Abstract
Selected Issues
Non-Oil Growth Impediments in Chad: Crisis Legacies and Structural Weaknesses1
Chad, which became an oil producer in the early 2000s, was strongly impacted by the 2014/15 oil price shock. After three consecutive years of recession, signs of stabilization became evident in 2018, and Chad is gradually recovering. However, non-oil growth is still weak, and non-oil GDP is far from having recovered to its pre-crisis level. It has become apparent that Chad’s economic activity is being held back relative to other Sub-Saharan African countries. This chapter explores non-oil growth impediments in Chad to better understand why the Chadian economy has not sufficiently rebounded from the crisis. It discusses how the economy is held back by crisis legacies such as high public debt and a fragile banking sector and how Chad continues to face long standing structural weaknesses which hamper potential growth. The chapter ends with a discussion of how Chad’s economic potential will require reforms to address those weaknesses to foster economic diversification.
A. Background and Recent Developments
1. Chad is a low-income fragile country with substantial and multifaceted development challenges. Chad is one of the poorest and least developed countries in the world, ranking 186th on the Human Development Index in 2017. It faces a difficult geographical and geopolitical environment; it is the 5th largest country in Africa, landlocked, crossed by the Sahara, and has a very low population density. The security and humanitarian situations are also challenging given the security tensions along the border areas, serious terrorist threats particularly in the Lake Chad region, and given that Chad hosts the most refugees (on a per capita basis) in Africa.
2. Chad became an oil producer in the early 2000s and although the onset of oil production and exports led to some improvements in development indicators, the gains of the last 15 years were not permanent. As Chad started to produce and export oil in the early 2000s, GDP growth jumped, GDP per capita and development indicators improved markedly. However, the increase in oil production and related government revenues did not translate into higher growth enhancing public investment, critical for long-term growth. Instead, the private sector became increasingly dependent on public expenditure and the overall non-oil sector more vulnerable to developments in the oil sector. Using the synthetic control method, a World Bank study showed the increase in GDP per capital could not be sustained into permanent higher GDP per capita levels.2 Furthermore, as Chad became an oil producer, export diversification declined (Figure 1).
Chad: Background
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: HDI, WEO and IMF staff calculations.Chad: Background
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: HDI, WEO and IMF staff calculations.Chad: Background
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: HDI, WEO and IMF staff calculations.3. More recently, Chad was hit by the 2014/2015 oil price shock, which had a severe and lasting impact on the Chadian economy. The considerable contraction in oil revenue between 2014 and 2016, as well as the heavy debt service burden of external commercial debt, primarily debt to Glencore, necessitated dramatic spending cuts, leading to an adjustment in the non-oil primary deficit of almost 12 percentage points of non-oil GDP in two years. This adjustment, along with a large domestic arrear accumulation, had set in motion a vicious cycle of contraction in non-oil economic activity, non-oil revenue, and government spending.
4. Signs of economic stabilization, particularly on the fiscal front, emerged in 2017 and continued in 2018. After three years of contraction between 2015 and 2017, non-oil growth returned into positive territories, with modest growth in 2018 which is expected to slowly firm up. Oil activity also improved in 2018 following two years of contraction. On the fiscal front, after bottoming out in mid-2017, non-oil revenues increased markedly, notwithstanding the decline in late 2018. Oil revenues also improved as oil production increased and the Glencore debt service was reduced following its restructuring. The restructuring significantly reduced debt vulnerabilities and included features to accelerate and decelerate debt service depending on the availability of oil receipts.
5. Despite these recent encouraging developments in the Chadian economy, the non-oil economic recovery remains subdued and below that of peer countries. Following a sharp three-year recession, the Chadian economy has been recovering very timorously and is far from having recovered to its pre-crisis level (Figure 2). At the current juncture, Chad’s GDP growth performance is significantly lagging that of peer countries.
