Mr. Daouda Sembene Executive Director for Gabon; Mr. Razafindramanana, Alternate Executive Director; and Mr. Nguema-Affane Senior Advisor to the Executive Director July 27, 2018

Second Review of the Extended Arrangement under the Extended Fund Facility, Request for Waivers of Nonobservance of Performance Criteria and Waivers of Applicability, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Gabon

Abstract

Second Review of the Extended Arrangement under the Extended Fund Facility, Request for Waivers of Nonobservance of Performance Criteria and Waivers of Applicability, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Gabon

1. The Gabonese authorities are thankful to Management and staff for their continued support to their economic recovery program (PRE) supported by the Extended Fund Facility (EFF). Consistent with their commitment under the EFF arrangement, the authorities are taking a wide range of measures to advance reform implementation— albeit with delay at times—to keep the program on track. Faced with increasing resource constraints, the new government established in May 2018 an economic task force responsible for identifying a set of additional adjustment measures to firmly put public finances on a sustainable path, consistent with the objectives of the program. Such measures were adopted in the context of the revised 2018 budget, paving the way for their implementation. In addition, significant progress has been made in clearing arrears. In this light, the authorities request the completion of the second review under the EFF arrangement.

Recent Economic Developments and Program Performance

2. As noted by staff, macroeconomic conditions in Gabon have begun to improve gradually, notably with welcome signs of economic stabilization. Non-oil commodity sectors including mining, forestry, and agribusiness continued to experience fast growth, helping mitigate the effects of the slowdown in the overall non-oil sector. Inflation remains contained while the external position improved. An increase in oil and mineral exports helped to reduce the current account deficit in 2017. At the same time, an increase in foreign direct investments in the agri-business sector helped to improve the capital account. As a result, Gabon’s net foreign assets at the BEAC increased, thereby helping to further strengthen regional external stability.

3. Fiscal consolidation efforts continued in 2017. Although oil production declined, higher prices and exceptional revenues led to higher oil revenues. However, non-oil revenues fell due to weak economic activity and strikes in the tax administration. The introduction of new measures aimed at boosting non-oil revenue mobilization during the last quarter of 2017 helped to avert a more severe deterioration in revenues. Lower revenues and delays in the disbursements of external assistance – which materialized in late December 2017 – led to strong cashflow pressures which complicated budget execution. In the face of limited resource availability, additional cuts to public spending, notably capital expenditures, were made, thereby contributing to more than offsetting the decline in total revenues. As a result, the overall fiscal deficit on a cash basis was almost halved in 2017 to 3.4 percent of the GDP, which made it possible to contain external and domestic borrowing and ensure a reduction in total public debt. Budget execution since the start of 2018 remained difficult with renewed cashflow pressures stemming from a continued underperformance of total revenues.

4. Budgetary pressures and weaknesses in debt management undermined efforts to fully service some external loans and clear arrears in a timely manner, as envisaged at the time of the first review. As described in the staff report, further complications arose in early 2018, materializing into further debt arrear accumulation. Nevertheless, public debt remains sustainable following the significant progress toward rescheduling and clearance of debt arrears, particularly those owed to bilateral and multilateral creditors. The authorities are committed to making similar inroads with regard to arrears owed to commercial creditors. The stock of domestic debt also declined in 2017. In this connection, a new “Club de Libreville”, a payment plan used in the past to clear domestic arrears, has been agreed in April 2018 to settle a large share of domestic arrears to small-and medium-sized enterprises over the next six years.

5. The implementation of the wide array of fiscal reforms is advancing but at slower-than-expected pace, as indicated in the staff report. In particular, progress is being made in strengthening tax and customs administrations, improving public financial management, and enhancing public investment management. The strategy to reduce the wage bill resulted in modest savings in 2017 largely thanks to efforts undertaken to update payrolls and rationalize staff-related expenditure. In addition, the framework to secure timely VAT refunds is being put in place and several measures have been initiated to detect, prevent, and address cases of VAT fraud and led to tax adjustments.

6. Strong measures were taken to firmly put public finances on a sustainable path and to accelerate fiscal reforms. Given the persistent downward trend in total revenue, the authorities took in July 2018 a wide package of fiscal measures to further boost non-oil revenue and contain expenditures. These include reducing the annual wage bill by 10 percent in 2018 through wage cuts and freezes in recruitment, the elimination of one hundred autonomous agencies with their activities reintegrated into regular government ministries, and the streamlining of the costly program of customs duty exemptions. These measures were included in the revised 2018 budget, which has been approved by the Senate. It is the authorities’ belief that they will contribute to further improving the fiscal position. As a contingency measure to better manage fiscal risks, an automatic adjustment mechanism has been set up to adjust public spending, except for social spending, in case non-oil revenue collection underperforms projections.

