Third Review Under the Extended Credit Facility Arrangement, Request for Waiver of Nonobservance of Performance Criterion and Financing Assurances Review-Press Release; Staff Report and Statement by the Executive Director for Chad
1. The Chadian authorities would like to thank the Board, Management and Staff for their support in recent years. The ECF-supported program adopted in July 2017 is helping the economy progressively recover from the effects of the sharp oil price decline that started in 2014. Discussions during staff last mission in N’Djamena have highlighted major achievements of the reform agenda, including in furthering fiscal consolidation and improving debt sustainability. The authorities broadly share the thrust of the staff reports as a fair account of progress made thus far and challenges still facing the economy.
2. Chad’s macroeconomic situation has improved owing to the authorities’ strong adjustment efforts paired with a rebound in oil production in 2018. They remain committed to moving ahead with their agenda of strengthening the non-oil GDP, improving non-oil revenue and keeping external debt in check. On the regional front, Chad has made a significant contribution, including in the fiscal burden sharing for enhancing the CEMAC region’s stability. The authorities are cognizant that heightened security conditions, delays in donors’ support and in the implementation of the regional stabilization program, and oil price volatility represent major drawbacks to the ongoing recovery. In this context, the Fund’s support and technical assistance in designing the policy responses are instrumental for enhancing the economy’s resilience.
Recent Developments, Program Performance and Outlook
3. Economic activity in 2018 shows signs of an upturn and is sustained by a rebound in the oil sector and a good performance of non-oil activities albeit less than expected. Overall, GDP growth is projected to reach 3.1 percent in 2018, following two consecutive years of contraction; while non-oil GDP is forecasted at 1 percent. Due to high prices in services and an uptick in water utility rates, inflation is projected to rise to 2.5 percent in 2018 and 3 percent in the medium-term. The fiscal position has continued to improve because of both increasing non-oil revenue and stronger oil revenue and a spending restraint, especially wages. The current account deficit has also bettered, falling from 5.7 percent in 2017 to a projected 4.2 percent in 2018, owing to an increase in oil exports. Chad’s external position has also benefited from enhanced net foreign assets (NFA) at the BEAC.
4. Program performance was good amid many challenges. All but one performance criteria at end-June 2018 were met. The authorities request a waiver for the continuous PC on non-accumulation of external arrears, which was temporarily missed by a very small margin due to technical difficulties. The authorities have implemented the important structural benchmark related to the publication of a quarterly note on the oil sector, including detailed information on debt service to Glencore. The authorities have also immediately made steps to implement the indicative targets (IT) and structural benchmarks that were missed, some for capacity constraints. In this regard, the authorities have selected two consulting firms and the review is underway for reorganizing the two public banks. As well, upon the completion of the ongoing audit of unverified arrears, a domestic arrears clearance strategy will be adopted by the government. The authorities are committed to stepping up efforts to implement their reforms agenda going forward.
5. The authorities are optimistic about the outlook. Ongoing reforms in the non-oil sector should boost the recovery underway; coupled with the positive prospects of the oil sector, they should support economic growth expected to reach 4.6 percent in 2019 and 5.2 percent on average in the medium-term. The overall climate should also improve as the long period of strikes in the public sector comes to an end. The domestic outlook should be further enhanced by the positive developments in the region, notably with regional growth expected to improve to 2.3 percent in 2018.
Policies for the Remainder of 2018 and the Medium-Term
6. Despite the deteriorated security conditions and the potential fiscal impact, the authorities are committed to pursuing fiscal consolidation. The 2019 budget targets an increase in non-oil revenue to 8.3 percent of non-oil GDP, while the non-oil primary deficit is expected to reach 4.5 percent of non-oil GDP. Thus, their efforts will be geared on further mobilizing non-oil revenue to support public investments and social spending, clearing domestic arrears and bringing debt on a sustainable path. On the revenue side, they are optimistic that measures taken in the 2018 budget notably efforts to optimize oil receipts and tax compliance in a context of increased production, will substantially improve domestic revenue mobilization. In the non-oil sector, measures will include reducing tax exemptions and improving collection of personal income tax and corporate income tax. The implementation of FAD Technical Assistance recommendations and the merge of DGI and DGDDI databases to enhance tax compliance will yield additional revenue. On the expenditure side, efforts will aim at a higher budget execution while ensuring a strict control of the wage bill within the program limits. The envisaged increase in that regard include a partial restoration of bonuses and benefits cut earlier this year and new civil service and security hires. The authorities will also make steps to reduce the cost of their domestic financing by limiting short term maturity T-bills and reducing public banks’ exposure to the government at the same time. These efforts will go hand in hand with enhanced public communication and transparency.
