Second Review of the Program Under the Extended Credit Facility, Request for Waivers of Nonobservance of Performance Criteria, And Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Chad
The Chadian authorities are thankful to the Executive Board, Management and staff for the Fund’s continued support to their reform agenda set forth in their economic program supported by the Extended Credit Facility (ECF). Despite a difficult environment characterized by low oil revenues, a difficult socio-economic situation and security challenges, the ECF-supported program has remained on track. Since the completion of the first review, the authorities have made progress in pursuing fiscal consolidation, addressing domestic and external arrears, mitigating liquidity pressures in the banking system. In addition, they reached a debt restructuring agreement in principle with Glencore on June 28, 2018, which helped improve the country’s fiscal position and debt sustainability prospects. In light of this progress and their strong and continued commitment to the objectives of the ECF-supported program, the authorities request the completion of the second review of the arrangement.
I. Performance under the ECF arrangement
The staff report provides a helpful account of recent economic developments, emphasizing notably the emerging signs of economic stabilization. The authorities remain committed to ensuring satisfactory program performance. All but one performance criteria at end- December 2017 were met, and only one indicative target was not met. The continuous zero ceiling on new external arrears of the government and non-financial public enterprises has been missed. Most indicative targets at end-March 2018 have been met while those related to the regularization of emergency expenditures procedures (DAO) and poverty reducing social spending were missed notably because of coordination problems, liquidity constraints, and civil servants strikes.
On the fiscal front, performance in 2017 turned out to be better than expected due to the government’s strong efforts to control spending and increase non-oil revenues. Collection of non-oil revenues improved in the first quarter of 2018 as efforts to boost domestic revenue and strengthen cash management continued. Total expenditures in the first quarter of 2018 were in line with program targets reflecting adjustment measures undertaken by the government. The government took steps to repay domestic arrears in the second half of 2017, reducing significantly the stock of domestic arrears.
Likewise, significant progress has been made in clearing external arrears, with outstanding external arrears being reduced almost by half in the first four months of 2018. Notwithstanding this progress, a small amount of external arrears accumulated in the first half of 2018, primarily because of various features of fragility, including coordination challenges and weaknesses in the debt management and reporting system exacerbated by staff turnover in the related administrations. These arrears have since been cleared and the authorities are determined to avoid the recurrence of new arrears, with Fund staffs assistance. They will continue to take steps to further strengthen debt management and look forward to Fund’s continued support in this regard.
In the banking sector, the government started to implement its strategy to strengthen the position of public banks. Reforms also aim to ensure that these banks play their financial intermediation role in an effective manner, including through deposit collection, and efficient allocation of resources to economic sectors. In this regard, the terms of reference for the review of public banks’ strategy and the preparation of a reorganization plan were finalized, in coordination with the Banking Commission, COBAC, and with support from IMF staff. The report on the reorganization plan is expected to be finalized by end-January 2019.
Progress has also been made on other aspects of the structural reform agenda including with a view to improving governance and oil sector transparency. The United Nations Convention Against Corruption (UNCAC) was ratified, and the list of tax and customs exemptions was published on the Ministry of Finance website. In addition, the government continued to publish quarterly notes on the oil sector, in line with the template agreed with IMF staff. The audit of domestic arrears which was due by end-October 2017 was launched in June. The audit of transfers and subsidies to identify potential areas for saving is expected to be launched before the end of the year.
II. Policies for the remainder of 2018 and the medium-term
With the expected increase in oil production over the medium-term, higher FDI notably in the oil sector, and lower external debt service following the Glencore agreement, risks to the program have significantly declined and Chad’s international reserves should improve further, thereby contributing to the regional external stability. Looking ahead, economic activity is expected to start to recover in 2018, reflecting notably projected favorable developments in the oil sector, increased investment spending, and progress in clearance of domestic arrears.
On their part, the authorities will continue their efforts to stabilize the economy and support the resumption in non-oil growth, while pursuing the implementation of the National Development Plan. Fiscal policy will remain the cornerstone of the program. The authorities will build on the measures introduced early this year to further strengthen non-oil revenue collection and contain current spending. Oil revenue is expected to increase in 2018 owing notably to the projected increase in production. At the same time, the government will aim to limit recourse to domestic financing, while working to further reduce the stock of recognized arrears in line with program objectives.
The authorities will maintain a prudent fiscal policy over the medium term. The efforts to increase non-oil tax revenues will be sustained, so will be the efforts to control the wage bill and increase the share of other expenditure in non-oil GDP, particularly social and investment spending. The authorities will pursue their dialogue with social partners, with the aim of preserving social cohesion and securing adequate support for reform implementation.
The government will continue to pursue measures to improve tax and customs revenues and strengthen public financial management. Building on recent tax and custom reform measures that have contributed to boosting revenue, the authorities will continue taking additional revenue-enhancing steps. In particular, a unit dedicated to property tax collection will be created in the tax administration while the customs administration will aim to better control transit operations and import valuation. The authorities will also strive to streamline tax exemptions to broaden the tax base, while introducing improvements to tax collection procedures and strengthening collaboration between tax and customs administrations. With regard to public financial management, efforts will be pursued to further improve the expenditure chain and meet the target for the regularization of DAO. In parallel, care will be taken to monitor and report public spending on a regular basis.
The banking system which dominates the financial sector in Chad plays a pivotal role in the national economy. Cognizant of this reality, the authorities are making relentless efforts to address vulnerabilities in the sector in close collaboration with the BEAC and COBAC. These include resolving payment arrears to commercial banks with a view to alleviating liquidity pressures facing them. The authorities have also stepped up efforts and financial reforms to review the institutional and operational frameworks as well as the financial position and strategy of some of the largest public banks. Moreover, strengthening the financial sector calls for an improved monetary transmission mechanism. In this connection, the development of a vibrant interbank market is considered to be critical and to this end the ongoing reform of the monetary policy framework conducted by BEAC is much anticipated.
The Chadian authorities have demonstrated their continued commitment to the ECF- supported program. While they have faced a number of hurdles in advancing their reform agenda largely because of the country’s fragility, performance under the program has remained broadly on track. Going forward, the authorities have renewed their commitment to program objectives and plan to continue their reform efforts to achieve in coordination with regional authorities, notably BEAC and COBAC. In this endeavor, they look forward to Fund’s policy advice and technical assistance as well as the support from the country’s development partners.