7. The banking system remains generally sound, but vulnerabilities are rising. NPLs increased and bank lending to the private sector declined further in 2017 and early 2018, reflecting notably stagnant economic activity and elevated domestic arrears. Progress in developing a framework for the resolution of NPLs has taken longer than expected due to financial constraints. Efforts by the authorities to resolve the three distressed public banks are advancing in collaboration with COBAC. A reputable international consultant will be hired this year to develop a resolution plan to minimize the related cost.

8. In terms of program performance, three out of five end-December 2017 performance criteria (PC) were met. Financing constraints were an important factor in missing the PC related to the non-oil primary balance and the continuous PC on external arrears and the three indicative targets on non-oil revenue mobilization, social spending, and domestic arrears. As indicated in the staff report, it is likely that these two PCs and the one on net central bank claims on the government were also missed at end-June 2018. Delays occurred in implementing structural benchmarks (SBs) through end-March 2018 but most related measures have been implemented since then.

Policies for the Medium Term

9. Medium-term prospects remain relatively promising. The large and continuing FDI flows toward agri-business and other nontraditional sectors can help the Gabonese economy to reduce its dependence on oil and governmental activities. At the same time, higher oil prices, as well as recent oil discoveries and the ongoing work for a new fiscal regime for oil, should encourage new investments and contribute to economic activity in the service sector. The largely rural and labor-intensive agricultural and forestry projects could also generate positive spillovers, as reforms to improve the business climate are implemented. Credit expansion is expected to pick up as recovery takes place.

10. The authorities remain strongly committed to the program and intend to speed up reform momentum to strengthen macroeconomic stability and foster economic diversification while further contributing to the regional external stability. They agree with staff that there is a risk of social resistance to the recent policy decisions to contain public spending and that a disorderly implementation of reforms could threaten the achievement of the program objectives. To minimize those risks, they are strengthening coordination between government institutions.

11. Fiscal policy remains the centerpiece of the program. It aims at preserving fiscal and debt sustainability by targeting a reduction in the fiscal deficit in 2018 and a return to an overall fiscal balance and surpluses over the medium term. This progressive improvement of the fiscal position will make it possible to reduce the level of total public debt to below 50 percent of GDP by the end of the Fund-supported program and increase the fiscal space for higher social and investment spending. Given the tight financing constraints the country is still facing, further assistance from international organizations will be critical to financially support the authorities’ macroeconomic and fiscal objectives, including to pay the domestic and external debt.

12. The authorities are committed to timely implementation of the critical fiscal reforms presented in the MEFP. In particular, ongoing efforts to increase domestic revenue mobilization will be sustained with a special focus will be placed on recovering tax arrears and strictly enforcing compliance with tax policy. To provide greater visibility to the creditors and address cash pressures, a new deferred payment that eliminate VAT credits will be introduced in the 2019 budget law. Fiscal reporting of earmarked revenues and corresponding expenditures, and the financial oversight of public entities and departmental agencies will be reinforced. The transparency of public procurement and the efficiency of public investment management will be improved. PFM reforms undertaken since 2015 will be consolidated. The Treasury Single Account will be consolidated through the transformation as TSA subaccounts of all existing government accounts in commercial banks. The predictability and quality of social spending will be improved, with the assistance of the World Bank.

13. The authorities will pursue the implementation of their arrears strategy and pursue the implementation of measures to prevent the accumulation of new domestic arrears. In particular, in addition to strengthening fiscal reporting, cashflow management is being reinforced, with regular meetings of the Government’s Cashflow Committee, and monthly fiscal cash flow plan to ensure no short-term liquidity shortfall.

14. Preserving financial sector stability and ensuring that the financial sector play a leading role in supporting private sector activity remain a top priority in the national and regional authorities’ agenda. Given that the rise of overdue loans to banks is a key financial sector vulnerability, the development of a framework for the resolution of NPLs will be a top priority.

15. The implementation of the structural reforms aimed at bolstering competitiveness and setting the basis for a strong and durable medium-term recovery will continue. Based on the first progress report of the PRE, structural reforms going forward will focus on restoring private sector confidence. These reforms include the completion of the land titling reforms by end-2018, the operationalization of the Arbitration Chamber that was created in April 2018; reducing time and costs pertaining to building permits; strengthening the one-stop-shop centers following their assessment study; and completing the ongoing reform of the labor code with the objective to make it more flexible and increase formal employment in the country.

Conclusion

16. Despite underperforming revenue collection, the authorities remain committed to the objectives of their Fund-supported program and have taken decisive actions to keep it on track. In light of these actions, Director’s favorable consideration of the authorities’ request for the completion of the second review of the program under the EFF arrangement will be appreciated. They also request a waiver of nonobservance for the continuous performance criterion on external arrears accumulation and two end-June performance criteria related to non-oil primary fiscal balance and net central bank claims on the government.