Chad:Staff Report for the 2019 Article IV Consultation, Fourth Review Under the Extended Credit Facility Arrangement, Request for Modification of Performance Criteria, and Financing Assurances Review—Debt Sustainability Analysis

Staff Report for the 2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Chad

Abstract

Staff Report for the 2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Chad

Public Debt Coverage

1. State and local debt has been added to the coverage of public debt. As in the previous DSA, coverage includes the central government, as well as state guaranteed external debt owed by the public oil company “Société des Hydrocarbures du Tchad” (SHT) (Text Table 1). This scope encompasses all public external debt; other public sector entities (including regions and other state-owned enterprises) do not have access to external financing. The Ministry of Finance plans to complete a census of public sector enterprises by the end of the year in order to assess the full amount of their outstanding domestic borrowing. Staff will use the findings to include SOE debt in the DSA.

Text Table 1.

Chad: Coverage of Public-Sector Debt and Design of Contingent Liability Stress Tests

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

2. The contingent liability stress test accounts for vulnerabilities associated with non-guaranteed state-owned enterprises (SOEs), unaudited domestic arrears, and financial markets (Text Table 1). Contingent liabilities from financial markets are set at 5 percent of GDP, which represents the average cost to the government of a financial crisis in a low-income country since 1980. The contingent liability stress test is customized to include domestic arrears that could potentially be validated by the ongoing audit. While there is significant uncertainty regarding these arrears, the size of the stress test is set at 8 percent, in addition to the standard amounts for SoEs’ debt (2 percent of GDP) and financial market (5 percent of GDP).

Table 1.

Chad: External Debt Stock 2015–20191

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Sources: 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.

Background

A. Evolution and Composition of Debt

3. Chad’s external public and publicly guaranteed (PPG) debt burden increased considerably over the past decade mainly on account of external commercial borrowings related to oil. 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 were the primary reason for reduced revenues available to repay oil sales advances. This debt has since been restructured twice, most recently in early 2018, which has considerably reduced its burden. At end- 2018, outstanding PPG external debt stood at about $2.6 billion (27 percent of GDP). Chad’s CFAF-denominated debt held by the regional central bank (BEAC), the regional development bank (BDEAC), and bilateral creditors in the currency union (Republic of Congo, Equatorial Guinea, and Cameroon) amounts to 9.9 percent of GDP. It is not included in external debt, which is calculated on a currency basis.

4. 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 87 percent in 2008 to 28 percent in 2018, while the share of commercial debt, which was virtually non-existent in 2008, is now trending down from a peak in 2017 of 54 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 2). Consistent with the ECF arrangement, external debt is defined on a currency basis.

Text Table 2.

Chad: Domestic Debt Stock 2015–2018

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Source: Chadian authorities

Includes advances that were consolidated in 2017.

Issued through banks’ syndication

Auctionned in regional securities’ market.

Legal commitments, standing payment orders, and accounting arrears.

5. Domestic public debt has begun to decline in recent years (Text Table 3).2 Following a peak in 2015, debt to the BEAC was restructured and Chad stopped borrowing from the BEAC. In addition to the debt owed to BEAC (33.7 percent of total debt), some debt denominated in local currency is held within the CEMAC region, including about 8.9 percent of total debt owed to official bilateral partners and BDEAC, and in the form of securities that could be held by non-resident banks. Since 2017, domestic debt has been declining as the authorities aim to loosen the bank-sovereign nexus and reduce domestic arrears.

Text Table 3.

Chad: Macroeconomic Assumptions Comparison Table

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Sources: Chadian authorities and IMF staff estimates and projections.

6. External payment arrears accumulated in 2016 and in 2017 but were reduced considerably in 2018. Due to 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 creditors (Mega bank from Taiwan province of China). At end-2017 about $102 million (about 1 percent of GDP) remained outstanding, mainly to bilateral creditors. The authorities have since reduced this stock to $63 million—particularly to the Rep. of Congo (about $55 million)—by paying the amount owed to the Islamic Development Bank and through a rescheduling agreement with Libya and India. Active discussions are underway to address all outstanding arrears, including with Angola, Equatorial Guinea, the Republic of Congo, the European Investment Bank, and Mega Bank. The authorities have taken concrete steps to prevent the further accumulation of arrears—including measures to improve coordination among relevant agencies and reactivate an escrow account for the payment of external debt at the BEAC.

B. Macroeconomic Forecast

7. The DSA’s baseline scenario reflects policies and financing assumptions underlying the ECF arrangement and medium-term projections that reflect the Glencore debt restructuring. The growth projection has declined compared to the previous DSA (December 2018) from 4.6 and 6.1 percent in 2019 and 2020 respectively to 2.4 and 5.5 percent. The non-oil economic recovery is expected to be slower than originally projected due to the persistent impact of legacies from the crisis. The outlook assumes that the ongoing revenue-led fiscal consolidation will continue over the program horizon at a gradual pace and that spending control would be maintained. Export growth in 2019 is similarly expected to be weaker than previously expected despite sustained oil production because of a lower oil price forecast. Oil production is expected to continue to increase in the medium term, leading to higher oil revenues, higher exports and overall GDP growth (Figure 3).3 The baseline scenario assumes full clearance of external arrears in 2019 and gradual repayment of domestic arrears.