Chad: Non-oil GDP, 2014–19
(Base year 2014)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: IMF staff calculations.Chad: Non-oil GDP, 2014–19
(Base year 2014)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: IMF staff calculations.Chad: Non-oil GDP, 2014–19
(Base year 2014)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: IMF staff calculations.6. This chapter seeks to better understand why the Chadian non-oil economy has not adequately recovered by exploring the impediments to growth. At the current juncture, non-oil activity in Chad is held back by two ranges of obstacles. First, as the economy is just exiting from recession, crisis legacies, namely high domestic public debt and stock of domestic arrears and a fragile banking sector, are still prevalent and weigh heavily on the recovery (section B). Second, Chad continues to face long standing structural weaknesses which hamper potential growth (section C). Unlocking Chad’s economic potential will require reforms to address those weaknesses to foster diversification in non-oil sectors (section D).
B. Crisis Legacies
7. Three years of recession in Chad have left important legacies that continue to affect fiscal policy and performance in the non-oil private sector and the banking sector. After the sharp and persistent decline in international oil prices in 2014/2015, the authorities’ response included a large fiscal adjustment together with a rapid increase in domestic debt, as the country tapped the regional security market3 Still, the government accrued a sizable amount of domestic payment arrears. Although the economy has bottomed out and started to gradually recover, both the non-financial and the banking sectors are still bearing the aftermath of the crisis. In particular, the large stock of domestic arrears is weighing on private sector and banks’ balance sheets, while the domestic public debt overhang has put pressure on banks’ liquidity position and has reduced the government’s fiscal space to support the recovery.
8. Public domestic debt more than doubled with the crisis. As the Chadian economy was hit by the oil shock, while dramatically cutting spending, the government had to rely on large domestic financing to cushion the impact of the shock. The government first resorted to central bank financing through statutory and exceptional advances, which reached the regulatory CEMAC limit of CFAF 420 billion in 2015. The government also financed the deficit through the regional security market. The stock of securitized debt on the regional market increased dramatically, from close to zero in 2014 to CFAF 484 billion (10 percent of non-oil GDP) by the end of 2017 (Figure 3).
9. The large increase in domestic public debt resulted in a jump in debt service which limited space for productive spending. The initially planned repayment of statutory and exceptional advances towards the BEAC (about 1 percent of non-oil GDP every year) has been reduced as the BEAC consolidated and restructured all advances in 2017.4 Despite the restructuring, interest payment on domestic debt increased to about 14 percent and 9 percent of non-oil revenue and primary spending respectively in 2018 (Figure 3).
10. Expenditure arrears increased sharply during the crisis. In addition to explicit contractual debt, the government accumulated a large stock of domestic arrears on its goods and services spending, investment, and transfers and subsidies. The arrears accumulated mostly vis-a-vis private suppliers and public entities. The stock of arrears peaked in mid-2017 at around CFAF 270 billion or 5.6 percent of non-oil GDP. However, it has since then been gradually declining, as the government has been paying down arrears recorded at the Treasury, with the stock declining to about CFAF 160 billion at end-2018 (Figure 3). In addition to these arrears recorded at the Treasury, a more sizable stock of yet to be verified arrears—consisting for instance of spending commitment by line ministries—accumulated. These arrears are currently being audited.
11. While the government started paying arrears, the remaining stock is very large and present a drag on the non-oil economy. The impact of the accumulation of arrears has been significant and multidimensional. Because of their effect on the private sector balance sheet and its ability to conduct normal activities and invest, arrears have held back economic activity and forced companies to lay off workers. Investment projects stalled as the government failed to make payments to construction companies. In addition, the main and most damaging indirect effect of arrears on the private sector has been the deterioration of banks’ balance sheet through an increase in non-performing loans (Figure 3), as the banking sector had massively financed the private sector, on the basis of government IOUs (“avis-de-credit”). More broadly, the increase in domestic arrears worsened the business environment and heavily affected trust in the government. Lastly, arrears to social sector ministries have led to a deterioration in the level and quality of social services which further weakened social conditions in the country. Domestic stakeholders (the private sector, the banking industry, sectorial ministries, labor unions and the civil society in general) consider domestic arrears as the main drag on the recovery.
