Oil production over the last 40 years has transformed Gabon into a middle-income country; but income inequality is high, and non-commodity sectors are stagnant. Gabon is recovering from the global financial crisis. The recovery to be sustained, with downside risks from commodity prices and possible slippages in policy implementation. The fiscal stance has important implications for domestic stability. Medium-term fiscal consolidation is vital to ensuring fiscal sustainability and external competitiveness as oil production dwindles over time. The authorities have embarked on major reforms of public financial management (PFM).

Abstract

Oil production over the last 40 years has transformed Gabon into a middle-income country; but income inequality is high, and non-commodity sectors are stagnant. Gabon is recovering from the global financial crisis. The recovery to be sustained, with downside risks from commodity prices and possible slippages in policy implementation. The fiscal stance has important implications for domestic stability. Medium-term fiscal consolidation is vital to ensuring fiscal sustainability and external competitiveness as oil production dwindles over time. The authorities have embarked on major reforms of public financial management (PFM).

On behalf of my authorities, I would like to express my appreciation to the Executive Board, Management, and staff for their continued advice and assistance to Gabon. My authorities particularly welcome the discussions held with staff during their visits to Gabon in March and November 2010. My authorities appreciate staff recommendations and inputs in their economic development plan for the post-oil era.

Recent developments

After turning negative in 2009 due to the global economic crisis, real GDP growth is estimated at 5.7 percent in 2010 and is projected to remain at the same level in 2011, driven by the strong public demand and a rebound in the mining sector. Inflation remained low in 2010 but is expected to increase in 2011 owing to higher food and energy prices. The financial sector weathered the global crisis well and the banking system remains profitable.

The country went through a political transition in 2009, marked by the election of a new president in August 2009. Upon taking office, the new authorities gave their attention to the significant long-term challenges facing Gabon, including the achievement of high and sustained non-oil growth and improving social indicators in a context of dwindling oil reserves.

To address these challenges, my authorities developed and rolled out an economic development plan aimed at reducing the country’s dependence on oil through economic diversification. This plan encompasses a series of institutional and structural reforms covering a wide range of areas, as well as a vast public investment program aimed at strengthening basic infrastructure in the country. Its main objectives are to support non-oil private sector development and improve the quality of life for the Gabonese population.

Fiscal performance and sustainability

In 2009 and 2010, my authorities took strong measures to reduce nonessential expenditures. In particular, they carried out a census of civil servants to detect and eliminate ghost workers from the public payroll. In addition, they have significantly reduced the number of high-level positions in the civil service. Savings from these measures have enabled the authorities to notably accelerate the hiring of new workers in the health, education and security sectors. The investment program in 2010 focused on the rehabilitation and development of transport, energy, and communication infrastructure. In the health and education sectors, new classrooms are being built and health infrastructure is being upgraded.

Overall, the implementation of the economic program increased total spending by 4.9 percent of GDP in 2010, which has been accommodated by higher oil revenue (4.5 percent of GDP) stemming from higher oil production and prices. However, while the overall balance remains in surplus, the non oil primary deficit (NOPD) widened from 14 percent of non-oil GDP in 2009 to 21.1 percent in 2010.

My Gabonese authorities recognize the need to maintain fiscal prudence and sustainability going forward, in order to preserve macroeconomic stability and the country’s external competitiveness, and hence achieve their development goals. My authorities fully subscribe to staff’s recommendations to avoid a procyclical fiscal policy and bring the NOPD down to a more sustainable level over the medium-term. However, they stress that the level of expenditures is expected to remain high during the implementation of the public investment program over the next few years. They are currently preparing a medium-term expenditure framework which aims to gradually lower the NOPD, notably by reducing gradually capital spending, pursuing wage and employment reforms, and pursuing the rationalization of expenditures on goods and services as well as transfers and subsidies.

My authorities also believe that ongoing tax and customs administration reforms and a better control of tax exemptions will strengthen non-oil revenue over time. They stress that the tax exemptions already granted in the context of the special economic zone (SEZ) will expire according to the law. They are of the view that the impact of the SEZ on growth and eventually on fiscal revenue will outweigh the corresponding tax expenditures. Regarding specifically the tax on wire transfers, my authorities are working to resolve this issue. However, reforming this tax is politically sensitive due to the fact that proceeds from this tax contribute to the financing of the health insurance fund.

