IMF Policy Paper: Chad: First Review Under the Extended Credit Facility Arrangement, Request for a Waiver of Nonobservance of Performance Criteria, Rephasing of Disbursements, and Financing Assurances Review–Debt Sustainability Analysis

First Review Under the Extended Credit Facility Arrangement, and Request for a Waiver of Nonobservance of Performance Criteria - Press Release; Staff Report

Abstract

First Review Under the Extended Credit Facility Arrangement, and Request for a Waiver of Nonobservance of Performance Criteria - Press Release; Staff Report

Background and Recent Developments

1. Chad’s external public debt burden increased considerably from 2008, mainly on account of external commercial borrowings related to oil. At end-2017, outstanding public and publicly guaranteed (PPG) external debt stood at nearly US$2.8 billion (27.2 percent of GDP) compared to US$1.6 billion (18 percent of GDP) at end-2008 (Text Table 1). Commercial borrowings (oil sale advances) from Glencore in 2013 to cover revenue shortfalls and in 2014 to purchase a share in the Doba oil Consortium were the main contributors. Falling oil prices over 2014-16 also contributed to rising debt service burdens by reducing revenues available to repay oil sales advances.

Text Table 1.

Chad: External Debt Stock 2014-17 /1

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Source: Chadian authorities, selected creditors, and World Bank and IMF staff estimates.

includes only debt denominated in foreign currency

Glencore loan accounts for about 98 percent of commercial debt stock in 2017

2. Debt relief, following the achievement of the HIPC completion point, along with some debt reprofiling helped to ease the rising debt burden. Chad benefited from US$756 million in debt relief after achieving the HIPC completion point in April 2015. This amount includes MDRI relief from the International Development Association and the African Development Bank, and forgiveness from the Paris Club, while non-Paris Club members agreed to reschedule their remaining amounts on IDA comparable terms. In late 2015, the authorities also signed a rescheduling agreement with Glencore to consolidate the oil sale advances and extend their maturities. However, while the rescheduling agreement provided some flow relief, it proved to be insufficient, and led to an increase in the present value of the debt. In February 2018, the authorities reached an agreement in principle with Glencore for a deeper restructuring which helped reestablish debt sustainability. In April 2017, the authorities rescheduled arrears (accrued in 2016) and upcoming maturities with China.

3. The composition of external public debt has changed significantly over the past decade. The share of external debt from multilaterals has fallen sharply from about 86.5 percent in 2008 to 24.1 percent in 2017, while the share of commercial debt, which was virtually non-existent in 2008, has risen to almost 50 percent, mostly to Glencore. Bilateral debt doubled over the decade but, as a share of total debt, it is still significantly less than commercial debt (Text Table 1).

4. External payment arrears accumulated in 2016 and in 2017. As a result of liquidity challenges in 2016 and the first half of 2017, the government accrued external arrears vis-à-vis a number of multilateral, bilateral, and one commercial creditor (a bank from Taiwan province of China). While some arrears particularly to multilateral creditors were cleared, some (to bilaterals) estimated at about US$98 million (1 percent of GDP) remained outstanding at end-2017 (Text Table 2). The authorities are making an effort to address those arrears.

Text Table 2.

Chad: Estimated External Arrears

(Millions of US dollars)

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In CFAF

Commercial bank from Taiwan Province of China.

5. Domestic public debt, which includes external debt denominated in domestic currency, has increased significantly in recent years. There has been a greater reliance on non-central bank financing, in particular issuance of government securities. While debt to the regional central bank (BEAC) remains high, its share in total debt has declined. In addition, in September 2017, all debt to the BEAC (for an amount of CFAF 479 billion) was consolidated and rescheduled into long-term securities with a grace period of 4 years and maturity of 14 years (Text Table 3).

Text Table 3.

Chad: Domestic Debt at Year-End, 2014-2017

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Source: Chadian authorities

Existing balances were converted into long-term securities with grace period of 4 years and maturity of 14 years.

Issued through banks’ syndication

Auctionned in regional securities’ market.

Assumes repayment of 20 billion in recognized arrears since June 2017 bring the total for 2017 to 51 billion.

Legal commitments, Standing payment orders, and accounting arrears.

Glencore Debt Restructuring

6. The authorities have reached an agreement in principle with Glencore on the terms of the debt restructuring. The restructuring is expected to reestablish debt sustainability and alleviate budgetary pressures. The restructuring agreement covers a total of about US$1.3 billion of external debt and includes a significant extension of maturity, a large reduction in restructuring fees, and a lower interest rate. Specific contingencies are included to help safeguard sustainability in downside scenarios and accelerate the payment of debt in case of upside scenarios.

