Gabon: Staff Report for the 2014 Article IV Consultation
Author: International Monetary Fund. African Dept.
Publication Date:
25 Feb 2015
eISBN:
9781498309165
Language:
English
Keywords:
ISCR; CR; debt; price; GDP; Gabon; revenue; plan Stratégique Gabon emergent; oil revenue; financial situation; growth performance; diversification plan; Oil; gas and mining taxes; Public expenditure review
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This 2014 Article IV Consultation highlights that Gabon’s growth performance has recently been strong, but fiscal pressures have increased significantly. Real GDP growth has averaged about 6 percent in the last four years on the back of substantial scaling-up of capital spending as the authorities implement their strategy Plan Stratégique Gabon Emergent to promote economic diversification and growth inclusiveness. The medium-term growth outlook has weakened as a result of the sharp decline in oil prices, but is expected to remain relatively strong. Growth is expected to be driven by a number of projects under way in agro-industry, mining, and wood processing.

Abstract

This 2014 Article IV Consultation highlights that Gabon’s growth performance has recently been strong, but fiscal pressures have increased significantly. Real GDP growth has averaged about 6 percent in the last four years on the back of substantial scaling-up of capital spending as the authorities implement their strategy Plan Stratégique Gabon Emergent to promote economic diversification and growth inclusiveness. The medium-term growth outlook has weakened as a result of the sharp decline in oil prices, but is expected to remain relatively strong. Growth is expected to be driven by a number of projects under way in agro-industry, mining, and wood processing.

Background: Strategy to Reverse Economic and Social Decline

1. Despite oil wealth, economic growth for most of the past 15 years has been lackluster and has not been inclusive. Real GDP growth averaged less than 1 percent in the decade through 2009 (Figure 1). As a result, despite relatively high per capita GDP (US$11,100 in 2013), one third of the population remains below the poverty line and (formal) unemployment is at 20 percent. While the political environment has remained stable, weak institutions and governance, a shallow financial sector, and a poor business environment have been obstacles to transforming the oil wealth into better living conditions for the population. Against this backdrop, President Ali Bongo Ondimba launched in 2010 an ambitious plan to transform Gabon into an emerging and diversified economy by 2025, underpinned by a large US$12 billion public investment program.

Figure 1.
Figure 1.

Growth Performance

Citation: IMF Staff Country Reports 2015, 047; 10.5089/9781498309165.002.A001

Sources: IMF and Gabonese Authorities.

2. The Plan Stratégique Gabon Emergent (PSGE) is the cornerstone of the authorities’ economic policies. The plan’s objectives are to: (i) significantly accelerate economic growth and diversify its sources away from oil; (ii) improve social indicators by having more inclusive and job-rich growth; and (iii) ensure sustainable management of natural resources for future generations. The two main pillars of the strategy are to improve the level and quality of infrastructure, and to raise the quality of human capital.

3. Despite its upper middle-income country status, Gabon fares poorly in areas that are critical to the success of the PSGE. Figure 2 and Text Table 1 compare Gabon to other emerging economies on several indicators, including the business environment and financial market development.1 As seen in Figure 2, Gabon ranks considerably lower than its comparators in most determinants of competitiveness, and does poorly in basic aspects such as infrastructure, health, and education. Comparisons of financial indicators show that emerging countries have considerably more financial depth and market access than Gabon (Text Table 1).

Figure 2.
Figure 2.

Global Competitiveness Index Comparison, 2014–15 (Position in the Ranking)

Citation: IMF Staff Country Reports 2015, 047; 10.5089/9781498309165.002.A001

Sources: World Economic Forum and IMF Staff estimates.
Text Table 1.

Financial Sector Indicators: Gabon and Emerging Countries

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Sources: World Development Indicators and IMF Staff calculations.

Refers to 2011 data only.