In order to strengthen public financial management, my authorities introduced program budgeting and adopted modern principles of financial management to become effective in 2012, as recommended by Fund TA mission. They are now holding weekly meetings to monitor investment-related payments, in order to avoid any accumulation of arrears and strengthen accountability. On the new institutions being created, they will ensure that they are not of an extra-budgetary nature and that they have strong governance structures.

My authorities intend to pursue a proactive debt policy, consistent with the 2011-2013 debt strategy adopted with the 2011 budget. In light of the findings of the debt sustainability analysis, this strategy limits the annual amount of new debt to be contracted by the government and defines criteria for contracting new loans. The framework for debt management has been strengthened with the creation of a Directorate General of Debt and the establishment of a national committee on public debt.

Public Investment Program

The public investment program aims at addressing infrastructure needs in the country. In particular, the selection of infrastructure projects will be guided by the need to boost and link the five geographical development centers identified in the development plan as having specific potential in sectors that are deemed essential for the diversification of the economy. Consistent with this approach, the SEZ being established will offer developed infrastructure and various incentives for the timber industry to invest in the local processing of logs and export of high value-added wood products.

In order to strengthen public investment management, a national agency for major public works was set up, entrusted with the planning, management, and implementation of large public infrastructure projects. This agency is benefiting from foreign technical expertise. In addition, a service contract was signed in November 2010 with the World Bank to enhance national capacities in this area.

Financial Sector Reforms

In the financial sector, my authorities recognize the important role that an efficient credit system can play in the development of the economy. In this respect, they are undertaking reforms to strengthen the credit infrastructure. These reforms include improved mechanisms and procedures to settle loan contract disputes, streamlined procedures for the realization of guarantees to obtain loans, and creation of a corporate balance sheet centralization system at the central bank that provides commercial banks access to companies’ balances. Also, they have streamlined the number of state-owned and sponsored financial institutions involved in SMEs and housing financing through notably mergers and restructuring, and appointed new top management teams. Work is also ongoing to finalize the microfinance development strategy and expand access to credit, while limiting operational and security risks. Going forward, Gabon intends to subscribe to the capital of the African Guarantee and Economic Cooperation Fund, which guarantees bank loans to SMEs. My authorities believe that all these actions will contribute to lower financing costs and increase access to financial services by SMEs and households.

Other Structural Reforms

Along with building infrastructure and reforming the financial sector, improving the business environment is a central piece of my authorities’ plan to promote private sector development and enhance the country’s long-term growth prospects. In this regard, my authorities signed a service agreement with the International Finance Corporation (IFC) in November 2010 to help the government identify the necessary measures to abolish burdensome regulations involving lengthy procedures, based on the analysis of the World Bank’s Doing Business. They also streamlined the number of government agencies involved in export and investment promotion and set up a competition authority which will ensure that the free play of competition is not hampered by illicit price-setting arrangements, notably in the retail market.

My authorities are also reforming the oil sector. A national oil company is being created and the Fund for Future Generations has been converted into a Strategic Sovereign Fund that will, among other things, enable the government to take equity stakes in companies of strategic importance for Gabon.

The public administration is also being revamped. Organizational structures of ministerial departments are being modified and their mandates are being updated.

Money and Exchange Rate

Gabon is a member of the Central African Economic and Monetary Community (CEMAC). The regional currency, the CFA franc, is pegged to the euro. The membership in the CEMAC has served the economy well, and monetary policy has been appropriate and prudent. As noted above, the Gabonese authorities will continue their structural reform efforts to improve the competitiveness of the economy.

Conclusion

Gabon is facing the significant long-term challenges of achieving high and sustained non-oil growth and improving social indicators in a context of dwindling oil reserves. To address this challenge, my authorities have embarked on an economic development plan aimed at reducing the country’s dependence on oil through economic diversification. Aware of the existing capacity constraints in the country and in order to ensure a sound, well-sequenced and cost-efficient implementation of their plan, my authorities have actively sought the technical expertise of reputable international organizations and corporations, including the Fund, the World Bank and the IFC. They remain determined to preserve macroeconomic stability going forward and will adapt their fiscal policy framework accordingly, notably by developing a medium-term fiscal framework.

Gabon: 2010 Article IV Consultation-Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Gabon
Author: International Monetary Fund