Chad: Stock of Domestic Arrears
(Billion CFAF; percentage of non-oil GDP)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: Chadian authorities, IMF staff calcultations.Chad: Stock of Domestic Arrears
(Billion CFAF; percentage of non-oil GDP)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: Chadian authorities, IMF staff calcultations.Chad: Stock of Domestic Arrears
(Billion CFAF; percentage of non-oil GDP)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: Chadian authorities, IMF staff calcultations.12. Liquidity pressures in the banking sector and the asset quality deterioration have undermined its ability to support the economic recovery. The recession, the increase in public debt, and the accumulation of domestic arrears have been having a detrimental impact on the banking sector. Banks portfolio quality deteriorated significantly with overdue loan increasing from around 12 percent at end 2018 to around 31 percent at end 2018. In parallel, the banking system has been under liquidity stress, mainly as public debt increased and had to be rolled over, which translated into a large increase in banks’ refinancing at the BEAC (from CFAF 10 billion in December 2014 to CFAF 160 billion in December 2018) at a time when the discount by the BEAC on government bonds used as collateral was high given the fiscal difficulties up to mid-2018. As a result, not only the profitability of the banking system has declined but also its capacity to collect deposits and provide credit. While credit and deposit grew at about 12 percent in 2014, they shrank in 2015, 2016 and 2017, before stabilizing in 2018 (Figure 4).
13. Addressing crisis legacies (domestic public debt overhang, large stock of domestic arrears and banking sector weaknesses) is critical for the economic recovery. Three areas of focus are critical:
Reduce domestic debt. The government needs to reduce its domestic debt, particularly debt held by public banks. This would help reduce the debt burden and loosen the sovereign bank nexus. Under the ECF arrangement, the government plans to gradually reduce the rollover rate of securitized debt, to 85 percent in 2019 (after 90 percent in 2018). Improving non-oil revenue mobilization and channeling part of any exceptional budget receipts towards reducing domestic public debt would help support these efforts.
Repay domestic arrears. Efforts to continue paying arrears on goods and services towards private sector as well as on transfers and subsidies towards social sector ministries are necessary to create the conditions for the non-oil private sector to contribute to the economic recovery and to improve social conditions. Going forward, as a large stock of yet to be recognized arrears is being audited, the government will need to develop and implement a clear and transparent strategy for domestic arrears clearance.
Address non-performing loans in the banking sector. Efforts will need to focus on adopting an action plan for reducing non-performing loans that would include: (i) increasing provisioning, , (ii) facilitating extra-judicial resolution, (iii) creating an asset management company, and (iv) adopting restructuring plans. The choice of the strategy will depend among others on the following factors: the size of NPLs, the fiscal space, the liquidity of the banking system, and availability of external financing.
Chad: Crisis Legacies
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Sources: Chadian authorities; and IMF staff calculations.Chad: Crisis Legacies
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Sources: Chadian authorities; and IMF staff calculations.Chad: Crisis Legacies
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Sources: Chadian authorities; and IMF staff calculations.C. Long-Term Structural Weaknesses
14. In addition to legacy factors that weigh on the recovery, Chad has deep rooted structural problems that affect its medium and long-term growth prospects. In particular, insufficient and poor-quality physical capital, low human capital, and weak governance drag on Chad’s diversification. As such, non-oil growth prospect is less favorable than those of peer countries in Sub-Saharan Africa (Figure 5). Notwithstanding exogenous factors affecting Chad’s growth potential (see paragraph 1), staff has found that other countries in similar situations managed to put in place the conditions for better growth performance. Addressing these structural weaknesses would therefore have sizable and durable positive impacts on Chad’s economic prospect.
Chad: Non-oil GDP Growth, 2019–24
(Percentage)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: WEO and IMF staff calculation.Chad: Non-oil GDP Growth, 2019–24
(Percentage)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: WEO and IMF staff calculation.Chad: Non-oil GDP Growth, 2019–24
(Percentage)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: WEO and IMF staff calculation.15. Chad’s level and quality of infrastructure are among the lowest in the world. Despite relatively high public investment, notably in the 2000s as Chad started to produce and export oil, the level of physical capital stock in the country is very low compared to peer countries including landlocked countries and oil exporters (Figure 6). Although the infrastructure gap in Chad has narrowed since the early 2000s, it remains significant compared to other African low-income countries.5 The low quality of physical capital stock also further aggravates the impact of the infrastructure gap. According to the World Economic Forum indicator on quality of infrastructure, and IMF data on the quality of investment, Chad has some of the lowest scores in the world for investment and infrastructure quality.6 Unsurprisingly, these elements translate very concretely into alarming indicators of energy access and electrification, transport infrastructure, and telecommunication (Figure 6). For example, less than 10 percent of the population has access to electricity, and 6.5 percent of the population has access to internet.7, 8
16. Chad also lags peer countries on human capital indicators. To assess the level of human capital, staff relied on the recently developed Human Capital Index by the World Bank.9 The index measures the human capital of the next generation, defined as the amount of human capital that a child born today can expect to achieve in view of the risks of poor health and poor education currently prevailing in the country where that child lives. It has three components: (i) survival measured with the under-5 mortality rate, (ii) expected years of learning-adjusted school reflecting both the quantity and the quality of education, and (iii) health measured with the rate of stunting of children under age 5 and the adult survival rate. Chad’s Human Capital Index is the lowest in the world (Figure 7), indicating very weak health and education outcomes.
