-2 and Figure 5). Real GDP contracted by 2 percent because of a sharp reduction in agricultural production due to poor rainfall and the trend decrease of oil production (Figure 2). Inflation (up from 8 percent on average in 2008 to 10 percent in 2009) has started to wane in the aftermath of the fuel and food crisis. Developments in rainfall, public spending, trading partner prices, and exchange rate movements have been the main determinants of inflation over time (Box 1).

Figure 5.
Figure 5.

Chad: Recent Economic Developments, 2002-10

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

Source: Chadian authorities and staff estimates.

10. The real effective exchange rate (REER) has appreciated over the past several years, reflecting the effects of a strong euro and surging public spending levels (Figure 5). Recent euro weakening (if sustained) and eventual fiscal adjustment (¶22) will likely yield real depreciation in the coming years.4 Application of conventional methodologies does not point to significant overvaluation vis-à-vis fundamentals (Box 2).

11. The fiscal position deteriorated sharply in 2009 as the government increased spending levels while oil revenues fell (Text Table 2, Tables 3-4 and Figure 3).

  • Oil revenues fell sharply (from 38 percent of non-oil GDP in 2008 to 13 percent in 2009) because of the drop in world oil prices and the advancement of oil tax payments from 2009 to 2008 as agreed with the oil consortium.5

  • Expenditure increased (from 43 percent of non-oil GDP in 2008 to 46 percent in 2009) and exceeded (by large margins) the expenditure ceilings under both the initial budget approved in December 2008 and the supplementary budget approved in August 2009 under the SMP.

  • The overall fiscal balance moved from a sizeable surplus (some 7 percent of non-oil GDP) in 2008 to a large deficit (about 21 percent of non-oil GDP) in 2009, which was financed by a mix of: (i) depletion of oil savings held at the BEAC; (ii) increased borrowing from BEAC (including the counterpart of Chad’s new SDR allocation6); and (iii) significant increased foreign financing (mainly grants) to finance projects implemented by donors.

  • The non-oil primary balance improved marginally in 2009 (by less than 1 percent of non-oil GDP), helped by improvement in non-oil tax revenues.

  • The alignment of spending with PRS priorities (as measured by the share of priority spending in total primary spending) deteriorated in 2009 on account of a further increase in security outlays.

Text Table 2.

Chad: Fiscal Operations of the Central Government, 2008-09

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

article image
Sources: Chadian authorities; and IMF staff estimates

Defined in Table 3, footnote 3.

Defined in Table 3, footnote 5.

12. Chad’s compliance with the macroeconomic convergence criteria of the Central African Economic and Monetary Community (CEMAC) has deteriorated since 2007, due to the worsening of its fiscal position and high inflation (Text Table 3).

Text Table 3.

Chad: Compliance with CEMAC Convergence Criteria, 2003-09

(Percent of GDP unless otherwise indicated)

article image
Sources: Chadian authorities; staff estimates

Overall fiscal balance excluding grants and foreign-financed investments.

Same as basic fiscal balance, but replacing oil revenue by average for years t to t-2.

Overall fiscal balance excluding oil revenue, grants and foreign-financed investments. In percent of non-oil GDP.

13. Chad’s balance of payments weakened in 2009 (Table 5 and Figure 5). The fall in oil prices induced a sharp increase of the current account deficit, a deterioration of the overall balance and a reduction of imputed gross official reserves (to 3 months of imports of goods and services, net of oil sector imports).7

14. Broad money contracted slightly in 2009 (Table 6), in part reflecting the drop in economic activity.

15. There are pockets of vulnerability in the financial system (Table 7). The balance sheets of the eight banks, most of which are foreign-owned, have not been directly impacted by the crisis in advanced countries, given their limited exposure to international financial markets. But the banking sector remains subject to vulnerabilities, stemming from its lack of depth, high credit concentration, the fragile situation of some banks, insufficient on-site supervision, the poor functioning of the judiciary system, and, more broadly, the underdevelopment of financial markets in the CEMAC.