Figure 1.
Figure 1.

Chad: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2019, 258; 10.5089/9781513509600.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals, When a stress test with a one-off breach happens to be the most exterrne shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.The tailored commodity price stress test presented here does not account for the contingency mechanisms in the Glencore debt as Text Figure 1 does.
Figure 2.
Figure 2.

Chad: Indicators of Public Debt Under Alternative Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2019, 258; 10.5089/9781513509600.002.A003

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any], while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Chad: Drivers of Debt Dynamics—Baseline Scenario

Citation: IMF Staff Country Reports 2019, 258; 10.5089/9781513509600.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.

8. Financing assumptions have been updated based on most recent information. Externally financed investment has remained unchanged, and the discount rate is kept at 5 percent over the forecast horizon. The grant element of new borrowing is assumed to decline gradually over the forecast horizon. With regards to domestic financing, based on a recent shift towards short term debt, the share of T-bills over the forecast horizon has been revised up. Reflecting this shift, average interest rate on domestic debt has been revised upward slightly.

9. The forecast is broadly realistic. The projected 3-year fiscal adjustment is in line with historical data on LIC adjustment programs. Continued fiscal prudence and efforts to raise non-oil revenues are expected to ensure a sustainable adjustment. The fiscal multiplier tool suggests that growth in 2020 could be optimistic given the projected consolidation. However, staff expects a catalytic effect on growth from the program outside the immediate fiscal impulse. Private sector confidence is expected to be boosted by the improvement in fiscal health, improvement in budget execution, progress is identifying and clearing domestic arrears, and the authorities’ ongoing efforts to implement the national development plan. This is consistent with expected private sector driven growth, led by private investment in the oil sector, as shown in Figure 4. New oilfield development projects have boosted expected private investment, while public sector investment remains low. The recent privatization of the cotton public enterprise is likely to help strengthen the private sector’s contribution to growth.

Figure 4.
Figure 4.

Chad: Realism Tools

Citation: IMF Staff Country Reports 2019, 258; 10.5089/9781513509600.002.A003

C. Country Classification and Determination of Stress Test Scenarios

10. The composite indicator (CI) based on April 2019 World Economic Outlook (WEO) projections and an update of the CPIA index to 2019 levels indicates weak debt carrying capacity for Chad. The CI combines the CPIA score, external conditions as captured by world economic growth and country-specific factors. The April 2019 data indicate weak debt carrying capacity, reflecting mainly a low CPIA, very low remittances, and a low level of foreign reserves (Text Table 5).

Text Table 4.

Chad: CI Score

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Source: IMF staff calculations. The CI cutoff for medium debt carrying capacity is 2.69.

11. The debt sustainability analysis relies on six standard stress tests and a customized oil price shock stress test (Figures 1 and 2 and Tables 3 and 4). The customized oil price shock entails oil prices lower than the baseline by 38 percent between 2020 and 2025 and has been calibrated to account for contingency mechanisms under the Glencore debt contract which limit the negative effect of the shock in the near term (Text Figure 1).4 Debt service under the contract includes a mandatory amortization and interest payment plus a cash sweep component that falls to zero as the Doba oil price hits a certain price. The contract also allows Chad to shift out some of the mandatory payments as prices fall. In 2020 debt service will rise as the grace period on mandatory amortization expires under the contract. The contingencies significantly alleviate the debt service burden over the next few years, but moderately raises it starting in 2023. By 2029, the debt service level returns to the baseline as the Glencore debt is retired.

Text Figure 1.
Text Figure 1.

Chad: Debt Service-to-Revenue Ratios

Citation: IMF Staff Country Reports 2019, 258; 10.5089/9781513509600.002.A003

Sources: Chadian authorities; IMF staff calculations.
Table 2.

Chad: External Debt Sustainability Framework, Baseline Scenario, 2008–2039

(In percent of GDP, unless otherwise indicated)

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Source;: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r- g – ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, andp = growth rate of GDP deflator in U.S. dollar terms.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Chad: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008–2039

(In percent of GDP, unless otherwise indicated)

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Sources: Ccumv authorities; and staff estimates and projections,1/ Coverage of debt; The central, state, and local government?, central bank. Definition -of external debt ii Currency-based.2/ The underlying Pv” of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is- defined as the sum of interest and amortization of medium and long-term, and short-term debt4/ Gross financing need is defined as the primary deficit plus deM service plus the stock of short-term deft at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10-years.
Table 4.

Chad: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–2029

(In percent)

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Sources: Country authorities; and staff estimates and projections.1/ A bold value indicates a breach of the threshold.2/ variables include real GDP growth. GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.3/ Includes official and private transfers and FDI.
Table 5.