17. Chad’s long-term growth prospect is also affected by weak governance and business environment indicators and corruption. Chad scores poorly with respect to governance, corruption and business environment. Paying taxes, starting a new business, getting electricity, trading across borders, and protecting minority investors are particularly problematic (Figure 8). Based on IMF staff’s estimates of the elasticity of per capita real growth10, Chad would gain significant benefits from improving the quality of governance and reducing the prevalence of corruption.11 In 2018, the Forum for the Recovery (“Forum pour la Relance”) organized by the private sector in Chad identified the fight against corruption as the first and foremost priority in order to support the role of the private sector in the economic recovery.
Chad: Physical Capital
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Chad: Physical Capital
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Chad: Physical Capital
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Chad: Human Capital Index, 2018
(0 = low, 1 = high)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: WB, Human Capital Index.Chad: Human Capital Index, 2018
(0 = low, 1 = high)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: WB, Human Capital Index.Chad: Human Capital Index, 2018
(0 = low, 1 = high)
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: WB, Human Capital Index.
Chad: Business Climate
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Sources: Doing Business, World Competitiveness IndicatorsChad: Business Climate
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Sources: Doing Business, World Competitiveness IndicatorsChad: Business Climate
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Sources: Doing Business, World Competitiveness Indicators18. While the financial sector is underdeveloped, alternative ways of financing are at an embryonic stage. Despite rapid banking sector growth prior to the crisis, its size remains small compared to SSA peers, and its ability to finance private sector activity is limited. In addition, financial inclusion is very limited with 9 percent of the population having a bank account and less than 5 percent of the population ever having contracted a credit (Figure 9). In addition, microfinance remains at a very early stage of development, providing very limited credit to the economy and facing difficulties with high NPLs level. Mobile payment is still under developed.
Chad: Financial Inclusion Indicators
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: FindexChad: Financial Inclusion Indicators
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: FindexChad: Financial Inclusion Indicators
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: FindexD. Reforms to Diversify the Economy and Unlock Sustainable and Inclusive Growth
19. The challenging environment for non-oil private sector has translated into a low level of diversification, leaving the government far too dependent on oil revenues and the economy vulnerable to oil price volatility (Figures 10 and 11). Chad’s export diversification index is low, with exports largely dominated by oil (around 94 percent) and with very small shares in cotton, livestock, and other agri-products. Low diversification and dependence on oil revenues have made the budget very vulnerable to oil price volatility. For instance, during the 2014/15 oil price shock, the drop in oil revenues forced Chad into a sharp and brutal expenditure based fiscal consolidation, with dramatic effects on growth and social outcomes. In addition, with low diversification, Chad’s GDP growth volatility is one of the highest in Sub-Saharan Africa.
Chad: Exports Diversification and Growth Volatility
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Chad: Exports Diversification and Growth Volatility
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Chad: Exports Diversification and Growth Volatility
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Chad: Indicators of Oil Dependence and Diversification
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: IMF staff calculations.Chad: Indicators of Oil Dependence and Diversification
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: IMF staff calculations.Chad: Indicators of Oil Dependence and Diversification
Citation: IMF Staff Country Reports 2019, 259; 10.5089/9781513509648.002.A001
Source: IMF staff calculations.20. Lifting Chad out of the low growth trap will require efforts in many areas. Cross country experience shows that countries that reached higher and more robust growth through diversification have done so through more efficient allocation of resources to higher productivity sectors.12 Key areas to create the conditions for productivity gains and economic diversification in Chad include (i) improving the business environment for non-oil private sector, (ii) enhancing fiscal governance, and (iii) deepening financial inclusion.