4. Gabon is the second largest economy in the CEMAC monetary and economic union, and its policies have significant spillover effects to the union. This is notably the case regarding the accumulation of external reserves, since Gabon’s large oil wealth is a major source of foreign exchange to the union. Representing over one fifth of CEMAC’s nominal GDP, the evolution of the Gabonese economy is bound to have significant effects over the rest of the region. Furthermore, a successful, fiscally sustainable implementation of Gabon’s diversification plan would not only be a valuable model for other countries in the region that are aiming to foster non-oil growth, but the resulting improvement in Gabon’s roads and telecommunications infrastructure could foster the region’s integration and connection to the rest of the world.2

Growth has Improved, But Near Term Risks Have Increased

5. Gabon’s growth performance has recently been strong, but fiscal pressures increased significantly. Real GDP growth has averaged about 6 percent in the last four years on the back of substantial scaling-up of public investment (Figure 3). Higher oil and manganese export prices have improved the external current account balance since 2010. However, the fiscal position has increasingly come under pressure due to a very rapid increase in spending, especially on investment, notwithstanding historically high oil prices. By 2013 the overall budget surplus (commitment basis) had virtually disappeared from a high of about 6 percent of GDP in 2009. Due to base effects in 2013, average inflation has increased in 2014 to a projected 4½ percent.

Figure 3.
Figure 3.

Gabon: Selected Economic Indicators

Citation: IMF Staff Country Reports 2015, 047; 10.5089/9781498309165.002.A001

Sources: IMF and Gabonese Authorities.

6. The growth outlook for 2015 has weakened due to the oil price shock, but should improve afterwards. Thus, while 2015 growth is projected to slowdown to 4½ percent, it should average about 5.7 percent in the following five years, driven by public investment, non-oil natural resources, and services. The gradual decline in oil output—which is driven by maturing wells—will likely continue in the coming years3, but may potentially be somewhat mitigated by the introduction of new extraction technologies and new small-scale discoveries. A number of projects underway at Special Economic Zones (SEZs) in agro-industry, mining, and wood processing, should help sustain the projected non-oil growth.

7. The foremost downside risk to the economic outlook in the short to medium term is an insufficient adjustment to fiscal policy in the face of extremely weak oil prices, and weak investment execution capacity. This could lead to further depletion of fiscal buffers and insufficient fiscal space to address binding constraints to growth (see Risk Assessment Matrix), which could depress both aggregate demand and supply. In the longer run, there is upside potential to raise growth if the PSGE rapidly succeeds in its objectives of reducing “horizontal” binding constraints, such as infrastructure bottlenecks, lack of qualified labor, and a weak business environment. In fact, the diversification strategy is starting to bear fruit in attracting new FDI in mining, wood processing, and agro-industry. The baseline assumes a somewhat higher growth rate toward the end of the projection period, in part driven by increased FDI. The baseline projections also assume implementation of additional fiscal adjustment beyond what the authorities currently envisage. If fiscal adjustment is insufficient or delayed, the lack of sufficient fiscal space could derail the diversification strategy toward a more private sector-led growth (see Figure 4). With the projected trend decline in oil exports, the external current account surplus is expected to turn negative over the medium term.

Figure 4.
Figure 4.

No Fiscal Adjustment Scenario1, 2014–2020

Citation: IMF Staff Country Reports 2015, 047; 10.5089/9781498309165.002.A001

Sources: IMF Projections1 With respect to the baseline scenario, the “No Fiscal Adjustment Scenario” assumes: (i) a lower increase in nonoil revenues because tax exemptions are not significantly eliminated; (ii) the fuel subsidy scheme is not reformed; (iii) other current spending items are not controlled and therefore grow in tandem with non-oil GDP throughout the projection period; and (iv) public investment also grows at the same rate as non-oil GDP from 2015.

8. Gabon’s track record in implementing the recommendations of the last Article IV consultation has been relatively weak, with some progress made only recently (see Text Table 2). Gabon has not adopted an oil price-smoothing rule and fiscal buffers have not been rebuilt mainly due to continued high spending levels, especially on the wage bill and energy subsidies. However, during 2014 the authorities eliminated industrial diesel subsidies for most sectors and reduced the very high capital spending. They also reduced the number of days needed to open a business in SEZs, and have initiated the assessment of the financial situation of weak public banks.

