Chad: Joint Fund-Bank Debt Sustainability Analysis under the Debt Sustainability Framework for Low-Income Countries

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. Background

A. Recent Developments in Public External Debt

1. Chad’s external debt burden diminished considerably over the past decade thanks to strong oil sector-driven growth and limited borrowing. The nominal stock of external debt declined from 63 percent of GDP in 2001 to 24 percent in 2009 (Text Table 1, Tables 1a and 1b). All of Chad’s external debt is public, and the bulk is owed to multilateral creditors, mainly the International Development Association (IDA) and the African Development Bank (AfDB). This includes debts incurred or guaranteed by the central government. The analysis is conducted on a gross basis. Nominal debt levels trended downward as Chad reduced its use of external loans, amortized debt as scheduled, and prepaid IBRD and IDA loans associated with the financing of the Chad-Cameroon Pipeline Project in September 2008.

Text Table 1.

Chad: External Debt Stock at Year-End, 2001-09

(billions of CFA francs)

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Source: Chadian authorities and selected creditors.
Table 1a.:

External Debt Sustainability Framework, Baseline Scenario, 2007-2030 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

All of Chad’s external debt is public.

Derived as [r–g–ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

For 2009, includes a reduction in foreign reserves equivalent to 11 percent of GDP. Also includes any exceptional financing (i.e., changes in arrears and debt relief) and valuation adjustments.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 1b.

Chad: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007–2030

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Gross debt of the central government including debts guaranteed for, or assumed from, state-owned enterprises.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

2. Notwithstanding a sharp deterioration of the fiscal position in 2009, external public debt decreased further in nominal terms. The international economic and financial crisis triggered a steep drop in oil revenue and a large increase in the fiscal deficit (to about 21 percent of non-oil GDP). This sharp deterioration of Chad’s fiscal position was financed by the depletion of government savings accumulated at the central bank and by the use of central bank statutory advances.

B. Recent Developments in Public Domestic Debt

3. Chad has a small stock of public domestic debt resulting from the accumulation of past arrears and the recent use of central bank statutory advances. Chad’s domestic debt is estimated at about CFA 250 billion (7.7 percent of GDP) at end-2009 (Text Table 2). The public domestic debt includes central bank statutory advances (avances statutaires); treasury arrears (arriérés comptables) from previous budget years; rescheduled debt (dettes conventionnèes); legal payment obligations (engagements juridiques); and one small public borrowing. The authorities view settlement of all verified arrears and debts as an opportunity to improve the public sector’s credit standing and increase private sector confidence.

Text Table 2.

Chad: Public Domestic Debt Stock at Year-End, 2005–09

(billions of CFA francs)

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Source: Chadian authorities.

C. Status of Implementation of Debt Relief Initiatives

4. Poor 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. Chad’s inability to meet agreed fiscal targets and to satisfactorily implement a program under the IMF’s Poverty Reduction and Growth Facility (PRGF) has been the principal obstacle. The 2005 PRGF expired in 2008 without any reviews being concluded. Subsequent efforts to achieve fiscal stability with the support of Staff-Monitored Programs (SMP) were also derailed by fiscal slippages. Progress towards other completion point triggers2 has either been slow, or early gains have been followed by subsequent deterioration.3

5. Meeting the conditions for debt relief under the Enhanced HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI) would cut external debt in half. MDRI relief would cover the full stock of debt owed to three multilateral creditors (IDA, IMF, and the African Development Fund (AfDF)) that remains after Enhanced HIPC relief on disbursements before end-2004 in the case of IMF and AfDF, and before end-2003 in the case of IDA. In nominal terms, this could total over $1 billion and would imply a reduction in debt service of about $40 million per year.

