I. Impact of the Pandemic and Response

The epidemiologic situation has improved following a second wave of high infection rates in early 2021. As of July 21,2021, the COVID-19 virus has infected 25,309 people with 163 deaths, which brings the mortality rate at around 75 deceases per million inhabitants. A vaccination campaign has been launched in the second quarter of 2021 following the acquisition of vaccines mainly from China and Russia. Despite these efforts, to date, only 23,300 persons have been vaccinated, representing a little more than 1.1 percent of the population.

The authorities followed through on their commitment to transparency in the use of COVID-19 spending. External support including the two RFI disbursements in 2020 was used to upgrade intensive care units in hospitals with appropriate equipment and build a large testing infrastructure and facilities. The use of the funds as of end-April 2021 has been accounted for and made public. A comprehensive audit of that spending is being undertaken by an external independent group and the results will be published by end-September 2021.

The macroeconomic impact of the pandemic has been substantial in 2020. The economy contracted by 1.8 percent in 2020 against a growth of 3.9 percent in 2019 due to the containment measures and global economic slowdown. Inflation has remained under control at 1.3 percent on average against 2.0 percent in 2019. The current account deficit widened from 1 percent of GDP in 2019 to 6 percent in 2020 due to the decline in crude oil and non-mining exports. With the improving epidemiologic situation, some containment measures have been progressively lifted or relaxed, but the path to economic normalization appears more challenging, as some sectors notably services remain critically affected by remaining movement restriction measures.

The overall budget balance turned negative and public debt vulnerabilities increased under intensive resource pressure. The fiscal deficit reached 2.1 percent of GDP against a surplus of 1.4 percent in 2019 mainly due to a sharp decline in both oil and nonoil revenues. Public expenditures increased modestly as spending priorities shifted towards COVID-related spending, mainly at the expense of public investment. It is worth noting that the wage bill declined in 2020 thanks to a better control of the headcount. Public debt remains sustainable despite a large increase in the public debt ratio notably due to a lower GDP. External debt arrears accumulated, and the implementation of domestic arrears clearance plan slowed down due to weak revenue performance and lower than expected external financing.

The Gabonese banking sector has been resilient although some financial vulnerabilities have increased. The regional central bank BEAC and the regional banking supervisor COBAC have adopted temporary monetary and regulatory relief measures to ensure sufficient liquidity in the system and facilitate bank loan restructuring during the pandemic. As a result, the banking system in Gabon has remained well-capitalized and profitable. However, asset quality is thought to have deteriorated, and banks’ exposure to sovereign bonds has increased. BEAC and COBAC will closely monitor the solvency and liquidity of the banking system, as the quality of bank portfolios may deteriorate with the persistence of the pandemic.

II. Outlook and Risks

While improving the outlook remains uncertain. The economic rebound in 2021 is expected to be modest with a GDP projected to grow by 1.5 percent and reach around 3.5 percent over the medium-term with progressive economic normalization. Inflation will remain contained at around 2.0 percent, below the regional convergence criterion of 3.0 percent. The current account deficit will also narrow and stabilize around 2.5 percent of GDP over the medium-term thanks to higher commodity prices. This medium-term outlook hinges on the progression of the pandemic, the evolution of terms of trade and global financial conditions, and the pace of the implementation of the economic program for which the authorities are requesting Fund support. Unfavorable developments on those fronts will add to already large BOP needs.

III. Fund-Supported Economic Program for the Medium Term

The medium-term economic program aimed to preserve the sustainability of public finances and debt, improve governance and transparency in the public sector, and support strategic sectors and further progress in economic diversification. The priority in the short term is to pursue the response strategy to the pandemic. Going forward, policies will aim to address macroeconomic vulnerabilities by reversing the temporary measures, as conditions permit, and accelerate reform momentum. A special focus will be placed on strengthening domestic revenue mobilization. The authorities intend to leverage digitalization to increase the efficiency and performance of Ihe public sector. A well-tailored capacity building and TA agreed with the authorities will support program implementation.

The fiscal program is the centerpiece of the authorities’ program and will be based on a growth-friendly fiscal consolidation. The fiscal reforms will aim at improving medium-term fiscal and debt sustainability while expanding fiscal space for social and development spending. Fiscal consolidation will be achieved by increasing domestic revenues and ameliorating expenditure composition and efficiency, while protecting social and development spending. A revised budget for 2021 outlining the shift in policy stance has been adopted last month and submitted to the Parliament. The overall fiscal balance will gradually improve to reach surplus over the medium term and public debt vulnerabilities will decline. In addition to Fund support, financing needs over the program period will be covered by budget support expected from other development partners and bond issuances. The authorities recognize the risks to the fiscal program posed by the uncertainty around of the pandemic and stand ready to deploy their contingency plans in case revenues or financing fall short of projections.