16. progress in microeconomic reforms has been limited. The state-owned cotton company continued to need budget transfers (in an amount of 1.3 percent of non-oil GDP in 2009) to absorb losses stemming from low international cotton prices, declining production, and weak management. The state water and electricity company also needed budget transfers (of 0.8 percent of non-oil GDP in 2009) to cover losses stemming from low collections, uncompetitive oil procurement, and poor overall management that contributed to frequent power outages.

Chad: Inflation Determinants

On average inflation has been moderate but has increased recently. Inflation averaged 5 percent per annum during 1983-2009, although with sizeable year-to-year fluctuations (Figure A). Food prices have risen relative to non-food prices over the past three years (Figure B).

Figure A.
Figure A.

Chad: Annual Inflation, 1983–2009

(Percent)

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

Figure B.
Figure B.

Chad: Monthly Consumer and Food Price Indexes, 2005:12–2010:3

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

Rainfall, public spending, changes in trading partner prices, and exchange rate movements have been the main determinants of inflation. Rainfall affects domestic prices (with a three quarter lag) through its impact on agriculture. The start of oil production in 2003 fueled public spending which has a significant impact on inflation (with a one quarter lag) through demand pressures on nontradables. Changes in trading partner prices and nominal effective exchange rate movements are passed through in domestic prices via imports (with a one quarter lag).

Chad: Real Effective Exchange Rate Assessment

Staff examined the appropriateness of the prevailing real exchange rate using the CGER methodologies, adapted to the characteristics of Chad, a low-income oil producer.1 The results suggest that the current level of the REER is not substantially misaligned; the medium-term scenario on which the conclusions are based assumes significant fiscal adjustment over time (¶22) to ensure fiscal sustainability:

  • Equilibrium Real Exchange Rate Approach. Regressions of the REER on a set of fundamentals suggest that, based on the current values of fundamentals, the REER exceeded its estimated equilibrium value by about 4 percent in 2009.

  • Macroeconomic Balance Approach. Estimations using this approach suggest an overvaluation of the REER of some 6-8 percent, which is the size of the depreciation needed to align the underlying current account balance with its estimated medium-term norm.

  • External Sustainability Approach. Estimations using this approach point to an overvaluation of the REER of some 5-8 percent. This is the size of the depreciation needed to close the gap between the underlying current account balance and a benchmark level that would stabilize the net foreign liability position at an assumed medium-term norm.

The results come with caveats in the case of Chad, given the projected depletion of oil revenues and the ensuing challenge of specifying appropriate medium-term norms for the current account balance and the net foreign liability position.

1 For more on the CGER methodologies, see Lee et al (2008), “Exchange Rate Assessments: CGER Methodologies”, IMF Occasional Paper 261; and Bems and de Carvalho Filho (2009), “Exchange Rate Assessments: Methodologies for Oil Exporting Countries” IMF Working Paper No. 09/281.

III. Policy Discussions

17. The Article IV consultation discussions centered on five main themes: (i) measures to address food shortages; (ii) the medium-term macroeconomic outlook; (iii) anchoring fiscal policy in a medium-term framework that recognizes the temporary nature of oil resources; (iv) improving public financial management for transforming oil resources into higher non-oil growth and lower poverty; and (v) fostering non-oil sector growth.

A. Measures to Address Food Shortages

18. Both short-term measures to address the immediate food shortage and long term action to improve agricultural productivity are needed. As in other Sahel countries, Chad is facing severe food shortages in 2010 in the aftermath of the poor rainfall in 2009. Agricultural production fell by one third in 2009 (¶9). Accordingly, about 2 million people (18 percent of the population) could face severe food shortages during the coming months, unless the shortfall of 80,000-100,000 tons of food is made up by that time. The government has started using its stock of 10,000 tons of food and ordered about 33,000 tons of food, at a cost of CFA 20 billion (about 0.8 percent of non-oil GDP), to be included in the 2010 supplementary budget (¶24). The World Food Program is coordinating the importation of 47,000 tons of food, at an estimated cost of $65 million, to be financed by the donor community. The staff welcomed the authorities’ prompt reaction to the crisis, while also pointing to the need for further efforts, assisted by donors, to improve agricultural productivity over the medium term.