D. Debt Burden Thresholds under the Debt Sustainability Framework

6. Chad is a weak policy performer for the purpose of debt burden thresholds under the Debt Sustainability Framework (DSF). Chad’s rating on the World Bank’s Country Policy and Institutional Assessment (CPIA) is low (2.62 on average for 2006-08 on a scale from 1 to 6) and declining (Chad’s CPIA declined from 2.88 in 2005 to 2.53 in 2008).4 The corresponding thresholds are shown in Text Table 3.

Text Table 3.

External Public Debt Burden Thresholds for “Weak Policy Performers” under the Debt Sustainability Framework

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II. Baseline Scenario Underlying the Debt Sustainability Analysis

7. The central feature of Chad’s medium- and long-term macroeconomic outlook is the steady decline of annual oil production foreseen over the next twenty years. Production at the Doba oil field started in 2003, reached its peak of 61 million barrels in 2004, with annual output set to decline steadily to a negligible level beyond 2030. Long-term oil export projections are based on this gradual depletion of the Doba field. Due to its quality, Chad’s oil sells at a discount, usually of $10-15 per barrel relative to the international reference price, reflecting a quality discount and transport cost. For the medium term (to 2015) the Chadian price is assumed to grow at the same rate as assumed in the IMF’s World Economic Outlook (WEO); for the longer term (2015 to 2030), at the growth rate of the International Energy Agency’s (IEA) reference price. Work has started to exploit a second oil field, about one third the size of the Doba oil field. Modest output from the second field is intended to supply the joint-venture refinery in N’djamena, once the refinery and the needed pipeline are completed in 2012. This second oil field is projected to reduce Chad’s imports of refined petroleum products, but not to increase oil exports or fiscal revenues.

8. The oil production decline will necessitate a fiscal adjustment because financing options are limited. Dwindling oil revenues will drive a steady decline of total government revenue (from 37 percent of non-oil GDP in 2010 to 20 percent in 2030). The successful exploitation of the second oil field and refinery under construction would not significantly alter the downward path of revenue, as this oil field is only about one third of the size of the Doba oil field, and the profitability of the projects hinges on yet to be resolved logistical and other issues. It is assumed that the authorities will adjust to this permanent decline of oil revenue because their financing options are limited: savings at the central bank are practically exhausted; the central bank’s statutory advance ceilings are declining gradually; the central bank window will close in 2014; and sustained external finance has been identified only for project loans. The fiscal adjustment is assumed to be accomplished primarily by restraining expenditure, but also by increasing non-oil revenue, through tax policy and revenue administration reforms.

Baseline Macroeconomic Assumptions

The primary driver of real GDP growth in the baseline scenario is the steady decline of annual oil production over the next twenty years (¶7). Non-oil growth should increase above its long term average in the short term owing to the construction of the second oil field, an oil refinery, a new power plant, and the impact of road construction on internal trade. After that, non-oil growth is expected to return to its pre-oil era trend growth.

Inflation moderates rapidly in the short term to stabilize at a level consistent with the CEMAC convergence criterion of maximum 3 percent per year (Table 1b).

The current account remains in significant deficit until the new pipeline and refinery are complete and operational in 2012, at which time construction-related and refined petroleum product imports drop significantly. Similarly, strong FDI, associated with the refinery and other investment projects, slows upon their completion in 2012 (¶7, Table 1a).

The fiscal outlook is dominated by dwindling oil revenues and limited financing options. The authorities adjust primarily by restraining expenditure, but also with tax policy and administration reforms that increase non-oil revenue (¶8).

External financing consists of project loans from official multilateral and bilateral creditors to finance public investment, but at less concessional terms over time, and stable official grants and other net transfers (¶10 and Table 1a).