Underlying Assumptions

7. The DSA’s baseline scenario reflects policies and financing assumptions underlying the ECF arrangement and the Glencore debt restructuring. It is based on the WEO oil price projection, a gradual recovery in oil production, and policies to stabilize the fiscal position and support a sustainable recovery in non-oil activity. It also assumes clearance of external arrears in 2018.

  • Oil exports. Chad’s medium- and long-term macroeconomic outlook is characterized by a gradual increase in oil production. In 2017, oil production was significantly lower than projected at the time of the 2017 DSA due to technical problems faced by the second largest oil producer in Chad. Production is expected to begin to recover in 2018 but delays in implementing new extraction technologies will keep production below the 2017 DSA projections up to 2020, after which production is expected to increase gradually in line with the use of this technology and with the capacity of new fields projected to start production (Text Figure 1). The price of a barrel of Chadian oil has been revised upward in the medium-term relative to the 2017 DSA projections, reflecting a significant decline in the discount applied to Chad oil in the past year and higher world oil prices, but converges from 2023 onwards.

    Text Figure 1.
    Text Figure 1.

    Changes in Oil Projections

    Citation: IMF Staff Country Reports 2018, 108; 10.5089/9781484352823.002.A003

    Sources: Chadian authorities; and IMF staff calculations.

  • Fiscal policy. It is assumed that the authorities remain committed to strengthen the fiscal position, including by maintaining tight spending control, and improving non-oil revenue mobilization. However, the fiscal surplus over 2018-21 is slightly lower than assumed in the 2017 DSA due to small revisions to non-oil tax revenues to take into account lower-than expected performance in 2017.

  • Arrears. Efforts are underway to clear arrears to official bilateral creditors and the authorities are making good faith efforts to clear arrears to the bank from Taiwan province of China. The baseline scenario also includes a gradual reduction in the stock of verified domestic arrears.

  • External current account. The current account deficit is now wider in the medium-term than under the 2017 DSA reflecting lower oil export receipts due to lower production and the use of part of government oil for domestic consumption. In addition, import projections have been revised up to reflect planned increases in oil capital expenditure and currency appreciation.

8. Risks to the outlook. While the agreement in principle to restructure the Glencore debt has removed a major source of vulnerability, the baseline remains subject to a number of risks. These stem from the potential for additional domestic debt and arrears not identified yet, a rise in non-concessional borrowing, and overruns in the wage bill. In addition, a further deterioration in the liquidity position of banks presents a risk given that it could undermine the rollover of domestic public debt. Developments in the international oil market continue to pose both upside and downside risks to the outlook, although the contingencies integrated into the agreement in principle to restructure the Glencore debt help alleviate the impact of lower oil prices.

Text Table 4.

2017 DSA vs. Current DSA (assumptions)

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External DSA

9. While the Glencore debt restructuring is expected to lead to a significant improvement in debt dynamics, at this time staff assesses external debt to be in distress given that the final restructuring agreement has not been signed and some external arrears remain. Once the final agreement is reached and progress is made on clearing the outstanding external arrears, other things equal, staff would expect to upgrade the risk rating to moderate under the current LIC DSF methodology (Text Figures 2).

Text Figure 2.
Text Figure 2.

Impact of Debt Restructuring

Citation: IMF Staff Country Reports 2018, 108; 10.5089/9781484352823.002.A003

Sources: Chadian authorities; and IMF staff calculations.
  • The agreement in principle to restructure the Glencore debt has eliminated the breach to the debt service to revenue threshold mainly responsible for the debt difficulties Chad has faced recently. The ratio drops considerably in 2018 to 13.2 percent, almost 5 percentage points below the threshold. While it increases slightly over the medium term, it remains firmly below the threshold under the baseline scenario, as well as under reasonable lower oil price scenarios. This is the main change from the 2017 DSA, in which the ratio was close to 40 percent for 2018. Similar improvement is seen to the evolution of the debt service to export ratio.

  • The present value of the debt reflecting the agreement in principle also improves. It is 4 percent lower compared to the old debt contract under a baseline scenario that reflects similar prices, and is also lower under higher and lower oil price scenarios. The PV of debt to exports is significantly below the LIC DSF threshold even with oil prices 20 percent lower than under the baseline.

