Republic of Equatorial Guinea: Request for Purchase Under the Rapid Financing Instrument—press Release; Staff Report; and Statement by the Executive Director
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International Monetary Fund. African Dept.
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Publication Date:
27 Sep 2021
eISBN:
9781513595849
ISBN:
9781513595849
Language:
English
Keywords:
Bata explosion; government deposit repatriation; net change; U.S. dollar; Bata emergency; COVID-19; Central Africa
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1. On March 7, a series of accidental explosions at a military warehouse in Bata—the largest city of Equatorial Guinea—caused a mass casualty event. An initial staff estimate of the economic impact (using partial authorities’ data) suggests that direct damages and losses amount to about 2.5 percent of 2020 GDP. The authorities emphasized, however, that the broader economic impact is likely to be much higher but considered it appropriate to use staff’s estimate until they have completed their own damage assessments. Limited access to market financing and the magnitude of the rehabilitation and reconstruction costs, amid the worsening COVID-19 pandemic, have prompted the authorities to seek financing from multilateral and bilateral agencies.

Abstract

1. On March 7, a series of accidental explosions at a military warehouse in Bata—the largest city of Equatorial Guinea—caused a mass casualty event. An initial staff estimate of the economic impact (using partial authorities’ data) suggests that direct damages and losses amount to about 2.5 percent of 2020 GDP. The authorities emphasized, however, that the broader economic impact is likely to be much higher but considered it appropriate to use staff’s estimate until they have completed their own damage assessments. Limited access to market financing and the magnitude of the rehabilitation and reconstruction costs, amid the worsening COVID-19 pandemic, have prompted the authorities to seek financing from multilateral and bilateral agencies.

Background

1. On March 7, a series of accidental explosions at a military warehouse in Bata—the largest city of Equatorial Guinea—caused a mass casualty event. An initial staff estimate of the economic impact (using partial authorities’ data) suggests that direct damages and losses amount to about 2.5 percent of 2020 GDP. The authorities emphasized, however, that the broader economic impact is likely to be much higher but considered it appropriate to use staff’s estimate until they have completed their own damage assessments. Limited access to market financing and the magnitude of the rehabilitation and reconstruction costs, amid the worsening COVID-19 pandemic, have prompted the authorities to seek financing from multilateral and bilateral agencies.

uA001fig01

Equatorial Guinea: Area Affected by the March 7 Explosions in Bata City

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Source: Mapdevelopers.com and Fund staff.

2. Before the Bata explosions, macroeconomic conditions were already difficult due to the COVID-19 pandemic—with a second wave still unfolding—but were projected to improve in 2021. Real GDP in 2020 is estimated to have contracted by 4.9 percent, amid the national restrictions on movement as the government fought the COVID-19 pandemic. These measures particularly impacted non-hydrocarbon output, which is estimated to have declined by 3.4 percent in 2020. Border restrictions also affected food imports contributing to a surge in food prices—with inflation registering 7.6 percent (year-on-year) in June 2020, before decelerating by end-2020 when some restrictions were relaxed (Text Charts 1 and 2). For 2021, growth is expected to pick up as the COVID-19 second wave is brought under control by the government’s vaccination campaign, national restrictions are lifted, reconstruction of Bata starts, and as hydrocarbon production accelerates from a new LNG pipeline. Inflation is expected to moderate in 2021, amid the lifting of restrictions and CFAF appreciation. At the same time, macroeconomic imbalances are expected to remain large as spending pressures expand faster than available revenues.

Text Figure 1.
Text Figure 1.

Equatorial Guinea: Inflation, 2019–21

(In percent, year-on-year)

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Source: INEGE, and IMF staff calculations.
Text Figure 2.
Text Figure 2.

CEMAC Countries: Food Inflation, 2020–21

(In percent, annualized)

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Note: C.A.R. is not included due to data availability.Source: FAO Big Data Tool on food chains under the COVID-19 Pandemic.