Chad: Sensitivity Analysis for Key Indicators of Public Debt, 2019–2029

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Sources: Country authorities; and staff estimates and projections.1/ A bold value indicates a breach of the threshold.2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.3/ Includes official and private transfers and FDI.

Debt Sustainability

A. External Debt Sustainability

12. Public external debt is projected to gradually decline over the forecast horizon under the baseline scenario. Under the baseline scenario the present value of PPG external debt to GDP ratio, the present value of PPG external debt to exports ratio and the debt service to exports ratio are well below their thresholds (Figure 1). The debt service to revenue ratio is expected to drop below its threshold of 14 percent in 2019 and rise moderately above it over the medium term before dropping significantly as the Glencore debt matures. The projected path of this indicator has improved relative to its path in the last DSA.

13. Under stress tests, the thresholds are breached for all indicators. By increasing the future debt servicing burden, the Glencore debt contract raises the present value of PPG external debt, an effect that is most pronounced in the historical scenarios. Under the shock scenarios, the exports shock stress tests produce the most extreme scenario for all indicators except the debt service to revenue ratio, for which the commodity shock stress test is the most extreme. Under the export stress test, the threshold of the present value of PPG external debt-to GDP ratio is breached from 2021 until 2024. The present value of PPG external debt to exports ratio is breached from 2021 until 2026 and debt service to exports is breached from 2021 onwards.

B. Public Debt Sustainability

14. The benchmark for public debt is breached under the baseline. The PV of total public debt-to-GDP ratio projected at end-2019 stands at 41 percent, which is about 6 percentage points above the 35 percent benchmark level associated with heightened public debt vulnerabilities with a weak debt carrying capacity. The indicator achieves a below-threshold level by 2022 under the baseline scenario.

C. Risk Rating and Vulnerabilities

15. Chad’s debt sustainability is less vulnerable to oil price fluctuations than before its debt restructuring. This reflects contingency mechanisms under the new Glencore debt contract, which allow lower external debt service to Glencore when oil prices are lower. As demonstrated by the recent oil price decline, the impact of a commodity price shock on debt sustainability is now limited. In 2019, external debt service to Glencore is now expected to be around 64 percent of what was scheduled before oil prices dipped late last year. Likewise, in a lower oil price scenario that accounts for the contingency mechanisms, the debt service to revenue ratio remains close to the baseline (Text Figure 1).

16. Chad is at high risk of external debt distress and high overall risk of public debt distress. Debt vulnerabilities have, however, declined significantly since the beginning of the program. 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 terms. The projected path of the debt service to revenue indicator has improved significantly since the restructuring and in fact is better at the baseline oil price than at the higher price of the third review. Nonetheless, it remains moderately higher than the threshold under the new DSA framework. As such, Chad’s external debt is assessed to be at high risk of debt distress. Additionally, the overall risk of debt distress is high based on the breach of an external debt sustainability indicator threshold and total public debt residing above its benchmark level. Mechanically, the CFAF-denominated debt held by the BEAC, BDEAC, and bilateral creditors would weaken the external debt sustainability indicators if the external DSA were done on residency basis. These claims do not face currency risk, and institutional ties with the creditors are relatively strong. Nonetheless, some difficulties may still be faced in restructuring such debt if necessary, and the risks associated with the rollover of securities held by non-resident (the scale of which is unclear) remains even if it is limited.

17. Significant efforts are warranted to ensure debt remains on a downward trajectory. Elevated vulnerabilities reinforce the need to maintain prudent fiscal policy including on external and domestic borrowing. While progress has been made recently to reduce the stock of external and domestic arrears, much more attention is needed going forward to clear the remaining arrears. Finally, continued effective inter-agency coordination to strengthen the capacity to record and monitor public debt is very important to better manage public debt.

18. The authorities remain committed to improving Chad’s debt sustainability and consider that improving the non-oil economy’s growth performance is key in this regard. A major roadblock for the authorities’ well-placed emphasis on developing the non-oil economy is the growing difficulty of attaining concessional borrowing. The authorities are convinced that the economic returns to projects like electrification and transportation are high enough to justify non-concessional terms and would in turn help further improve debt sustainability. However, their commitment to the program and conservative debt management remains the priority.

1

Chad’s debt carrying capacity was rated weak according to the composite indicator (CI) based on the October 2018 WEO and the 2017 CPIA index.

2

State and local debt amounts to less than 0.1 percent of GDP.

3

Note that the historical changes in Figure 3 are driven by the crisis and debt restructuring.

4

The fourth panel of Figure 1 presenting debt service-to-revenue ratios under standard alternative scenarios does not include the Glencore debt contract contingency mechanisms.

Chad: Staff Report for the 2019 Article IV Consultation, Fourth Review under the Extended Credit Facility Arrangement, Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Chad
Author: International Monetary Fund. African Dept.