Text Table 2.

Gabon: Status of Implementation of Key Recommendations from the 2012 Article IV Consultation

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Sources: 2012 Article IV staff report on Gabon and information from the authorities.

Adjusting Fiscal Policy to Ensure Sustainable Financing of Authorities’ Growth and Diversification Strategy

9. Given the economic challenges facing Gabon, the Article IV consultation was centered on how to make the PSGE a reality while ensuring fiscal sustainability in the face of a major terms of trade shock. Specifically, the discussions focused on the following issues: (i) creating the fiscal space necessary to finance the PSGE on a fiscally sustainable basis, notably by keeping rapid public debt accumulation in check despite the collapse in oil prices; (ii) policies to strengthen competitiveness and promote economic diversification; and (iii) deepening the financial sector and enhancing financial stability.

A. Financing the PSGE on a Fiscally Sustainable Basis

Fiscal framework and policies

10. Despite historically high oil prices, in recent years the fiscal stance has substantially deteriorated as a result of a massive scaling up of public investment. The accelerated implementation of the PSGE led to a large increase in government expenditures from 38 percent of non-oil GDP in 2009 to 46.5 percent in 2013 (see Figure 5).4 The non-oil primary deficit consequently increased from 11.7 to 19.6 percent of non-oil GDP between 2009 and 2013. The massive boost in public spending, in the context of gradually declining oil revenues, has been partly financed by a large increase in public debt from 16.5 percent of GDP in 2011 to 27.6 percent in 2013, statutory advances at the maximum permissible level and a rapid draw-down of deposits at the central bank in 2014, a significant accumulation of domestic payments and VAT arrears, and even some accumulation of external arrears.5

Figure 5.
Figure 5.

Gabon Fiscal Indicators

Citation: IMF Staff Country Reports 2015, 047; 10.5089/9781498309165.002.A001

Sources: IMF and Gabonese Authorities.

11. The authorities recognized the tight fiscal situation, appropriately rectified their 2014 budget in order to scale down their investment program, and are finalizing a conservative 2015 budget assuming much lower oil revenues. The revised budget approved by parliament in July 2014 sharply cut down capital spending with respect to the initial budget by an amount equivalent to 12 percent of 2014 non-oil GDP. Preliminary estimates indicate that the adjustment in 2014 resulted in an overall surplus of 4½ percent of non-oil GDP on a commitment basis that allowed the government to pay about CFAF 435 billion in arrears.6 The authorities also recently implemented measures to speed up the reimbursement of the VAT. The most recent version of the 2015 budget to be sent to parliament conservatively assumes the price of Brent oil at US$45 per barrel, cuts down spending on goods and services with respect to 2014, substantially reduces oil subsidies, reschedules repayment of domestic arrears7, and freezes the level of public investment. To protect capital spending, the government intends to issue a eurobond in 2015.8 The staff report baseline scenario (see Tables 1-5 and Figure 7) incorporates the expenditures proposed in the latest 2015 budget, reduces by half the size of the eurobond issuance, and projects oil revenues based on a price of US$51 per barrel as per January 20, 2015 WEO assumptions. For 2016 onwards, the projections are based on staff’s understanding of the authorities’ planned medium-term policies, and present an adjustment scenario aimed at controlling public debt levels and ensuring repayment of arrears, mainly by containing the wage bill growth and considerably reducing oil subsidies.

Table 1.

Gabon: Selected Economic Indicators, 2012–20

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Sources: Gabonese authorities and IMF staff estimates and projections.
Table 2.

Gabon: Central Government Accounts, 2012–20

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Sources: Gabonese authorities and IMF staff estimates and projections.
Table 3.

Gabon: Central Government Accounts, 2012–20

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Sources: Gabonese authorities and IMF staff estimates and projections.
Table 4.