B. Medium-Term Macroeconomic Outlook

19. The macroeconomic outlook is shaped by the expected rebound of agriculture, the construction of a second oil project, the gradual recovery of oil prices, and the need for fiscal adjustment in response to financing constraints (Text Table 4).

  • Non-oil growth will be boosted by the expected rebound of agriculture and major construction projects, including a second oil project (about one third the size of the project initiated in 2003), an oil refinery, and a power plant.

  • Inflation should converge toward the CEMAC target of 3 percent in 2011, with improved agricultural production, new roads facilitating trade, and fiscal consolidation.

  • The overall balance of payments should strengthen on account of higher oil prices and capital inflows to finance the second oil project.

  • The overall fiscal balance is expected to improve owing to the recovery of oil prices in 2010 and to fiscal adjustment responding to financing constraints starting in 2011. While the authorities have secured the financing to increase spending in 2010 (¶24) a severe fiscal adjustment is looming in 2011 as, absent a surge in oil prices, there are few financing options (¶21).

  • While agreeing with staff on the outlook for 2010, the authorities had not yet formed a view on the outer years.

Text Table 4.

Chad: Macroeconomic Framework 2008-13

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

IMF Country Report No. 09/206; Chad--Staff-Monitored Program--Staff Report.

Goods and non factor services.

C. Anchoring Fiscal Policy in a Medium-Term Framework

Fiscal policy in the medium-term

20. For staff, the central feature of Chad’s medium- and long-term macroeconomic outlook is the steady decline of annual oil production during the next twenty years. The annual production of the Doba oil field reached its peak in 2005 and is projected to decrease steadily over the next twenty years and become negligible after 2030 (Figure 1). The decline of oil production will be reflected in falling government revenue (Figure 6). Improvements in non-oil tax policy and revenue collection could attenuate the reduction of oil revenue. However, even after taking feasible improvements into account, total government revenue in Chad would still decline from about 37 percent of non-oil GDP in 2010 to about 20 percent in 2030 (based on current oil price assumptions in the WEO).8

21. The absence of fiscal adjustment in response to the decline of oil production would lead to a sharp increase in debt, were it financeable. In fact, financing options to avoid fiscal adjustment are limited as a result of the near-exhaustion of oil savings and central bank statutory advances(¶11) the underdevelopment of financial markets in the CEMAC, and the absence of sustained external financing for budget support (¶5). However, if the authorities were able to secure financing to maintain the current level of spending, the resulting debt path would increase steeply, leading to an unmanageable debt and debt-service burden (Box 3).

22. To address the trend decline of annual oil production, staff proposed undertaking a fiscal adjustment strategy based on achieving a steady improvement over time in the non-oil primary balance (NOPB). A prudent fiscal policy that reduces the non-oil primary deficit to a sustainable level over the medium term would allow both the transformation of oil revenue into a higher level of physical and human capital than before the oil era and the accumulation of savings to support consumption levels in the post-oil period. In order to build up meaningful savings by the end of the oil period, the NOPB would need to reach its sustainable level (¶ 3) by about 2020 (Figure 7). Fiscal consolidation need not come at the expense of development priorities if spending focuses on priority areas.

Chad: Debt Sustainability Analysis1

uA01fig01

Present value of Debt-to-GDP ratio

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

The updated DSA points to the urgent need for fiscal consolidation and a cautious approach to incurring new debt. If the current spending level were maintained and additional financing could be secured, the resulting debt path would increase steeply, leading to an unmanageable debt and debt-service burden (“Without Fiscal Adjustment”). If domestically financed spending were adjusted in parallel with oil revenue declines, the resulting debt path would be sustainable (“With Fiscal Adjustment”).