9. In the short term, debt ratios will increase significantly owing to two large non-concessional external loans. These loans will increase external public debt from 24 percent of GDP in 2009 to 28 percent in 2011 (Table 1a). An official creditor has agreed to lend the Government of Chad $300 million (3.6 percent of 2009 GDP) for budget support with a grant element of about 15 percent, with 2½ years grace and 6 years maturity. A commercial creditor associated with the construction of the N’djamena refinery has agreed to lend the Chadian partner, the state-owned Société des Hydrocarbures du Tchad (SHT), €232 million (4.1 percent of 2009 GDP) at LIBOR plus 3 percent, with 5 years grace and 10 years maturity. Disbursement of the entire budget support loan is assumed in 2010, the refinery loan in equal tranches this year and next, leading to rapid debt accumulation in 2010-11 and sizeable debt service pressure in the medium term. The interest rate, grace period and maturity on these loans reduce the average grant element of external borrowing in the short term (Figure 1a). Given Chad’s present very tight fiscal situation (¶2) and the prospect of steadily declining oil revenues (¶¶7-8), it is unlikely that creditors will offer additional financing for budget support.

10. The evolution of public debt will be driven by the volume of project loans. New borrowing is expected to comprise funding from IDA, AfDB, other multilateral lenders, Paris Club and non Paris Club lenders.5 Absent a substantial improvement in macroeconomic and public financial management performance, traditional donors (multilaterals and Paris Club) are projected to continue to provide concessional project loans at roughly the same nominal level as in the last few years. The share of new borrowing on concessional terms is projected to decline steadily over the 20-year horizon, gradually decreasing the grant element of new borrowing (Figure 1a). In the absence of an IMF arrangement, there is no target date for the HIPC completion point, and the baseline does not take into account HIPC and MDRI debt relief for which Chad is eligible (¶5). In recognition of the authorities’ plans to clear accumulated arrears, and their obligation to fully repay central bank statutory advances within five years, domestic public debt declines to a negligible level by the end of 2014.

III. Debt Sustainability Analysis

A. External Debt

11. A continuation of current policies would quickly bring the external public and publicly-guaranteed (PPG) debt burden above the thresholds. If the authorities were to continue to run a current account deficit far higher than the foreign direct investment (FDI) inflows in the oil sector, as they did in 2009 by running down their official foreign exchange reserves, external PPG debt would breach most of the sustainability thresholds (Historical scenario in Figure 1b, c, d and e; and Alternative Scenario A1 in Table 2a).

Table 2a.

Chad: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010–2030

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assumingan offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

12. Owing to the lack of financing options (¶8), maintaining the current policy stance is unlikely; the authorities will have to tighten fiscal policy in synch with the trend decline in oil revenue. Under this baseline scenario, Chad’s external debt remains below the thresholds through the projection period (Figure 1 and Table 1a).

Figure 1.
Figure 1.

Chad: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is a shock to export growth proportional to a one-standard-deviation lower oil price in 2011 and 2012.

13. Chad’s external debt burden indicators are highly sensitive to an oil price shock. Across all indicative debt burden thresholds, the most extreme shock is a drop in export growth in 2011-12 proportional to a one-standard-deviation lower oil price (Most extreme shock in Figure 1 and B2 Bound Test in Table 2a). Such a shock would send the debt on a path that would breach three indicative debt burden thresholds (Figures 1b, c, and e). While severe, such a shock is plausible, given the volatility of oil prices. A shock to net non-debt creating flows (B4 Bound Test in Table 2a) results in breaches of three out of five thresholds, including one liquidity indicator, as the PV of debt service-to-export ratio is placed on an upward trajectory during the last decade of the projection horizon.

B. Public Debt

14. The sustainability of Chad’s total public debt also hinges on fiscal adjustment. The inclusion of domestic debt does not alter the assessment of Chad’s debt sustainability. Given the limited size of Chad’s domestic debt (¶3) and the fiscal adjustment underlying the baseline scenario, the public debt sustainability analysis broadly parallels the external debt sustainability analysis (Figure 2 and Table 1b).

Figure 2.
Figure 2.

Chad: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2010, 196; 10.5089/9781455203321.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020.2/ Revenues are defined inclusive of grants.