Gabon: Monetary Survey, 2012–20

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Sources: Gabonese authorities and IMF staff estimates and projections.
Table 5.

Gabon: Balance of Payments, 2012–20

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Sources: Gabonese authorities and IMF staff estimates and projections.
Figure 6.
Figure 6.

Gabon 2013 Eurobond Interest Yield and Spread with 10 Year US Bond

(percent)

Citation: IMF Staff Country Reports 2015, 047; 10.5089/9781498309165.002.A001

Source: Bloomberg.
Figure 7.
Figure 7.

Gabon Medium Term Outlook, 2014–2020

Citation: IMF Staff Country Reports 2015, 047; 10.5089/9781498309165.002.A001

Sources: IMF and Gabonese Authorities.

12. The substantial and continued decline in oil revenues will complicate the sustainable implementation of the PSGE, absent additional fiscal consolidation. With oil prices forecast at half of their 2014 level and with Gabonese production continuing its declining trend, considerable fiscal adjustment is required. As seen in Figure 4, without adjustment the fiscal position would deteriorate sharply and debt levels would considerably surpass the government’s own ceiling of 35 percent of GDP. Plans to finance the 2015 and 2016 deficit through international borrowing amidst a potential increase in global interest rates could be further complicated by negative prospects in the oil sector and the perception of a weakening fiscal situation. In fact, the spread of Gabon’s 2013 eurobond has climbed about 200 basis points between end-November 2014 and mid-January 2015 (see Figure 6), and the regional bond market may also tighten as many oil exporters in the region are also seeking additional financing. The implementation of the PSGE itself could be endangered without the fiscal resources needed for many of its public and public-private investments. At the same time, even if projects under the PSGE reach production stage in the medium run, generous tax concessions will significantly limit their potential contribution of net fiscal revenues anytime soon.9

13. In this context, ensuring the fiscal sustainability of the PSGE requires revenue and spending measures upfront. The non-oil revenue tax base should be expanded, notably by reducing overly generous tax exemptions. On the spending side, the government should strictly contain growth in current expenditures, especially of the wage bill, and seize the opportunity provided by low oil prices to phase out the substantial and poorly targeted fuel subsidies (Appendix III), while protecting well-targeted spending on key social areas. The government should avoid any increase in spending beyond its current projections in the run-up to the 2016 elections. Staff’s macroeconomic framework assumes the full implementation of these measures, and shows how capital spending can be gradually increased to finance the PSGE while accumulating currently low government deposits to protect the economy against exogenous shocks and without permanently violating the government’s debt ceiling.10,11 The government should further strengthen the legal environment to promote PPPs in order to help finance much-needed infrastructure, making sure the necessary safeguards are in place so as to avoid putting excessive risk on the government. Finally, staff recommends anchoring medium-term fiscal policy based on a nonoil primary deficit of less than 10 percent of GDP and an overall surplus of at least 2 percent of GDP, which would allow the authorities to progressively rebuild fiscal buffers.

14. Under the proposed staff scenario, public debt approaches the government’s ceiling only temporarily and gradually declines afterwards, but shocks could considerably worsen the debt situation (see Debt Sustainability Analysis). Debt is expected to continue its rapid upward trend in 2015 and 2016 slightly exceeding the 35 percent of GDP ceiling in 2016, and gradually decline afterwards as the government further controls spending. External debt is also projected to increase up to 2016 and gradually decline afterwards. Lack of fiscal adjustment, GDP growth below projections, and/or shocks to government revenues would significantly accelerate public debt accumulation to bring it considerably above the government’s ceiling. External debt could substantially rise if the non-interest rate current account deteriorates and the real exchange rate depreciates.12 The destabilizing impact of the shock scenarios highlights the urgent need to accumulate fiscal buffers.