While remaining moderate owing to the still low level of debt, Chad’s debt vulnerabilities have increased since last year’s DSA because total public debt is increasing steeply. Total debt is rising fast (from 24 percent of GDP in 2008 to 34 percent of GDP in 2010) on account of two large external loans and credit from the regional central bank. The authorities have secured a $300 million loan with a grant element of 15 percent from an official creditor to finance the budget. They have also guaranteed a loan of about €232 million on commercial terms to finance the government’s share (40 percent) of a new oil refinery, now under construction, to be operated in a joint venture with a Chinese oil company.

1 Chad—Joint Fund-Bank Debt Sustainability Analysis under the Debt Sustainability Framework for Low-Income Countries (forthcoming).
Figure 6.
Figure 6.

Chad: Total revenue, oil revenue, and non-oil revenue, 2000-31

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

Source: Chadian authorities; and staff estimates and projections.
Figure 7.
Figure 7.

Chad: Non-Oil Primary Balance (NOPB), 2000-20

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A001

Source: Chadian authorities; and staff estimates and projections.

23. While the authorities acknowledged that the fiscal situation had become very tight, they expressed more optimism about the medium-term outlook and argued that higher investment levels were needed to facilitate longer term development. In light of the sharp reduction of government deposits at the BEAC and the near-exhaustion of their ceiling on statutory advances from BEAC (Tables 3-4), the authorities noted that their short-term financial situation had become very tight. They attributed most of the deterioration in their fiscal position to the security outlays needed to defeat rebel attacks in 2008-09. Going forward, they expected that the improvement in the security situation (¶1)would boost non-oil economic activity and non-oil revenue and allow a decline of security spending. They also noted that higher-than-expected oil prices or the discovery of new oil fields or other natural resources would improve the outlook. Finally, they argued that higher investment levels were necessary to meet the country’s pressing development needs.

Fiscal policy in 2010

24. The authorities and staff agreed that a supplementary budget was needed to respond to under-funded priority outlays, but held different views on the scale of the revision that was warranted.

  • The 2010 budget approved by parliament in December 2009 envisaged a major reduction of the non-oil primary deficit from the unsustainable highs of 2008-09 and a significant improvement in the composition of expenditure (Text Table 5 and Tables 3-4).

  • The authorities now face significant spending pressures owing to food shortages (¶18), the upcoming elections, ongoing investments, arrears, and other liabilities. Hence, staff and the authorities agreed on the need to prepare a supplementary budget that would accommodate some of the spending pressures.

  • However views differed on the level of total spending. While the authorities and staff agreed on the need to accommodate spending pressure in an amount of about 4 percent of non-oil GDP, the authorities felt it necessary to add further spending in an amount of about 11 percent of non-oil GDP, much of it for security purposes.

  • While the authorities’ plan could be financed by using the full amount of a loan in an amount of $300 million secured from an official creditor (Box 3), staff recommended a tighter fiscal stance in order to reduce the non-oil primary deficit without further delay and to limit the scale of the adjustment needed in 2011.

Text Table 5.

Chad - Fiscal Operations of the Central Government, 2009-11

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

article image
Sources: Chadian authorities; and IMF staff estimates

Defined in Table 3, footnote 3.

Defined in Table 3, footnote 5.

D. Improving Public Financial Management for Transforming Oil Resources into Higher Non-Oil Growth and Lower Poverty

25. The staff and the authorities agreed that across-the-board improvement in public financial management is needed. As to specific reforms:

  • The exemplary transparency of the interim petroleum revenue management mechanism in tracking oil revenue should be preserved once the authorities start receiving royalties in kind rather than cash.

  • Actions underway to implement the Extractive Industry Transparency Initiative will help to maintain revenue transparency.

  • Non-oil tax revenue performance needs to be improved by expanding nascent reforms at the tax administration and simplifying the tax and customs codes.

