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
1. The Chadian Authorities would like to express their appreciation to Staff, Management and the Executive Board for their continued support to Chad. The Extended Credit Facility (ECF) arrangement has been instrumental in the authorities’ efforts to stabilize the economy following the severe oil and security shocks. The discussions with staff in the context of the 2019 Article IV consultation and Fourth Review under the ECF have shed light on the achievements thus far and the policies needed to further the recovery. The authorities broadly share the thrust of the staff report which gives a fair account of issues at stake.
2. In view of its fragile situation, Chad is still facing a challenging socio-economic environment characterized by heightened security conditions and a humanitarian crisis, which put additional pressures on already constrained public finances. Despite such a context, the authorities have made good progress in reform implementation while contributing to the macroeconomic stability of the CEMAC region. As a result of their efforts supported by the Fund and other development partners, notable achievements have been made in economic recovery both in the oil and non-oil sectors, enhancing the fiscal position and debt restructuring.
3. Going forward, the authorities reiterate their commitment to the objectives of the ECF-supported program. They are determined to step up effort to further supporting economic recovery for a stronger and inclusive growth and increased domestic revenue.
Recent Developments, Program Performance and Outlook
4. Economic activity in 2018 was characterized by higher-than-anticipated oil production and a lower activity in the non-oil sector. Overall GDP growth is estimated at 2.4 percent while inflation stood at 4 percent resulting from price increases in services. The authorities’ prudent fiscal policy in 2018 translated notably into a more comfortable position at the regional central bank (BEAC). As well, improvements in oil exports caused the current account deficit to decline to 3.4 percent from 6.6 percent in 2017.
5. Despite challenges, program performance was satisfactory with all performance criteria (PC) met and corrective measures are being implemented for the indicative targets that were missed on poverty-reducing social spending and on regularizing emergency spending procedures. In addition, out of the six structural benchmarks, two were met, one was partially implemented, one was implemented with slight delays and two are still pending.
6. The authorities share staff’s views on a broadly favorable outlook while being cognizant of the downside risks. The rise in oil production paired with the recovery in the non-oil sector, albeit at a slower pace, bode well for medium term growth. The authorities remain committed to maintaining fiscal discipline regardless of future developments on oil markets while accelerating structural reforms. As well, they will closely monitor security situations and take preventive measures to ensure a peaceful environment conducive for private investment.
Policy and Reform Agenda for the Medium-Term
7. The authorities are determined to enhance macroeconomic stability and to implement their reform program to achieve the overarching goal of a sustainable and inclusive growth. For the period ahead, they will strive to enhance fiscal policy while lifting bottlenecks to the development of the non-oil sector and the diversification of the economy, including addressing infrastructure gaps and improving the business climate, as envisaged under the National Development Plan (NDP).
8. Fiscal policy for 2019 and the medium term will be geared towards ensuring fiscal sustainability through continued improvement in domestic revenue mobilization and greater spending efficiency. This will be needed to create space for key expenditures—including increasing public investment in infrastructure and meeting social spending—and for clearing arrears, in line with the program objectives.
9. To enhance revenue mobilization, the authorities will aim at expanding non-oil revenue through more efficient collection methods by streamlining tax and customs exemptions including on VAT, reforming VAT, corporate income tax and strictly enforcing the legislation on importers. On the other hand, strengthened transparency and strict enforcement of tax collection in the oil sector is expected to better support revenue mobilization. Measures are also being taken, including strengthening the IT system, to improve customs and tax administrations and further increase revenue. Furthermore, the authorities are committed to enhancing fiscal resilience by building buffers.
10. On the expenditure side, the authorities will continue their prudent approach, including through the close monitoring of the wage bill. They will prioritize productive public investment, notably in infrastructure and education and health sectors. The government is also making progress in the clearance of domestic arrears despite pressures on public finances stemming from the fragile security situation.
Public Financial Management
11. Public financial management (PFM) will be enhanced with ongoing efforts to improve efficiency and transparency in public resources management, including measures to strengthen monitoring and reporting, implement CEMAC directives and enhance cash management and the public procurement process. Specific measures encompass: (i) reducing the use of emergency spending procedures; (ii) establishing a cash management plan; (iii) implementing the Treasury Single Account (TSA); and (iv) for capacity building notably in public procurement.
12. Stronger PFM will also require the clearance of government domestic arrears. In this regard, the authorities are determined to adopt by November 2019 a comprehensive clearance strategy for resolving recognized domestic arrears, in line with the program objectives. An audit will help assess the remaining arrears before payment.
13. Liquidity conditions in the banking sector have improved and recourse of banks to BEAC refinancing has declined. Moreover, the strategy of government arrears clearance should help reduce non-performing loans (NPLs) and reinforce banks’ contribution to the recovery. In addition, the authorities are taking steps to address remaining vulnerabilities in the banking system, including by implementing the recommendations of the reports of the external consultants on the review and the reorganization plans for the two major public banks. The authorities will also work closely with regional institutions, BEAC and COBAC, to deepen the interbank money market. Progress will also be made in advancing financial inclusion, including through supporting the development of mobile banking.
14. The authorities are grateful to the IMF and development partners for the increased technical assistance (TA) that has accompanied the implementation of the ECF arrangement and helped improve ownership. TA has covered tax policy and domestic revenue mobilization, oil revenue projection and management, non-oil revenue mobilization, debt management, the reform of the Treasury and PFM. Going forward, Chad being in fragile situation, the authorities are requesting long-term experts, notably in the area of PFM, to sustain the impact of capacity development and buttress the coordination of TA and reform programs.
15. The authorities will pursue the implementation of their structural reform agenda. Priority areas include enhancing transparency and governance and improving the business climate. To this effect, they will facilitate the creation of SMEs by rationalizing related procedures. They will also pursue financial sector reforms aimed at improving the access of businesses to financing. On the governance front, the authorities will forcefully implement the United Nations Convention against Corruption (UNCAC) approved by the national assembly in 2017, as well as the new anti-money laundering law in their continued efforts to further improve the business climate.
16. To foster non-oil growth, it is imperative that the authorities be able to invest in the electricity sector, which requires significant resources. In this vein, they call on development partners to avail the necessary concessional financing given the zero limit on non-concessional borrowing under the ECF-supported program. A number of actions are also underway to enhance transparency, especially in the oil sector. These include the recent publication of oil contracts and revenues, notably those earmarked for debt servicing, as well as the publication of the financial statements of the state-owned oil company, Société des Hydrocarbures du Tchad (SHT).
The authorities have made commendable progress in the implementation of sound policies and reforms to stabilize the economy and support recovery amid a difficult security environment. Performance under the ECF arrangement continues to be satisfactory. The authorities are cognizant of the challenges that still lie ahead, including the imperative of increasing domestic revenue to finance public investment and diversify the economy away from oil dependency. In view of Chad’s appreciable program performance in a difficult environment and the authorities’ continued commitment to the objectives of the program, we would appreciate Executive Directors’ support for the completion of the Fourth Review under the Extended Credit Facility arrangement and the request for modification of performance criteria