21. The private sector in Chad operates in a rather difficult climate. In this regard, areas to improve include streamlining procedures for the creation of small and medium size enterprises, facilitating access to financing for exporting companies to foster trade, modernizing tax administration to reduce non-compliance, widening the tax base, and reforming regulation to facilitate investment in the electricity sector to increase access to reliable and affordable power supply needed to improve Chad’s competitiveness.
22. Good fiscal governance is also critical for economic diversification and fiscal sustainability.
Reducing the budget dependence on oil revenues. At the macro level, fiscal policy plays an important role in ensuring macroeconomic stability, which is a prerequisite for achieving and maintaining economic growth.13 In Chad, the high volatility of oil prices and the procyclical fiscal policy conducted in the past have clearly hampered economic activity. Strengthening non-oil revenues collection and using conservative oil price assumption in the budget would enable Chad to gradually accumulate fiscal buffers and allow the government to conduct more countercyclical fiscal policy to absorb fiscal shocks.
Enhancing public financial management. The authorities should improve the process of budget preparation and public debt management, strengthen the reporting and monitoring of spending. In addition, the use of emergency spending procedures needs to be curtailed to impart a degree of certainty to the budget execution and help avoid the accumulation of domestic arrears.
Increasing social and growth-enhancing expenditure. Spending on social sector is low in Chad compared to peer countries, totaling 4.3 percent of GDP compared to 7.2 percent on average in low-income countries. Increasing spending in social sector and improving its quality will help improve social conditions and human capital both important for growth.14
Improving government spending quality. Prior to the crisis, Chad’s level of public investment was high relative to SSA countries. However, its impact on growth was transitory and didn’t crowd in private sector activity nor increased long term growth. Indeed, Chad still suffers from a large infrastructure gap and public investment remains largely inefficient.15 It is therefore essential to improve public investment management through stronger, more transparent institutional arrangement at key stages of the investment (planning, allocating, and implementing).
23. Developing financial inclusion is essential for inclusive growth. In that respect, the authorities should:
Ensure financial stability and improve resilience. A sound, reliable, and resilient banking system is needed to develop financial inclusion. Mistrust in the banking sector appears as a drag on financial inclusion in Chad at the current juncture. Banks should publish their audited financial statement and a credit bureau should be put in place to help restore confidence.
Enhance the regulatory system of microfinance institutions (MFIs) and mobile banking. In the microfinance sector, accelerating the implementation of the 2017 regional regulation requiring first category MFIs to regroup under umbrella bodies would help facilitate control and supervision. It is also important to ensure that a regulatory framework for mobile money is put in place that guarantees both stability and innovation while protecting the consumers.
Promote financial education. In parallel to the above-mentioned measures, promoting financial education will reduce recourse to costly informal financial sector due the lack of awareness of opportunities in the formal sector.
References
Regional Economic Outlook – Sub-Saharan Africa (IMF, 2017)
Fiscal Policy and Long-Term Growth (IMF, 2015)
Selected Issues Paper – Public Investment Efficiency in Chad (IMF, 2016)
A Governance Dividend for Sub-Saharan Africa? (IMF, 2018)
Making Public Investment More Efficient (IMF, 2015)
Tracking SDG7: The Energy Progress Report (WB, 2018)
Escaping Chad’s Growth Labyrinth (WB, 2018)
Prepared by Moez Ben Hassine and Samuel Delepierre.
“Escaping Chad’s Growth Labyrinth” (World Bank, 2018)
Selected Issued Paper—Chad’s First Steps in the Reginal Public Securities Market (IMF, 16/275).
A four-year grace period on principal repayment, extension of maturity and reduction in interest to 2 percent were agreed.
Selected Issues Paper – Public Investment Efficiency in Chad (IMF, 16/275).
World Bank (WDI, 2017).
The Human Capital Project (Word Bank, 2018)
For more details on the methodology and on estimates, see Selected Issues Paper on Governance (IMF, 2019).
See Chapter 3 of this Selected Issues Paper.