  • Budget preparation needs to be enhanced by aligning the budget more closely with the PRS, improving investment preparation and monitoring, and providing sufficient resources for current spending in health and education to make operational the many schools, hospitals, and health centers already built or under construction.

  • Budget execution needs to be tightened by adhering to normal budget procedures, using competitive bidding, and regularly monitoring budget execution.

E. Fostering Non-Oil Sector Growth

26. Improving the environment for private business is essential for medium-term growth prospects. The authorities noted, and staff agreed, that the ongoing improvement in the security situation, if maintained, would provide a vital boost to business confidence. Staff called for government leadership and early actions in the following priority areas:

  • Improving the judiciary is essential for developing the financial sector and the non-oil economy at large. As an illustration, private sector representatives noted that companies keep their bank deposits at a minimum out of fear of asset seizures flowing from frivolous law suits.

  • Close cooperation with the regional bank supervisor is needed to restructure a sizable bank that faces solvency problems. Non-performing loans need to be written off and the bank needs to be recapitalized or wound down in an orderly manner.

  • Reforming the energy and cotton sector companies is overdue. As a first step, the accounts of these and other state-owned companies should be audited to lay the ground for reforms and published to foster transparency and accountability.

IV. Relations With The Fund

27. The policy response to key issues raised in recent Article IV consultations has been limited. Little progress has been made in improving the sustainability of fiscal policy, PFM, or the quality of public spending.

28. Performance under the 2009 SMP was mixed. The authorities took some measures to resume normal budget procedures under the SMP (Table 11), but sizeable spending overruns on security and public investment pushed the SMP well off track (¶11 and Table 10) and the planned review of the SMP was not completed.

Table 10.

Chad: Indicative Targets for the Period April 1 to October 31, 2009 and Projections for the Period Beyond1

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

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

Indicative Targets are defined in more detail in the technical memorandum of understanding (TMU) of June 22, 2009.

IMF Country Report No. 09/206; Chad-Staff Monitored Program.

As per the adjustment clause in the TMU.

Continuous

€ 232 million loan guaranteed, with a LIBOR plus 3 percent interest rate, a 5-year grace period, and a 10 year maturity, for the construction of an oil refinery.

US$ 300 million loan contracted with an official creditor, with a 2 percent interest rate supported by the lender, a 2.5-year grace period, and a 6-year maturity.

Table 11.

Chad: Prior Action and Structural Benchmarks for the Staff-Monitored Program April-October 2009

article image

29. The authorities and staff discussed the possibility of a new SMP that would cover most of 2010, but agreement could not be reached on the appropriate level of budgetary outlays for the year (¶24). Staff noted that a SMP covering 2011 could be discussed next year: key objectives of a SMP would be to ensure that budgetary outlays remained within targets and that all non-security outlays were executed in accordance with budget procedures.

30. Serious data shortcomings continue to hamper surveillance. Shortcomings are most serious in public finance data, the balance of payments, and national accounts.9 The authorities have been working with the Central African Regional Technical Assistance Center and the Fund’s Statistics Department to improve statistics in these areas. The staff recommended allocating more resources to statistical collection and analysis.

V. Staff Appraisal

31. The global financial crisis affected Chad mainly through the decline in oil prices. The fiscal position deteriorated sharply in 2009 as the government increased spending levels in the face of a fall-off in oil revenues by depleting its oil savings and borrowing from the central bank.

32. Prompt reaction to the pressing food shortage needs to be complemented by measures to increase agriculture productivity. The authorities have been quick to mobilize internal and external resources to import food. In the medium term, measures to improve agricultural yields are needed.

33. The current fiscal stance is unsustainable. In 2009, expenditure exceeded (by large margins) the expenditure ceilings under both the initial budget approved in December 2008 and the supplementary budget approved in August 2009. Oil savings have vanished and public debt has increased significantly since 2008. Two large non-concessional loans have increased debt vulnerabilities.