Authorities’ views

15. Given the tight fiscal situation and the collapse of oil prices, the authorities recognized the need for further adjustment. In their view, the oil price shock has underscored the need to accelerate structural reforms to boost non-oil growth. While emphasizing the need to keep public debt below its conservative ceiling by limiting growth in current spending, they stressed the need to adequately finance their diversification strategy. In order to do so, the authorities agreed on the need to eliminate discretionary tax exemptions and progressively phase out fuel subsidies, while more forcefully controlling current expenditures after 2016. At the same time, they underscored the need to protect capital spending by shifting away resources from current spending, notably on goods and services. The authorities emphasized that they are also strengthening the PPP regulatory framework, as well as redoubling its tax collection effort. Revenue measures also include greater emphasis on risk-based audits and enhanced customs controls including the use of scanners, which will be facilitated by the survey of tax expenditure already undertaken by the authorities. To improve the credibility of the tax system, the authorities are committed to ensuring that they are current on VAT refunds.

Public finance management issues

16. Ensuring the fiscal sustainability of PSGE requires continued efforts to improve the effectiveness and efficiency of government spending. A recent Public Expenditure and Financial Accountability (PEFA) assessment on Gabon found many deficiencies in its PFM system including: (i) low credibility of the budget due to frequent upward revisions and inadequate monitoring of arrears; (ii) weak accounting and financial reporting; (iii) insufficient monitoring and external audit, and lack of parliamentary review; (iv) weak internal controls; and (v) low transparency of budgetary transactions and of transfers to local authorities. On the positive side, the PEFA praised the fact that the annual budget is prepared in a participatory process and within a medium-term framework.

17. Overall, the PEFA concluded that the PFM system remains outdated and relatively ineffective. There are gaps between budget transactions and accounting, delays in the expenditure chain, inadequate financial information systems, a chasm between payroll and personnel files, and weak ex-post internal controls. There is need to improve the quality of spending, especially for investment (“investing in investment”) by enhancing the selection, execution and monitoring (Figure 8), as well as to curtail high extra-budgetary spending, which potentially leads to the accumulation of arrears, and to strengthen anti-corruption safeguards. These improvements should be facilitated by more manageable levels of investment.

Figure 8.
Figure 8.

Public Investment Management Index, 2011

Citation: IMF Staff Country Reports 2015, 047; 10.5089/9781498309165.002.A001

18. An action plan should be developed to tackle weaknesses identified in the PEFA. The authorities should aim to: (i) improve the completeness of the transactions recorded in the state budget by fully integrating revenue and expenditure operations currently performed in cash on the accounts of the treasury; (ii) enhance financial supervision of public institutions; (iii) modernize the accounting functions to produce more reliable accounts within a reasonable time; and (iv) strengthen collaboration between revenue collection units (at the Ministry of the Economy) and spending units (at the Ministry of the Budget).

Authorities’ views

19. The authorities expressed their determination to strengthen the PFM system and welcomed IMF assistance in this area. They also highlighted recent PFM reforms, such as the recent establishment of a single treasury account, the unification of customs and tax statements, and the ongoing process to introduce a “budgeting by program objective” (BOP, according to its initials in French), which should result in a budget implementation in program mode as of January 2015.13 The law governing the budget in BOP mode should be adopted by end-2014. The authorities underscored their determination to increase transparency of natural resource revenues. To this end, they have adopted an action plan to become EITI-compliant during 2015. Regarding investment quality, the authorities highlighted their adoption of a public procurement code, a requirement to finalize technical studies underpinning specific investment projects before monetary outlays are made, and a requirement to effect payments only after proof of performance. They also note that Bechtel Corporation, a large construction and engineering multinational company, contributes to the design and monitoring of the implementation of PSGE infrastructure projects.