3. Despite an improving external environment, Equatorial Guinea now faces significant economic stress due to the fallout from the Bata explosions and an unfolding second wave of the COVID-19 pandemic. Thus far, it has been confirmed that 107 people died from the explosions and around 19,000 were directly affected. The damages from the destruction to the military base and surrounding neighborhoods are estimated at 2.5 percent of 2020 GDP. The most immediate humanitarian crisis is being contained relatively quickly by the authorities with international support. However, the most vulnerable segments of the population in Bata, already deeply impacted by COVID-19, have been severely affected, with deepening poverty turning food security into a larger challenge. Residential housing needs rebuilding so that displaced families can return from villages, shelters or from relatives’ homes, where they are temporarily sheltering . Moreover, the difficulty in adhering to COVID-19 precautions due to the Bata crisis contributed to strengthening the second wave. As of July 20, 8,848 cases had been reported, and the country’s capacity has been stretched by managing the double shock of the pandemic and the Bata explosions. Measures to contain the pandemic include increasing public spending and restricting population movement, which have reduced private sector economic activity and non-oil revenues. Expenditure has also been increased to meet the emergency needs of the population of Bata, but full rehabilitation efforts may be delayed due to the second wave of the COVID-19 pandemic and limited implementation capacity, generating uncertainty in the near term with knock-on effects on domestic activity. These developments could magnify existing macroeconomic, governance and financial sector vulnerabilities.

4. The authorities started implementing measures envisaged under the EFF arrangement approved in December 2019, but the program is now considered off-track:

  • Before the onset of the COVID-19 pandemic, the authorities met four out of five performance criteria (PC) and two out of three indicative targets (IT) for end-December 2019 (Text Table 1). Regarding the three structural benchmarks (SB) set for end-December 2019, one was met and two were not met but were implemented with a delay (Text Table 2).

  • Since the onset of the COVID-19 pandemic, the associated restrictions on the normal functioning of government operations and the need to focus on a robust crisis response, progress on program implementation has become more difficult to maintain. In particular, data for end-March 2020 indicate that the authorities met three of eight ITs. For end-June 2020, they met one of five PCs and one of three ITs, for end-September they met four of eight ITs , and for end-December they met one of five PCs, and one of three ITs . The six SBs set for 2020 were not met, and the authorities have implemented one from end-March 2020 with a delay. While not met or fully implemented yet, progress is being made on the other five 2020 SBs that remain outstanding (one from end-March, three from end-June, and one from end-September), as detailed in Text Table 2.

  • The EFF-supported program is considered off-track as implementation of governance reforms and other structural benchmarks has taken longer than envisaged owing to the exigencies of the COVID-19 pandemic and weak capacity. Slow reform progress has delayed the first and second EFF reviews, which had been envisaged for June and December 2020. The authorities, however, continue to work on implementing their ambitious reform agenda.

Text Table 1.

EFF Quantitative Performance Criteria and Indicative Targets

(Billions CFA Francs, cumulative for each fiscal year) 1/

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Sources: Equatorial Guinea authorities: and IMF staff estimates and projections.

Quantitative Performance Criteria and Indicative targets are dearly defined in the TMU of the EFF.

As of May 2021, cumulative arrears through Sep-2020 have been cleared, with pending arrears of 15 billion CFA Francs corresponding to a misted December 2020 payment.

Cumulative ceiling, starting from the day of program approval (December 16, 2019).

Excluding all budgetary support identified in the program.

Excluding IMF financing.

As defined in the TMU. This definition is taken from the Board paper on social spending “A strategy for IMF engagement on social spending. June 2019.” https://www.imf.org/en/Publications/Policy-Papers/Issues/20l9/06/10/A-Strategy-for-lMF-Engagement-on-Social-Spending-46975.

Text Table 2.

EFF Structural Benchmarks for December 2019–September 2020

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Source: IMF staff

Impact of Shocks, Outlook and Risks

5. The widespread destruction and loss of life in Bata along with a still-unfolding second wave of the COVID-19 pandemic have weakened the near-term outlook. Real GDP growth for 2021 is projected at 4.1 percent, implying that real output at end-2021 will remain below its 2019 level. The impact is projected to be concentrated in the non-hydrocarbon sector (Text Table 3).1 Real non-hydrocarbon growth has been marked down (by 0.7 percentage points relative to the EFF-supported program) to 2.2 percent, owing largely to the loss of business and employment effects due to disruptions from the explosions (0.2 percentage points), along with the effects of the pandemic (disruptions to trade, increased uncertainty, and the general impact of quarantine measures on the economy, by 1.3 percentage points). That said, the projection accounts for a partially offsetting growth effect from the increased construction activity (0.8 percentage points) related to the rebuilding of the housing stock and infrastructure in 2021, with some carry over to 2022. Hydrocarbon growth is projected at 5.9 percent for 2021, reflecting a one-time effect from the coming onstream of a new LNG pipeline. Henceforth, the downward trend in production resumes in 2022. The disruption of economic activity in Bata and the need to provide emergency assistance to the affected population and rehabilitation/reconstruction contributes to increasing imports and government expenditures, and reducing government revenues. The overall impact of emergency spending, rehabilitation and reconstruction activities and cost of procuring the COVID-19 vaccines will keep the fiscal accounts in deficit over the next two years. As a result, an additional financing gap has opened in the balance of payments and the fiscal accounts, especially in 2021.

