Recent Economic Developments and Program Performance

3. The Gabonese economy is recovering albeit at a pace slower-than expected. Economic activity picked up in 2018, driven mainly by buoyant agricultural and mining sectors. However, overall growth in 2018 will be lower than previously projected at around 1.2 percent, owing to under-execution of the public investment program and shortfalls in oil production. Inflation increased slightly above the regional convergence criterion of 3 percent at end-September 2018 and will increase to 4 percent by end-year due to higher food prices following the elimination of related subsidies and higher fuel prices reflecting the pass-through of rising international oil prices. The trade balance has improved aided by higher oil prices despite shortfalls in oil and manganese export volumes.

4. Fiscal performance at end-September 2018 exceeded expectations. Sustained domestic revenue mobilization resulted in improved non-oil revenue performance. However, expenditures were also above projections due to the costs of the legislative and local elections held in October 2018 and delays in the rationalization of public agencies. Nevertheless, the non-oil fiscal deficit at end-September 2018 settled 0.4 percentage points of non-oil GDP lower than programmed. Furthermore, the non-oil fiscal deficit could outperform the program’s target by 0.7 percentage points, should the current fiscal stance be maintained throughout the last quarter of 2018. This will represent a total adjustment of 4.6 percentage points of non-oil GDP since the beginning of the program, which is a significant contribution to efforts in preserving external stability in the CEMAC region.

5. Public debt will decline to below 60 percent of GDP in 2018 as it continues to be serviced and arrears are being repaid. At times liquidity constraints led to the occurrence of some short-term arrears, both external and domestic. Nevertheless, the strategy for the settlement of public debt arrears as presented in the second review is being implemented. In particular, all external debt arrears to official creditors have been repaid and external arrears on non-guaranteed commercial loans should be fully settled by end-December 2018. The repayment of the domestic debt arrears to the “Club de Libreville” creditors has started, consistent with the agreed repayment schedule. A contract with the firm selected to audit domestic arrears has been signed and the report of the audit should be available by end-April 2019.

6. Fiscal reforms to improve domestic revenue mobilization and rationalize expenditure progressed in the second half of 2018. In particular, efforts to broaden the tax base continued, with among others, the identification and regularization of the new VAT taxpayers, and the elimination of exemptions to companies holding public procurements and other government contracts. Moreover, efforts to collect of outstanding taxes picked up, but liquidity constraints of targeted companies limited progress in this area. At the same time, several key measures introduced in the revised 2018 budget law to reduce expenditures, notably the wage bill – such as the downsizing of the Presidency and the consolidation of public agencies – are being implemented. As regard fiscal transparency, a unit tasked with financial oversight of public entities has been created and will be fully operational in 2019.

7. Progress is also being made in improving cash management with a view to preventing resurgence of debt arrears. The authorities welcomed the Fund TA in November 2018 whose recommendations are already being implemented, notably the development of a cash flow plan for 2019. The consolidation of the treasury single account (TSA) has started with the closure of all accounts of public entities at the state depository corporation (Caisse des dépots et des consignations, CDC) and the transfer of their balances to the TSA. The consolidation of the TSA will be completed by end-March 2019 with the closure of all public accounts opened with commercial banks.

8. Monetary conditions continue to improve as money supply grew by 23 percent, supported essentially by rising private sector deposits. The financial system remains stable and profitable despite the deterioration of asset quality. The resolution of public banks is advancing, with all three banks now under liquidation following the recent decision by the regional supervisory body COBAC to withdraw the operating license of the development bank.

9. As noted above, theimplementation of the program has improved since the last review. Five out of seven indicative targets for end-September 2018 were met. The two indicative targets on the stock of domestic arrears and priority social spending were missed due mainly to strong liquidity pressures and low execution of investment budget in priority sectors. The continuous performance criterion (PC) on external arrears was also missed following the emergence of small amount of external arrears, which has been cleared in early December 2018. The Gabonese authorities are requesting a waiver for the nonobservance of that PC. Most of the structural benchmarks have been observed albeit a few of them with delays. As indicated in the staff report, the authorities set up a technical committee tasked with closely monitoring the Fund-supported program to improve program implementation and coordination across the government.