34. Fiscal policy needs to be tightened within a medium-term framework that factors in the trend decline of oil production over the next 20 years. The non-oil primary deficit should be steadily reduced, while focusing spending on priority areas, to allow accumulation of some savings before oil depletion. Absent a fiscal adjustment, the debt would rapidly reach unsustainable levels.

35. In 2010, the authorities should adopt a supplementary budget that substantially reduces the non-oil primary deficit while accommodating priority spending. This would limit the scale of the adjustment needed in 2011.

36. Improving public financial management is key to transforming oil resources into higher non-oil sector growth and lower poverty. Preserving the exemplary transparency of oil revenue, expanding recent improvements in tax administration, aligning spending with the PRS, and improving public investment planning and procurement are among the main priorities.

37. Acceleration of non-oil growth will require substantial improvements in the business climate. Priority measures include strengthening the functioning of the judicial system, deepening the financial sector while addressing problem banks, and reforming the state-owned cotton and utility companies.

38. Staff recommends that the next Article IV consultation be held on the 12-month cycle.

1.

For estimations of the sustainable non oil primary balance in Chad, see IMF Country Report No. 09/68; Chad: 2008 Article IV Consultation; Staff Report; Box 1, p.13 and IMF Country Report No. 09/67; Chad–Selected Issues; Chapter II.

2.

Chad—Staff Report for the 2010 Article IV Consultation—Informational Annex, p. 7.

3.

Chad—Poverty Reduction Strategy Paper (www.imf.org); and Chad—Poverty Reduction Strategy Paper—Joint Staff Advisory Note (www.imf.org).

4.

A recent regional external sustainability assessment also found that the CEMAC region’s REER’s alignment with fundamentals hinges on fiscal adjustment.

5.

IMF Country Report No. 09/206: Chad: Staff Monitored Program, Staff Report, paragraph 9, p.7.

6.

Chad benefitted from an additional SDR allocation of SDR 44.2 million (CFA 32 billion or 1.4 percent of nonoil GDP) as a result of the US$ 250 billion general SDR allocation and the fourth amendment of the Fund’s Articles of Agreement; funding in this amount was then lent to the Government of Chad by BEAC.

7.

Given that the oil consortium finances its large imports needs for developing the oil field with its own means, the relevant metric for monitoring the level of imputed foreign exchange reserves is imports of goods and services excluding oil sector imports.

8.

The successful exploitation of the second oil field under construction (¶19) would not significantly alter the downward path of oil revenue, as this oil field is only about one third of the size of the Doba oil field. Moreover, a positive impact on public finances of this oil field hinges on the resolution of outstanding questions, such as the access of oil production to export markets and the profitability of the oil refinery.

9.

See Chad—Staff Report for the 2010 Article IV Consultation—Informational Annex (forthcoming), pp. 9-12, for more details.

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Chad: 2010 Article IV Consultation: Staff Report; Staff Supplements; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Chad
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 196
Publisher:
International Monetary Fund
ISBN:
9781455203321
ISSN:
1934-7685
Pages:
71
DOI:
https://doi.org/10.5089/9781455203321.002
Figure 1.

CEMAC: Oil Production Horizons

(thousands barrels per day)
Figure 2.

Chad: Progress Toward MDGs, 1990-2015
Figure 3.

Chad: Impact of Oil Production on Fiscal Policy and Public Financial Management, 2002-09
Figure 4.

Chad: The Financial Sector is Underdeveloped Compared With African Low-income Countries (LIC)
Figure 5.

Chad: Recent Economic Developments, 2002-10
Figure A.

Chad: Annual Inflation, 1983–2009

(Percent)
Figure B.

Chad: Monthly Consumer and Food Price Indexes, 2005:12–2010:3

Present value of Debt-to-GDP ratio
Figure 6.

Chad: Total revenue, oil revenue, and non-oil revenue, 2000-31
Figure 7.

Chad: Non-Oil Primary Balance (NOPB), 2000-20