2019 Article IV Consultation, Fourth and Fifth Reviews under the Extended Arrangement under the Extended Fund Facility, and Request for Waiver of Nonobservance of Performance Criteria, and Rephasing of the Remaining Purchases; Press Release; Staff Report; and Statement by the Executive Director
On behalf of my Gabonese authorities, I would like to thank Directors, Management and staff for their continued support to the Gabonese authorities in their efforts to restore macroeconomic stability and lay the foundations to support economic recovery in the context of the Extended Arrangement under the Extended Fund Facility. The authorities welcome the Selected Issues Paper which addresses topical issues for the authorities. They are particularly grateful for the substantive and productive technical assistance the Fund has provided them. They are committed to implement the comprehensive capacity building strategy agreed with the Fund in the context of the Fund Capacity Building Framework project.
Important progress has been made in implementing the Fund-supported program. Following difficulties encountered during the last quarter of 2018, the authorities have taken all the measures necessary to enable the satisfactory implementation of the program. As a result, performance of the program improved significantly at end-June 2019, compared to end-December 2018. In particular, three out five performance criteria (PCs) at end-June 2019 were met. Most end-September 2019 interim targets (ITs) were met and all structural benchmarks, except the one for EITI membership, were implemented, albeit with some delays. Progress in program implementation has enabled the country to contribute to the rebuilding of regional reserves. The authorities remain strongly committed to the objectives of the program.
Based on the corrective measures already implemented, those in progress, and the authorities’ strong commitment to the program, the authorities are requesting (i) a waiver for non-observance of the two performance criteria for June 2019 that were not observed as well as the continuous performance criteria on the non-accumulation of new external arrears, (ii) the completion of the fourth and fifth reviews under the Extended Arrangement, and (iii) a rephasing of the remaining purchases.
Recent developments and Economic Outlook
Macroeconomic performance continues to improve. Economic activity has picked up, with a growth rate expected to reach 3.4 percent this year compared to 0.8 percent in 2018, mainly due to strong performance in the oil, mining, and timber sectors. Growth in oil production could be around 15 percent in 2019, compared with around 5 percent initially forecasted, thanks to the performance of new oil fields and the absence of operational malfunctions during the year. In the non-oil sector, growth is projected at 2.5 percent compared to 1.8 percent in 2018. Inflation declined by 0.9 percent at end-September 2019 due to reduction in food prices, and private sector credit growth at end-September 2019 remain modest at 4.0 percent. During the same period the external current account improved by more than 3.5 percentage points of GDP. The banking sector is well capitalized, liquid and profitable but NPLs remain elevated.
Fiscal performance at end-June 2019 was better than anticipated, reflecting both improved domestic revenue collection and better control of current spending. Revenues were slightly higher than projected due to both strong oil and non-oil revenues. Expenditure was lower than expected thanks to efforts to streamline the wage bill and to control transfers and subsidies. There was also under-execution of capital spending which affected social spending execution, but the latter has improved in recent months. In addition, special accounts-related spending was higher than anticipated due to the delays in reforming public agencies and entities. After declining from 9.6 percent in 2017 to 7.6 percent in 2018, the non-oil budget deficit is expected to further decline to 4.6 percent of GDP in 2019 as the authorities are sustaining efforts to mobilize domestic revenues and control spending. Public debt declined from 62.6 to 60.6 percent of GDP and remains sustainable.
The recovery is projected to strengthen in 2020 and the medium-term outlook remains favorable. The continued good performance in the mining sector and the beginning of the production phase of large agricultural projects launched years ago should lead to a gradual increase in non-oil growth to 4 percent in 2020 and to above 5 percent in the medium term. Investments in the oil sector, encouraged by the new oil code and recent discoveries of new offshore reserves, will help to slow the decline in oil production due to the obsolescence of mature wells. Under these conditions, overall growth is expected to gradually increase to more than 4.5 percent in the medium term. Inflation should remain below 3 percent and the current account should turn positive by 2022. The authorities agree with staff assessment of downside risks to the outlook but stress the upside risks particularly related to the high volume of foreign direct investment in the oil and non-oil sector.
Program performance improved at end June 2019. Three out of five performance criteria at end-June 2019 were met, including the one on nonoil revenue. The PCs on the central bank and banking system net credit to the government were missed due mainly to difficulties encountered early in the year in the issuance of securities on the regional market. During the year, mobilization of resources on the regional market improved, which should help meet the objectives for end-December 2019. The continuous performance criteria on the non-accumulation of new external arrears was also missed, as external arrears were accumulated in early 2019. Following the measures taken, the authorities have been current in servicing external debt payments since April 2019. Moreover, all existing arrears on external debt were cleared. Finally, notwithstanding those efforts, social spending and payment of domestic arrears fell short of the objectives. The authorities are currently taking corrective measures necessary to achieve social spending objectives for end-December 2019. All structural benchmarks were implemented, except the one for EITI membership, which has been deferred until end-March 2020, in order to allow effective participation and collaboration among all stakeholders, including civil society.
Policies for 2020 and beyond
While economic performance in 2019 is encouraging, the Gabonese authorities are of the view that growth remains low and major efforts are still needed regarding infrastructure and human capital development. Going forward, they are committed to sustain their reform momentum to consolidate the stabilization of the economy and generate stronger, sustainable and more inclusive growth. Accordingly, in the context of the program, they will continue to implement a series of far-reaching macroeconomic and structural reform measures, particularly in the areas of economic governance and public financial management, in order to enhance domestic revenue mobilization, improve fiscal efficiency and management, and promote a business environment that is more attractive and conducive to private investment. Policies will continue to remain consistent with the objective of restoring the external stability of the CEMAC region.