B. Improving Competitiveness for Economic Diversification and Structural Transformation

20. The PSGE aims to achieve greater economic diversification while moving up on the exports value-added chain. With oil-related GDP accounting for about 35 percent of GDP and oil exports accounting for about 80 percent of goods exports in 2014, and against the background of falling oil prices and aging oil wells14, the authorities recognize the need to develop non-oil sectors (mainly agro-industry, wood processing, industrial fishing, and service exports). Overall, the PSGE has an ambitious target of creating 325,000 new jobs by 2025. According to value chain analyses conducted by the World Bank for agriculture, forestry, and tourism, key hurdles to the expansion of the non-oil economy include high transportation and labor costs, low labor productivity, and lack of craftsmanship and technical know-how.15

21. To meet the PSGE’s objectives, the government has taken several actions. In 2010, the government banned the export of raw logs. A special economic zone (SEZ) has been established at Nkok (near Libreville) and a free-trade zone is being established in Port-Gentil. Both offer very generous incentives to firms exporting more than 75 percent of their production, including a 10-year corporate income tax holiday, total tariff exemption on imported capital equipment and parts, total exemption from the value-added tax (VAT) for the first 25 years, unlimited and tax-free profit repatriation, and flexible labor laws for seven years for the employment of foreign workers. 16 Steps have also been taken to facilitate business, such as cutting in half to two weeks the average time needed to start a business in the SEZ of Nkok, and the granting of construction permits has been reduced from more than six months to ten days.

22. To support the economic takeoff, the PSGE seeks to improve public infrastructure, enhance the business climate, and strengthen human capital. Objectives for the modernization of public infrastructure include developing a nationwide fiber optic infrastructure, doubling the country’s energy capacity to 1,000 MW, and establishing a national network of 3,600 kilometers of paved roads17 and 3,000 kilometers of waterways by 2025. The target for business climate reforms is to make Gabon one of the top 10 performers in Africa in the ranking of the World Bank’s of Doing Business indicators by 2020 (Figure 9). Regarding human capital formation, the objective is to refocus the educational system toward technical training in the sectors targeted by the PSGE.

Figure 9.
Figure 9.

Gabon: Business Environment and Governance

Citation: IMF Staff Country Reports 2015, 047; 10.5089/9781498309165.002.A001

Sources: Doing Business, 2014; World Bank’s Worldwide Governance Indicators (WGI), 2012, (average of control of corruption, government effectiveness, rule of law, regulatory quality, political stability and voice and accountability); Economist Intelligence Unit (EIU); and IMS staff calculations.LIC = Low-income country; UMIC= Upper-middle income country; OIL=Oil producers; WGI= Worldwide Governance Indicators. SSA oil exporters = Angola, Cameroon, Chad, Congo, Rep. of, Equatorial Guinea, Gabon, and Nigeria.

23. Despite considerable progress in attracting investment and improving infrastructure (Appendix I), the government needs to focus on “horizontal” policies to ensure a positive impact of the PSGE on the Gabonese population. Key achievements under the PSGE include improvements in transport and energy infrastructure, and joint-ventures with foreign companies in strategic sectors, but much remains to be done. Indeed, foreign investors typically cite insufficient and unreliable electricity supply, limited supply of qualified labor, and security of contracts as key deterrents to investing in Gabon. Given high labor costs, the authorities have aimed to compensate for them by granting foreign investors tax exemptions and subsidized electricity. This may have the perverse effect of attracting industries that are capital-intensive, thereby leading to a limited increase in employment and government revenue. Staff underscored that cross-country evidence shows that to attract labor-intensive industries that do not require direct government assistance, priority should be given to “horizontal” reforms.18 These include notably reforms to improve the business climate, physical infrastructure, and the quality of technical education. Clear targets for social indicators should be defined and surveys should be conducted regularly to monitor progress. This is particularly important given that Gabon has fallen short of meeting most Millennium Development Goals (Table 7).

Table 6.

Gabon: Financial Soundness Indicators for the Banking Sector, 2009–13

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Sources: BEAC, COBAC, and staff estimates using definitions from IMF’s “Compilation Guide on Financial Soundness Indicators.”
Table 7.

Gabon: Millennium Development Goals, 1990–2012

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Sources: Authorities and World Development Indicators.