Outlook Prior to the Dual Shock

Following the oil price plunge in 2014, the Gabonese authorities swiftly devised and implemented an economic recovery program (Programme de relance économique, PRE) in 2015. Implementation of this program has been supported by the Fund in the context of the current Extended Arrangement under the Extended Fund Facility (EFF) since 2017 and helped strengthen macroeconomic stability with higher growth, improved fiscal and external positions and lower public debt. As a result, Gabon has been able to contribute to the rebuilding of international reserves at the regional central bank (BEAC) to strengthen the external stability of CEMAC. Although economic diversification has continued to advance, the country remains heavily dependent on commodities, notably oil.

The medium-term economic prospects for 2020 were deemed favorable during the Article IV consultation in December 2019. The economic recovery underway was projected to strengthen in 2020, supported by higher investments in the oil, wood and agri-business sectors, continued good performance in the mining sector and higher agricultural production. Overall, growth was expected to gradually increase from 3.8 percent in 2020 to more than 4.5 percent in the medium term. Inflation was projected to remain under 3 percent and the current account deficit to narrow to 2 percent in 2020 before turning positive by 2022. Downside risks to the outlook included a slowdown in the reform momentum, a decline in international oil prices, and lower global growth. The authorities viewed the programmed high volumes of foreign direct investment in the oil and non-oil sectors as upside risks.

Impact of the Pandemic and the Oil Price Shock

As of April 7, 2020, Gabon has registered 33 cases of COVID-19, including one fatality. Since the confirmation of the first case on March 12, 2020, the authorities have acted swiftly and forcefully with several containment measures including the closing of borders, schools, bars and restaurants, and the suspension of international flights. They are devoting significant additional resources to meet the medical needs of the persons affected by this virus and track and test people who might have been in contact with confirmed cases. Gabon has also received external support from World Health Organization, World Bank and Agence Française de Développement (AFD) to help strengthen the health system capacity in face of the COVID-19.

The impact of the pandemic, coupled with that of the oil price shock, on the Gabonese economy are significant. The near-term economic outlook has worsened significantly as downside risks identified in December 2019 have materialized since the COVID-19 outbreak. Oil production and exports in 2020 are expected to decline as a result of depressed global demand and a postponement of planned oil recovery investments amid lower oil prices. Non-oil sector output is also projected to suffer from the direct effect of COVID-19 on the population and labor, and the negative domestic demand shock induced by containment measures. Spillovers from the external environment add to the economic strains.

As a result, economic activity in 2020 is now anticipated to contract by 0.4 percent and the balance of payments will be affected notably by the collapse in both oil and non-oil exports and in foreign direct investment. In particular, the current account deficit will widen more than fourfold to 8.5 percent of GDP. The slowdown in oil exports and economic activity will have a negative impact on fiscal revenues, which together with higher COVID-19-related and social expenditures will lead to a large downward revision of the overall fiscal balance in 2020 from a surplus of 1.4 percent of GDP to a deficit of 2.9 percent in 2020. Public debt sustainability will be preserved despite the deterioration of the fiscal position. The authorities agree that this assessment of the impact of the dual shocks is subject to large uncertainty.

Policy Responses to the Shocks

Looking beyond the health crisis, the authorities remain committed to maintaining macroeconomic stability, boosting competitiveness and growth, and reducing poverty, notably by pursuing the implementation of policies and structural reforms envisaged under the EFF arrangement. However, their immediate priority is to contain the spread of COVID-19 in the country, and near-term policies will be geared toward mitigating the human, social, economic and financial consequences of the pandemic and terms of trade shocks, notably on the most vulnerable population.

The fiscal consolidation process will be interrupted this year to ensure proper response to the shocks. In particular, in the face of lower revenues, non-priority spending is being reduced further and resources are reallocated towards the financing of COVID-19-related expenditures. A special fund has been established to combat the propagation of the epidemic in the country. Other measures to support the most vulnerable and the private sector, notably small businesses, through these difficult times have also been adopted and include food vouchers, utilities cost discounts, reduced licensing fees and tax relief. The authorities will pursue a prudent fiscal policy during these turbulent times and resume fiscal consolidation when the health crisis subsides. Additional revenue and expenditure measures will be adopted when needed to ensure fiscal sustainability and avoid the creation of new arrears. In particular, the authorities will continue to apply the expenditure regulation mechanism set up in 2019 with the support of the Fund. A revised budget law for 2020 will be adopted as soon as possible to reflect the new priorities.

As regards monetary and macro-financial policies, the regional central bank has announced several measures to prevent any liquidity tension that could have adverse effects on financial stability while preserving the external stability of the region. The measures include the suspension of liquidity absorption operations, monetary policy easing with a reduction of the policy rates and higher liquidity provision with an expansion of the set of instruments accepted as collateral for central bank refinancing. The regional supervisory body COBAC will closely monitor the impact of the dual shock on portfolio quality and profitability of financial institutions in CEMAC, as compliance with prudential regulations is expected to deteriorate owing to weaker borrowers’ repayment capacity. COBAC has already issued recommendations to financial institutions on prudent and transparent loan restructuring to preserve financial stability.

Request for Financing under the RFI

In light of the urgent balance of payments and fiscal needs arising from the impact of COVID-19 pandemic and the collapse of oil prices, and given the practical difficulties to conclude an ad hoc review of the program under the EFF arrangement, the Gabonese authorities are requesting Fund’s financial assistance under the RFI in the amount equivalent to SDR 108 million (approximately USD 148.8 million) to meet 35 percent of those financing needs. The authorities are also seeking additional financial support from other development partners, including the World Bank, the African Development Bank, and AFD to close the remaining financing gap. With these disbursements, the country’s capacity to repay the Fund will remain appropriate. The authorities agree that further financing might be needed should the health crisis last longer than expected.

In light of all the above, the Gabonese authorities will greatly appreciate the Executive Board’s approval of their request for emergency financing.