10. All external debt burden indicators are generally below their respective thresholds in the baseline. The PV of public and publicly guaranteed external debt as a share of GDP declines gradually from 27.2 percent at end-2017 to under 10 percent by 2028 (Figure 1; Table 1). At 202.7 percent, the PV of debt-to-revenue ratio is slightly above the 200 percent threshold mark in 2018 but falls below it in 2019 and continues to decline steadily to reach 54 percent by 2028.

Figure 1.
Figure 1.

Chad: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2017-37 1/

Citation: IMF Staff Country Reports 2018, 108; 10.5089/9781484352823.002.A003

Sources: Country authorities; and staff estimates and projections.1/The most extreme stress test is the test that yields the highest ratio on or before 2027. In figure b. it corresponds to a Combination shock; in c. to a Exports shock; in d. to a Combination shock; in e. to a Exports shock and in figure f. to a Combination shock

11. All the debt indicators breach the relevant thresholds in the presence of extreme

shocks (Figure 1, Table 2). A shock to exports would push the PV of debt-to-exports and the debt service-to-exports ratios well above their thresholds. The shock that generates the largest impact for the PV of debt-to-GDP ratio, the PV of debt-to-revenue ratio, and debt service-to-revenue ratio is a combination shock where both growth and the primary balance fall below their historical average by half a standard deviation. All three debt burden indicators would rise sharply above their respective threshold in 2018 and remain elevated well into the medium-term. This highlights the sensitivity of the debt trajectory to the fiscal and growth assumptions and further confirms the need to adhere to the fiscal adjustment path under the IMF-supported program.

Public DSA

12. Analysis of total public debt suggests a heightened level of vulnerability (Figure 2, Table 3). The PV of total public debt, as a share of GDP, at end-2017 stood at 49.7 percent, which is about 11.5 percentage points above the benchmark level associated with heightened public debt vulnerabilities for weak policy performance. However, this indicator declines continuously over the medium-term, falling below the threshold by 2023 and eventually stabilizing at about 20 percent into the long-term. The fixed primary balance scenario follows a similar trajectory but remains above the baseline, underscoring the need to remain committed to prudent fiscal policies (Figure 2).

Figure 2.
Figure 2.

Chad: Indicators of Public Debt under Alternative Scenarios, 2017-37 1/

Citation: IMF Staff Country Reports 2018, 108; 10.5089/9781484352823.002.A003

Sources: Country authorities; and staff estimates and projections.1/The most extreme stress test is the test that yields the highest ratio on or before 2027.2/ Revenues are defined inclusive of grants.

Conclusion

13. Chad’s external debt is assessed to be in distress at this time and there are heightened public debt vulnerabilities. The rescheduling of the Glencore debt, along with the projected recovery in the oil sector and prudent fiscal policy, result in debt burden indicators declining significantly over the near and medium term. The external debt trajectory remains sensitive to a number of shocks including on exports and to fiscal slippages. However, given that the restructuring agreement is still to be finalized and some external arrears remain outstanding, external debt is considered currently in distress. Additionally, total public debt vulnerabilities remain elevated, which reinforces the need to maintain prudent fiscal policy including on external and domestic borrowing. Finally, effective inter-agency coordination to strengthen the capacity to record and monitor public debt is very important to better manage public debt.

Table 1.

Chad: External Debt Sustainability Framework, Baseline Scenario, 2014-371/

(Percent of GDP, unless otherwise indicated)

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Source: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - p(1+g)]/(1+g+p+gp) 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.

Includes exceptional financing (i.e., changes in arrears and debt relief), changes in gross foreign assets, and valuation adjustments. Projections also include contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

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

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

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 2.

Chad: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2017-37

(Percent)

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Source. Country auLiionues, and sL.au esumates 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 interest rate on new borrowing is by 2 percentage points higher than in the baseline. 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 assuming an 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.

Table 3.

Chad: Public Sector Debt Sustainability Framework, Baseline Scenario, 2014-2037

(Percent of GDP, unless otherwise indicated)

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Source: Country authorities; and staff estimates and projections.

The coverage of public sector debt comprises the obligations of the central government, including commercial debt. The definition of debt corresponds to gross debt.

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.

The primary deficit grosses up oil revenue and debt service on the oil sales advances

Table 4.

Chad - Current Policies: Sensitivity Analysis for Key Indicators of Public Debt, 2017-37

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Source: 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.