Text Table 3.

Impact of COVID-19 Pandemic and Bata Explosions

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Source: Fund staff estimates. Note: Table excludes replacement cost of destroyed military equipment.

6. Fiscal balances are expected to deteriorate sharply in 2021. The overall balance is now projected at -0.8 percent of GDP for 2021, compared to a surplus of 1.6 percent under the EFF-supported program. Emergency measures to respond to the Bata mass casualty event (including spending to meet the immediate needs of the affected population) are projected to increase spending by 1.1 p er cent o f GDP. At the same time, lower economic activity due to disruptions from the Bata explosions and the COVID-19 pandemic, is projected to result in a 2.0 percent of GDP fall in non-hydrocarbon revenues. The combined effect of revenue losses and increased expenditure associated with the Bata explosions and the COVID-19 pandemic are expected to weaken the non-hydrocarbon primary fiscal balance by 3.4 percent of GDP relative to the EFF-supported program projection.

7. The Bata explosions and the COVID-19 pandemic have created an urgent balance of payments (BOP) need. Higher oil prices in 2021 are expected to only partially mitigate the urgent BOP need. Indeed, through end-December 2020, net foreign assets (NFA) at the BEAC declined by CFAF 143 billion from their end-2019 level, to negative CFAF 267 billion, as the government drew down deposits in the face of lower revenues and increased expenditure related to the pandemic. Overall, the external current account deficit is expected to widen to 4.3 percent of GDP in 2021, compared to 3.8 percent projected under the EFF. Foreign direct investment inflows are projected to fall, as companies respond to the increased uncertainties in the wake of the pandemic. At the same time, the need to import construction materials to rehabilitate and rebuild destroyed property and infrastructure in Bata, together with emergency assistance and COVID-19 inputs, is expected to more than offset the import-depressing impact of the pandemic, leading to higher imports. The weakening of the current and capital accounts will cause a further substantial strain in Equatorial Guinea’s NFA at the BEAC, keeping it in negative territory. The BOP financing need created by the 2021 shocks is estimated at about CFAF 206 billion (3.1 percent of GDP), with a government financing need of CFAF 275 billion (4.1 percent of GDP) (Text Table 4).

Text Table 4.

Change in Fiscal and External Financing Requirements in 2021, Compared to EFF

(Billion CFA francs, unless otherwise stated)

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Source: IMF staff calculations

8. The banking system remains weak. The sector has been weighed down by high non-performing loans (NPLs), undercapitalization, and low liquidity at some banks. At end-2020, the NPL ratio amounted to 53 percent, mainly driven by government arrears with contracts funded by banks in the construction sector. Much of the NPLs are concentrated in the largest bank, in which the government has recently acquired a majority stake. Following the alignment of capital definitions with the Basel II framework by COBAC at end-2019, the banking sector is deeply undercapitalized (Text Table 5). The aggregate short-term liquidity ratio remains above the prudential minimum, although deposits continue to decrease. While the contraction o f the no n-hydrocarbon sector and the widespread property damage in Bata is expected to further raise banks’ NPLs, this effect could be offset by the full securitization of government arrears envisaged under the program for 2020, but now scheduled for 2021 (¶12). The securitization is expected to sharply reduce NPLs while helping to improve liquidity and solvency in the banking sector. 2 The authorities are conducting an audit of the country’s largest bank and they are strengthening its governance. In particular, in November 2020, a new board was installed at the bank, and once the audit is concluded, a restructuring plan will be produced and submitted for COBAC approval. These measures, taken together with the pending arrears securitization, will provide the authorities with a more precise figure on the recapitalization needs of the bank. The authorities stress ed that they plan to recapitalize, restructure and privatize the bank , in line with COBAC’s advice.

Text Table 5.

Financial Soundness Indicators for the Banking Sector, 2017–19

(Percent)

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Source: IMF Financial Soundness Indicators Database; Banking Commission of Central Africa (COBAC).

