Statement by Mr. Assimaidou on Gabon, February 13, 2013

Economic growth has been robust under favorable conditions in Gabon, but has not been inclusive enough, leaving one-third of its population in poverty. Building larger fiscal buffers, backed by a more prudent fiscal stance, will be critical to withstand possible negative oil price shocks. Efforts are under way to improve the management, and transparency of public finance must be carried out vigorously. Comprehensive policies are needed to support a diversified and more inclusive economic growth that is rich in employment opportunities.

Abstract

Economic growth has been robust under favorable conditions in Gabon, but has not been inclusive enough, leaving one-third of its population in poverty. Building larger fiscal buffers, backed by a more prudent fiscal stance, will be critical to withstand possible negative oil price shocks. Efforts are under way to improve the management, and transparency of public finance must be carried out vigorously. Comprehensive policies are needed to support a diversified and more inclusive economic growth that is rich in employment opportunities.

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 found very fruitful the discussions held with staff during their visit to Gabon in November 2012. My authorities appreciate staff recommendations and inputs in their economic development plan.

Over the past three years, my authorities have been implementing a large economic development plan, Plan Stratégique Gabon Emergent (PSGE), aimed at transforming the oil-dependent Gabonese economy into an emergent economy by 2025. This economic plan is underpinned by (i) a vast public investment program (PIP), which focuses on addressing Gabon’s huge physical and digital infrastructure gaps, notably in the energy, telecoms, transportation and social sectors, and (ii) a set of institutional and structural reforms covering a wide range of areas, including public administration, public financial management and business environment. The PGSE is offering significant investment opportunities for international investors, many of whom are now present in Gabon, notably in the construction, energy, housing, industry and mining sectors.

Recent developments

The implementation of the PSGE has boosted economic activity in Gabon. Real GDP grew at an average rate of more than 6 percent over the period 2010-2012, driven by high public investment spending. Contribution to growth essentially came from the non-oil sector with the mining, construction and wood-processing sectors spearheading non-oil economic growth. Production in the oil sector remained broadly stable, owing to sustained efforts by oil companies to optimize production in existing fields. The current account surplus exceeded 10 percent of GDP on average and international reserves increased, reflecting favorable international oil price developments. Inflation increased in 2012 but remained below the regional convergence criterion of 3 percent.

Higher oil prices also helped fiscal balances which register surpluses in 2010 and 2011, despite the increase in total spending in that period, including a trebling of public investment spending. In 2012, the fiscal balance is projected to turn into a deficit due to a still high public investment spending and higher current expenditures, reflecting an expansion of social expenditures. Public debt ratio remained low at 18.8 percent of GDP in 2012, well below the regional convergence criteria of 70 percent and still below the country’s own debt ratio ceiling of 35 percent set in the debt management strategy adopted in 2011.

As regards fiscal reforms, the reform of the public financial management framework is advancing well. In particular, the preparatory work to introduce by 2015 the new budgeting framework, Budget by Program Objectives, as required by a CEMAC regional directive, is progressing as scheduled, with the assistance of the Fund. A pilot phase of the implementation of the new budgeting framework is underway in four ministries: budget, economy, education and energy. As part of the budget reform, the number of procedures in the expenditure process has been halved. The selection, preparation, execution and monitoring of public investment projects are being strengthened with the assistance of foreign technical expertise.

On the revenue side, the reform of the tax administration is also proceeding well with the assistance of the Fund. A component of this reform concerns the strengthening of SMEs tax administration. Oil revenue management has been strengthened with the revision of the legal framework for the sovereign wealth fund, to make it more consistent with Santiago Principles. Transparency in the oil revenue management was improved with the publication of annual EITI reports for the years 2007 to 2010.

The Gabonese banking sector is well-capitalized, liquid and profitable. As the result of the buoyant economic activity, credit to private sector picked up but remains highly concentrated in a few sectors such as oil, telecoms and construction. The ratio of NPLs to total loans is low at 4.4 percent. The restructuring of two small banks experiencing financial difficulties and high NPLs is underway, in line with the recommendations of the regional banking supervision commission (COBAC).

The business environment is being improved. In particular, my authorities are undertaking a reform of the land administration and regulatory framework. They believe that such a reform is crucial to support economic diversification, notably for the purpose of developing a sustainable housing sector and deepening the financial sector. As part of this reform, the number of procedures to obtain a construction permit has been reduced from 134 to 7. In order to increase the country’s attractiveness as destination for FDI, a law on public-private partnerships has been adopted, existing sectoral codes are being amended, and master plans are being developed for other sectors. My authorities are pursuing the strengthening of institutional framework dedicated to private sector development, with the restructuring of the chamber of commerce and the creation of an enterprise development agency for SMEs.