The authorities are strongly committed to the vast fiscal reform agenda. On the revenue side, they have started reducing tax expenditure and increasing the tax base to mobilize more domestic revenue and will further streamline tax exemptions following a comprehensive review of existing exemptions to be completed in the next few months. They will improve the administration of the VAT and pursue the modernization of the revenue administrations. On the expenditure front, they will continue their efforts to rationalize nonessential expenditures and reduce fiscal risks by further strengthening and modernizing public financial management, public investment management, and oversight of public entities. A particular emphasis will be placed on increasing the efficiency and transparency of public spending, including the wage bill, social protection programs, capital expenditures, and COVID-related spending. A list of public entities to close will be finalized by September 2021 and the governance and financial management for those to remain under state ownership will be improved.

Public debt management will be enhanced to avoid new accumulation of arrears. In this regard, the coordination between the Directorate General of Debt and other stakeholders will be reinforced. A plan for clearance of all external arrears before the first EFF review has been prepared. A comprehensive domestic debt repayment strategy will be developed following the conclusions of the task force work on domestic debt. Such strategy is particularly important for reducing macro-financial risks and preserving financial stability.

The authorities are committed to reinforce social policies. They will maintain the temporary COVID-related measures to support the most affected population and will preserve social spending in case of adverse shocks. They are in a process of improving the targeting and monitoring of social spending. With the assistance of the World Bank, a review of the eligibility criteria for social protection programs is underway and will be completed by end-2021.

Oil sector management will continue to be strengthened. The authorities have completed the audits of Gabon Oil Company and the SOGARA refinery and action plans to address weaknesses identified in the audits will be prepared by October 2021. The authorities have also implemented major steps toward the country’s application to the EITI by September 2021. Transparency in the oil sector will be improved through the publication of various documents, information and reports as required by the EITI.

Weaknesses in the financial sector and public financial entities will be addressed. Actions in this regard include the strengthening of the operations, financial autonomy and transparency of the Gabonese Fund for Strategic Investment (FGIS) and the Caisse de Depots et Consignations (CDC) following extensive audits in 2020. An audit of the Gabonese sovereign wealth fund (FSRG) assets will help reassess the investment strategy and develop a new funding model for the FGIS and FSRG. The liquidation of the three public banks which has been delayed due to the pandemic will be accelerated. The authorities will also update the NPL reduction strategy in parallel with the domestic arrear clearance plan and take measures to expand the investor base for sovereign bonds to reduce the sovereign banks nexus. They will promote financial inclusion with the adoption of a national strategy, consistent with the regional strategy under preparation.

Efforts will continue to enhance the business climate to spur domestic and foreign investment. The legal framework governing the special investment zones is being reviewed to strengthen their governance and operations and rationalize the benefits and exemptions offered in those zones. In addition, a draft investment code to strengthen the regulatory framework for investment is under preparation. The resumption of the investment policy dialogue with various stakeholders is expected to lead to the adoption of a Doing Business roadmap for 2021–23 and an enhanced framework for employment and vocational training. The envisaged modernization of land administration is intended to accelerate access to land which has been a deterrent to investment in the past and to facilitate the gradual implementation of a property taxation

A special attention will be given to governance and fight against corruption. The anticorruption framework has been reinforced in previous years with updated legislation, and the creation of a new criminal courts and institutions to improve governance and transparency and sanction corruption offenses. The authorities will pursue this momentum with a focus on strengthening the asset declaration regime for public officials to align it with international best practices. The activities of the anti-corruption commission will be published in an annual report.

Further progress is expected in the reinforcing of the national statistics system during the program period. In particular, the authorities will advance the institutional reform to upgrade the legal framework of the system. They will also continue improving production and dissemination of economic and social data including through the General Data Dissemination System (GDDS) with the support of international organizations including the Fund.

With virgin forest covering nearly 80% of the country, the Gabonese authorities remain committed to their climate change mitigation commitments. Gabon allocates significant resources to environmental conservation and forest management efforts. These efforts were notably rewarded last month by the Kingdom of Norway under the UN-supported Central African Forest Initiative. The development of a carbon trading mechanism to help finance policies and actions towards forest conservation is ongoing in line with the Paris agreement on climate change. The authorities will pursue a sustainable development of the forest-wood sector and palm oil industry as part of their economic diversification strategy to limit forest-related emissions.

IV. Conclusion

In the face of the lingering impact of the heath crisis, the Gabonese authorities are strongly determined to bolster their response to the pandemic, address macroeconomic imbalances and advance the implementation of their reform agenda, in line with the PAT 2021–23. They are requesting a new EFF arrangement to support the implementation of the economic program developed in that regard. Given the authorities’ commitment to the program and actions already taken in recent weeks, we will appreciate Directors’ favorable consideration of their request.