7. Going forward, the authorities are committed to making decisive steps to significantly improve fiscal governance with the view to ensure fiscal sustainability. They will target important areas including: (i) strengthening non-oil revenue mobilization through streamlining exemptions and increasing revenue from VAT; (ii) improving public financial management; and (iii) implementing a transparent strategy for domestic arrears clearance. Regarding non-oil revenue, the authorities’ target is about 9 percent of non-oil GDP by 2020. The list of all exemptions will be published and streamlined, including those granted in the oil sector. Furthermore, a provision of the 2019 Finance Act recently submitted to Parliament will remove exemptions that are not economically justified, and a technical committee will be established within the ministry of finance for monitoring and preventing automatic renewals. Building on recent TA, the authorities are also considering implementing an action plan to raise the VAT revenue, which represent about 1 percent of non-oil GDP. Tax and custom administration will be enhanced with computerized services for securing revenue. As regards arrears, the completion of the ongoing audit will inform the elaboration of a clearance strategy.
The authorities are also committed to making efforts to improve PFM, including through better controlling the spending chain to avoid the accumulation of arrears and strengthening transparency in procurement management. In particular, the authorities intend to address the persistent problem posed by the use of DAO (Dépenses Avant Ordonnancement) by issuing a decree limiting its use.
8. The authorities take note of the assessment of the new DSA that Chad’s risks of external and overall debt distress are high. They are confident that their actions underway, including in domestic revenue mobilization will help improve debt ratios, especially the debt-to-revenue ratio – which breaches its threshold under the baseline scenario. As well, the envisaged strategies to emphasize long term maturities on the domestic market and to clear arrears should contribute to reduce total public debt vulnerabilities.
The authorities are strongly committed to debt sustainability. They intend to build on Fund’s technical assistance to develop a Medium-Term Debt Strategy (MTDS) and enhance debt management capacity. The Glencore debt restructuring agreement concluded in June 2018 was a milestone; the authorities will continue to maintain this favorable development by relying on concessional financing going forward.
9. The financial system has bettered as a result of the authorities’ efforts to address public banks’ vulnerabilities. External consultant firms have been selected to review the financial situation of two banks (CBT and BCC) and prepare a reorganization plan; reports will be shared by end February to the IMF staff and the COBAC as planned. The authorities remain confident that the reforms in the sector will help improve banks’ ratios and step up their financial intermediation role with limited risks. As regards the third bank, BAC a recapitalization has been decided and a strategic plan submitted to COBAC.
Monetary Policy and Regional Stabilization Strategy
10. The Chadian authorities have demonstrated strong leadership in implementing the regional stabilization strategy. The strategy adopted in 2016 and reaffirmed by CEMAC members in October 2018 in N’djamena emphasizes the adoption of a Fund-supported program, a swift recovery of international reserves and advocates policies aiming, among other objectives, to foster compliance with foreign exchange regulation. The authorities have provided all the contracts and agreements with oil companies to the relevant regional bodies in their efforts to enforce foreign exchange regulation. Going forward, the authorities are committed to continue to conduct policies that support the stability of the regional financial and the monetary arrangement, including by: (i) ensuring that all public entities repatriate and surrender all their forex receipts to resident banks, and (ii) communicating to the CEMAC Commission by end-2018, Chad’s 2019-21 convergence plan that is consistent with the ECF arrangement and the regional convergence framework, including external arrears clearance. These measures and others are part of the regional strategy for crisis exit.
11. The authorities are well aware of the need to bolster structural reforms for supporting the non-oil economy and increasing the overall economic resilience. Their actions will emphasize improving the business climate for the development of the private sector. In particular, they will step up efforts to strengthen governance by fighting corruption. In this vein, the authorities are committed to the full implementation of the recently ratified United Nations Convention Against Corruption (UNCAC). In addition, they are in the process of developing legislation to implement the asset declaration regime for public officials. An ongoing assessment under the Extractive Industries Transparency Initiative (EITI) should also contribute to increase transparency and oversight in the oil sector. Finally, the implementation of the National Development Plan (NDP) is progressing well and should help secure key public investments and private sector participation to spur broad-based growth and reduce the dependency on oil.
12. Since the sharp fall in oil price started in 2014, the Chadian authorities have embarked on an adjustment program to stabilize the macroeconomic situation. The ECF arrangement concluded in 2017 has provided an appropriate anchor to help the authorities address the challenges facing the economy and exit the crisis. The strong reform agenda paired with the CEMAC’s regional stabilization strategy in a conducive environment of rebound in oil production has started to bear fruit. Along a good program performance, macroeconomic stability is being enhanced with efforts in fiscal consolidation and external debt restructuring. Going forward, the authorities will further strengthen fiscal consolidation while stepping up efforts on structural reforms to advance the development of the non-oil economy and reduce the dependency on oil.
13. In view of the good performance and the authorities’ continued commitment to the objectives of the program, we would appreciate Executive Directors’ support for the completion of the third review under the ECF arrangement and for the authorities’ request for a waiver for non-observance of a performance criterion.