15. The analysis of total public debt sustainability confirms that the current fiscal stance is not sustainable. In 2009, the authorities could accommodate a sharp reduction of oil revenue by running a large primary deficit (about 10 percent of GDP, Table 1b) which was financed by depleting the sizeable oil savings accumulated on the government’s accounts at the central bank (withdrawing the equivalent of 7 percent of GDP) and using central bank statutory advances (borrowing the equivalent of 4 percent of GDP). In 2010, thanks to increased oil revenues, the authorities are expected to run a smaller primary deficit (4.9 percent of GDP), financed by drawing down a nonconcessional budget support loan (¶9). Going forward, financing options are limited (¶8). 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 (Fixed Primary Balance Scenario in Figure 2, and Alternative Scenario A2 in Table 2b). A temporary shock to real GDP growth in 2011-2012 would also impair public debt sustainability (Most Extreme Shock in Figure 2 and Bound Test B1 in Table 2b).

Table 2b.

Chad: Sensitivity Analysis for Key Indicators of Public Debt 2010–2030

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

C. The Authorities’ Views

16. The authorities expressed more optimism than staffs about the medium-term fiscal outlook and their ability to raise additional debt. They expect that the improvement in the security situation will boost non-oil economic activity and non-oil revenue and allow a decline of security spending. They noted that higher-than-projected oil prices would improve the outlook. In addition, they hope that the discovery of new oil fields and other natural resources would improve public revenue in the medium term. Finally, they believe that the debt burden thresholds applicable to Chad under the DSF are too low, considering their pressing investment needs.

D. Main Differences from the 2008 Low-Income Country Debt Sustainability Analysis

17. The 2010 DSA projections begin from a higher initial debt burden than anticipated in the 2008 DSA, but the baseline trajectories are broadly similar. Total public sector debt as of the end of 2009 was higher than expected in the 2008 DSA, 6 due to higher-than-expected primary spending, financed by domestic borrowing. The extension of this spending level into 2010, financed by nonconcessional external budget support, was not foreseen in the 2008 DSA. Both scenarios hinge on the trend decline in oil production and revenue and fiscal adjustment. Whereas the rate of debt accumulation was relatively stable and positive in the 2008 DSA, a different mix and terms of external financing in the 2010 DSA (¶ 10) imply both stronger amortization pressures in the medium term and a declining average grant element throughout the projection period.

IV. Debt Distress Classification and Conclusions

18. Compared to last year’s DSA, Chad’s debt vulnerabilities have increased because the authorities have used central bank financing and contracted two large non-concessional external loans. These two loans will lead to a sharp increase of the debt during the next two years before amortization begins. They will also make Chad’s debt dynamics more vulnerable to shocks, as they will bring Chad’s debt and debt service burdens closer to the thresholds in the short term.

19. Chad’s risk of debt distress remains moderate provided that the authorities adjust the fiscal stance to the decline in oil production. Such a baseline scenario does not lead to a breach of debt-burden thresholds. However, if current policies were continued, the resulting debt path would increase steeply, leading to an unmanageable debt and debt-service burden. While the risk of debt distress remains moderate, the more rapid increase of the debt ratios than projected in the previous DSA is cause for concern.

20. Progress toward the HIPC completion point would substantially reduce Chad’s debt vulnerabilities, as HIPC and MDRI debt relief would cut external debt in half.

1

The DSA has been produced jointly by World Bank and Fund staffs in consultation with the staff of the African Development Bank.

2

For a description of completion point triggers, see Chad, Decision Point Document for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative, May 4, 2001, pp. 29-31.

3

Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) - Status of Implementation 2009. Table 2B, p.32.

4

For CPIA methodology and results, see IDA Country Performance ratings 2008.

5

The terms of IDA, AfDB and other multilateral loans are concessional, with grant elements ranging from 35 to 52 percent.

6

IMF Country Report No. 09/68. Chad: 2008 Article IV Consultation; Staff Supplement on Debt Sustainability Analysis.