My authorities believe that a successful economic diversification will bring about employment opportunities and contribute to reduce poverty. Aware of the labor skill mismatch, my authorities have taken measures to address it. In particular, they are upgrading some existing professional institutes and have set up, with the collaboration of the private sector, new professional training schools in oil and mining. They plan to establish another school to train specialized labor for construction. In the meantime, they have exerted flexibility in the application of labor regulations to allow greater hiring of foreign workers, notably in the agriculture sector. They have also reformed the scholarship program to align it with the objectives of the PGSE.

Program for the medium-term

My authorities remain resolved to achieve a sustainable economic development through an efficient use of natural resources that will benefit the entire population while preserving the environment. They continue to believe that the focus on developing infrastructure remains warranted as it is critical to improve the competitiveness of the non-oil economy, support economic diversification, create employment and increase the country’s attractiveness for FDI. Most of the major infrastructure projects currently underway are expected to be completed by 2017. They will maintain reform momentum to increase growth potential and social inclusion.

As experience is gained in the implementation of the plan, actions are taken to review its content in order to ensure its relevance and feasibility. In particular, a new management team has been appointed at the helm of the national agency for major public works (ANGT), which is tasked with the planning, management, and implementation of large public infrastructure projects. The new management team is reviewing the list of investment projects, to ensure that they yield high return and are of high quality, and to make them consistent with the country’s absorptive capacity and financial constraints for the period ahead.

In that context, Gabon’s medium-term economic outlook remains bright, as the implementation of the PGSE will continue to support economic activity. Real GDP growth is expected to remain high at more than 6 percent over the next five years, despite an anticipated decline in oil production. The current account balance could deteriorate on account of projected decline in oil exports and lower oil prices. My authorities concur with staff’s assessment of risks to this economic outlook and acknowledge the policy challenges going forward in the implementation of the economic program should those risks materialize.

My authorities remain committed to a prudent fiscal policy that will preserve the implementation of the investment program from oil price volatility, while ensuring medium-term fiscal sustainability and continuous compliance with CEMAC fiscal convergence criteria. They particularly agree on the need to avoid a procyclical fiscal policy which will hamper a smooth implementation of the strategic development plan. Staff’s recommendations on the need to anchor fiscal policy and increase existing fiscal buffers were timely and very much appreciated, and are being carefully examined. My authorities stress that a fiscal anchor should adequately balance the needs for increasing savings for risk management purposes with those to address pressing infrastructure and social gaps.

As staff indicated, fiscal stance will remain expansionary over the medium-term reflecting sustained high public investment spending in the context of the PGSE. My authorities believe that their own revenues would cover their budgetary expenditures for the period ahead. That said, they took note of staff’s projections of continuous fiscal deficits over the next five years starting in 2013 while pointing that they could tap into international markets to finance them without threatening debt sustainability. In the meantime, should adverse oil price shock materialize, my authorities will postpone the launch of new investment projects.

Fiscal reforms will be pursued, with the assistance of international organizations. In particular, they will pursue the reform of the public administration and notably the public workforce management. My authorities welcome the report of the World Bank Public Expenditure Review, whose recommendations will be helpful in strengthening the PFM reform underway. On tax exemptions granted in the context of special economic zones (SEZ), my authorities continue to believe that the impact of the SEZs on growth and fiscal revenue will outweigh the corresponding tax expenditures. As regards oil subsidies, my authorities are also examining staff’s recommendations and would very much appreciate additional insight following the recent FAD study on the subject.

My authorities will pursue the improvement of the business environment, with the assistance of IFC, and continue to boost human capital and address the labor skill mismatch through the reform of the education system and the institutional and regulatory framework for the labor market. Likewise, the development of the financial sector will help to increase financial intermediation and facilitate access by SMEs while preserving compliance with prudential regulations. My authorities will also continue to improve the production and timeliness of statistical data.

As regards the tax on wire transfers, my authorities believe that this tax does not hamper cash transfers and is consistent with proposals in the international arena to tax capital flows. Furthermore, the removal of this tax remains a politically sensitive issue as the proceeds of this tax aliment the health insurance fund.

Conclusion

To conclude, the implementation of the economic development plan boosted economic activity in Gabon against the backdrop of favorable international oil price developments. Going forward, my authorities will ensure the implementation of the plan remains sound, well-sequenced and cost-efficient. They are committed to pursue prudent macroeconomic policies and structural reforms to reduce risks to the smooth execution of the investment program underpinning the development plan and achieve a more socially inclusive economic growth. They continue to count on the technical assistance of the Fund and other international organizations in their development endeavors.

Gabon: 2012 Article IV Consultation
Author: International Monetary Fund. African Dept.