Fiscal policy will remain the cornerstone of the program over the medium-term. Growth-friendly fiscal consolidation will continue in 2020 and over the medium term, by deepening reforms initiated in 2019 and introducing new measures. The objective in the draft 2020 budget law is to reduce the non-oil primary deficit to 4.2 percent of non-oil GDP. To this end, revenue mobilization efforts will be sustained and a special emphasis will continue to be placed on streamlining current spending by containing wage bill growth and rationalizing non priority spending, while pursuing the improvement in social spending execution and increasing the efficiency of the public infrastructure investment.
Fiscal consolidation will be essentially based on revenue mobilization. Efforts to mobilize additional revenues will focus on pursuing the modernization of tax and custom administrations and streamlining of tax and customs exemptions. In addition, a tax policy unit (TPU) will be set up to provide the Minister of Finance recommendations to optimize and develop the tax system in Gabon. Furthermore, the law establishing the “Tax and Customs Advantages Commission” will be amended to strengthen its oversight over all requests for exemptions and ensure the enforcement of its decisions.
Public financial reforms will be sustained to achieve the fiscal objectives. They seek to improve the controls and efficiency of public spending while reducing corruption vulnerabilities, in line with the recommendations of various Fund technical assistance reports, including the PIMA report. The authorities are committed to improve cash management in relation to debt management. This includes strengthening the expenditure adjustment mechanism in place since April 2019 and the establishment in early 2020 of a Treasury Committee. The implementation of the treasury single account (TSA) will remain a priority for 2020, in order to enhance the transparency and efficiency of cash management. Efforts to modernize and improve the functioning of the financial reporting information system and to strengthen controls in budget implementation at all levels will be further pursued. Improvements in the financial supervision of public companies and state operators will be consolidated and sustained using the new monitoring unit for public entities. Efforts will also be made to review the Public Investment Management (PIM) framework and the legal framework for public procurement.
The authorities reiterate their commitment to improve transparency in the management of oil and mining revenues. A report on the situation of oil and mining assets in September 2019 has been prepared and the authorities will submit the country’s application to the Extractive Industries Transparency Initiative (EITI) following consultations with civil society. In the meantime, all the contracts signed with the mining and oil companies will be transmitted to the BEAC. The authorities will ensure that these contracts/conventions are compatible with the regional foreign exchange regulations.
The medium-term debt reduction strategy to help address debt servicing and refinancing risks will be strengthened. The authorities will aim to improve the institutional framework for public debt management, including by relaunching the project to create a National Public Debt Committee (CNDP) to coordinate debt activities and put in place a medium-term debt strategy. The planned Eurobond issuance in 2020 will mainly be used for debt smoothing operations to reduce refinancing risks and any additional amounts will be used consistent with the fiscal objectives. A new clearance strategy for domestic arrears that will seek to maximize the impact of arrears clearance on growth, financial sector stability, and poverty will be developed, based on the independent audit report on public debt arrears.
The predictability and quality of social expenditure will be improved. The low rate of social expenditure budget execution of 37 percent in 2019 reflects, among others, constraints in the implementation of the school construction program, and the reserve mechanism that made unavailable about one quarter of the social spending budget. The targeting of poor and vulnerable populations and the monitoring of social spending will be improved by using the definition of poor of the existing social protection program and the new poverty profile derived from the 2017 Gabonese Poverty Assessment Survey (EGEP).
Financial sector policies
The authorities are committed to clearing nonperforming loans and urgently conducting the needed financial development reforms to facilitate access to credit. The strategy and action plan to reduce overdue loans were finalized on March 31, 2019. However, the implementation of this plan has been delayed, both in terms of clearing domestic debt arrears and, hence, reducing NPLs. They are determined to ensure that the ongoing liquidation of public banks and the sale of the temporary holding of a non-strategic participation in a systemic domestic bank are carried out at the lowest possible cost to public finances. The authorities will develop an SME financing strategy and a national financial inclusion strategy, in line with the regional financial inclusion initiative.
Promotion of the private sector
The authorities remain determined to implement structural and institutional reforms to improve the business climate and promote private-sector-led growth building on the encouraging implementation of its economic diversification strategy. In this context, the revision of the judicial framework legislation has been initiated with notably the drafting of a law on the organization of justice that creates commercial courts, and the adoption of the law on the organization of the Gabon’s court of justice and of a new penal code this year. The latter takes into account all new forms of crime, particularly in the areas of finance, terrorism and the environment. The current investment framework will be completed by 2020 with an investment code and a national investment promotion strategy. Institutional reforms consist of continuing the operationalization and strengthening of the performance of the National Agency for Investment Promotion (ANPI), the support unit for public-private partnerships, as well as the special economic zone of NKOK (SEZ).
Significant progress has been made in the implementation of the ambitious program of reorganization of economic statistics in Gabon and reform momentum in this area will be pursued in 2020. Particularly noteworthy is the portal on the enhanced General Data Dissemination System (e-GDDS), which is now available to users. Similarly, the work on a new, harmonized national consumer price index (HICP) for a better measure of inflation will be finalized by the end of 2019. Significant progress is also being made in the transposition and reporting of public finance statistics according the 2014 IMF’s Government Finance Statistics Manual (GFSM). Activities envisaged for 2020 include the changing the base of national accounts to 2010; the updating and maintaining of the National Data Summary Page established in October 2019, the launch of the General Census of Enterprises and the start of the preliminary work on the second Statistics Development Strategy (SNDS II) in the first quarter of 2020.
Program implementation has improved thanks to remedial actions taken to keep the program on track and the Gabonese authorities remain committed to the program. In light of this, the authorities are requesting the completion of the 4th and 5th reviews under the Extended Arrangement. Directors’ favorable consideration of the authorities’ requests will be appreciated.