Policies for 2019 and beyond

10. The recovery is expected to accelerate, and growth will reach 3.1 percent in 2019, as the oil production outlook is improving and activity in forestry, mining and agriculture sectors is projected to remain strong. The economy will also benefit from the launch of several PPP projects. Inflation is expected to decline from 4 percent in 2018 to 3 percent in 2019. The medium-term prospects remain broadly promising, supported by continuous flows of FDI in the non-oil sector and effective implementation of the authorities’ ambitious reform program to address the challenges facing the Gabonese economy. As indicated in their Memorandum of Economic and Financial Policies (MEFP), the authorities plan to maintain the policy stance and reforms agreed under the EFF arrangement to strengthen macroeconomic stability, promote strong, inclusive and private sector-led growth, while contributing to the regional external stability.

11. The authorities remain committed to pursuing fiscal consolidation and addressing weaknesses in the public financial management to deliver quality adjustment and avoid further debt accumulation. They submitted a draft 2019 budget law to the Parliament which targets a lower fiscal deficit of 4.5 percent of nonoil GDP, as measures initiated in 2018 become fully effective and new measures are introduced. The mobilization of domestic resource and rationalization of expenditures remain top priorities in the fiscal program. To this end, initiatives to streamline and control tax and customs exemptions will continue with a view to ensuring that only exemptions with legal basis remain. On the expenditure side, measures to further reduce nonessential expenditure and the wage bill will be implemented. These include the continued consolidation of public agencies and the formalization of organizational frameworks for the administrative services. These efforts will be supported by the World Bank’s technical assistance. As in the revised 2018 budget law, the draft 2019 budget includes an automatic mechanism to adjust expenditures in case of revenue shortfalls.

12. The fiscal reform agenda for 2019 places a special emphasis on improving fiscal transparency and governance, notably in oil and mining revenue and public financial management. In particular, the authorities will step up their efforts to submit the country’s application to the EITI in 2019. Moreover, the law creating the Gabonese Strategic Investment Fund (FGIS) will be amended to allow participation of the government official representatives on the FGIS Board of Governors. Moreover, the transposition of CEMAC directives on public financial management into the Gabonese legislation will continue.

13. The authorities are committed to improving the execution and reporting of social spending during fiscal consolidation. They recognize that the low execution rate of social spending compared to program target needs to be addressed and, in this vein, they are accelerating social spending by end-2018. That said, as the staff report notes, the authorities believe that the definition of social spending do not reflect accurately the efforts made toward social protection. Therefore, they will review the coverage of that program indicator by including various benefits already made to the most vulnerable groups of the population and improve targeting of poor based on the findings of the 2017 Household Survey, with the assistance of the World Bank. The monitoring of social expenditure execution will benefit from the ongoing modernization of public expenditure management.

14. The strengthening of the financial system will continue. First, the authorities recognize that an effective clearance of domestic arrears will improve corporations’ cash flow positions, which in turn will help bring NPLs down. Likewise, the authorities plan to convert part of its domestic debt into marketable securities. A strategy for resolving NPLs will be prepared by end-Mach 2019. The liquidation of the public banks will be expedited with the assistance of a recently-created liquidation support group whose members, to be appointed by end-January 2019, will represent all stakeholders and must not present any conflict of interest.

15. The authorities maintain their intention to implement structural and institutional reforms aimed at further advancing economic diversification and promoting sustainable and inclusive private-sector-led growth. Besides structural reforms in the fiscal and financial sector, their reform program focuses on making the financial sector a major player in bolstering private sector development, notably for the small- and medium-sized enterprises (SMEs), and strengthening the judicial system, with the launch of the Arbitration Division, the training of specialized judges and the creation of commercial courts.

Conclusion

16. The Gabonese program performance has improved since August 2018 with the implementation of the bold adjustment measures introduced in the revised 2018 budget. The authorities remain committed to the program’s objectives and recognize that adjustment efforts need to be sustained to preserve fiscal sustainability and external stability. In particular, they are determined to pursue policies and reforms aimed at strengthening macroeconomic stability and reducing dependence on oil by unlocking growth potential in the nonoil sectors, with the assistance of the Fund and other developments partners. In light of the satisfactory program performance, including through recent corrective measures, and the authorities’ resolve to pursue their macroeconomic and structural transformation objectives, Directors’ favorable consideration of the authorities’ request for the completion of the third review under the EFF will be appreciated.