The reduction in the regulatory capital in 2019 results from the implementation of Basel II norms at end-2019.

The banking sector consists of five banks – BANGE. BGFI, CCEI, SGB and Ecobank

CCEI is the largest bank in Equatorial Guinea

9. The near-term macroeconomic outlook is highly uncertain, with risks tilted to the downside. The outlook is based on the expectation that the authorities can secure sufficient financing to commence the rebuilding and compensate victims and purchase sufficient vaccines. It also assumes that the macroeconomic effects of the pandemic would be temporary and that global and domestic conditions will start to improve in the second half of 2021. However, should the pandemic persist or worsen, including due to the emergence of new COVID-19 virus variants, and should rehabilitation and reconstruction work in Bata face delays, the recovery could be slower and economic conditions could be worse than currently envisaged. In this context, economic growth in 2021 could be lower than currently projected, further deteriorating the external and fiscal balances. In addition, the disruption of business activity in Bata and the pandemic, together with capacity constraints and governance and corruption vulnerabilities, could have a stronger-than-envisaged negative effect on revenue and on the authorities’ ability to enforce tax compliance, weakening the fiscal accounts further. Under such a scenario, the fiscal and external financing needs would be larger, potentially requiring greater domestic policy actions and support from development partners. On the upside, higher oil prices could contribute to a faster improvement in fiscal and external balances.

Policy Discussions

10. The authorities have adopted a package of measures to meet the emergency and immediate needs of the victims of the Bata explosions and the COVID-19 pandemic, and to limit their impact on economic activity and vulnerable groups.

  • For the Bata explosions, they have allocated an initial sum of CFAF 10 billion (0.2 percent of GDP) to support the immediate emergency needs of the victims. The government is providing support to about 5,000 vulnerable households , including via eight shelters for minors with more than 500 orphaned children and a shelter for the elderly. In March, they provided cash grants to those most affected , totaling CFAF 1.5 billion for over 2,800 families. Further, a task force has been established to develop and coordinate a strategy for rehabilitation and reconstruction of private property and public infrastructure. The authorities emphasized that the pace of reconstruction would depend on the availability of external financing, where they see a key catalytic role from their continued IMF engagement in the context of the EFF-supported program.

  • On the COVID-19 pandemic, the government has deployed a health spending plan focused on prevention and mitigation. In early 2021, the government secured 820,000 doses of COVID-19 vaccines and launched its inoculation campaign on March 3 (China donated 320,000 doses and the government purchased 500,000 doses for about CFAF 5.8 billion). In June, the authorities signed an agreement with the United Nations to obtain 600,000 full doses of COVID-19 vaccines, financed by the Equatorial Guinea Multi-Partner Trust Fund to complement its efforts to inoculate 70 percent of the adult population by end 2021. As of July 20, 2021, according to John Hopkins University’s Coronavirus Resource Center, the authorities had administered over 289,000 doses, with about 118,000 individuals fully inoculated . In the early stages of the pandemic, the authorities established a social assistance scheme for the most vulnerable and provided resources to facilitate continued education. The government ha s also provided limited and temporary tax relief to the private sector to help address cash-flow pressures and cushion adverse effects on activity and employment. The response has also included delaying the execution of domestically financed capital spending and other non-priority expenditures. Further, with UN assistance, the authorities have launched a study to measure the socio-economic impact of the pandemic on Equatorial Guinea, and design policies for recovery to a sustainable growth path over the medium term. At a regional level, the BEAC has eased monetary conditions while the COBAC is allowing banks to use capital buffers to absorb pandemic-related losses.

Text Figure 3.
Text Figure 3.

Equatorial Guinea Mobile Transfer Diagnostic

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Note: Further from the center represents a better outcome.Source: IMF staff estimates using IMF Mobile Government-to-Person Transfer Diagnostic Tool (IMF Working Paper No. 20/198).

11. Staff supports the authorities’ near-term focus on limiting the macroeconomic and social impact of the Bata explosions and the COVID-19 crisis. Amid these shocks, staff supports the authorities’ accommodative short-term fiscal policy stance. This response would help partly offset the strong negative impact on non-hydrocarbon GDP and employment, while providing support to victims, especially poor households most vulnerable to food insecurity, and supporting healthcare needs.

  • Social Spending. In 2020, despite a sharp drop in revenues, social spending was maintained at its 2019 level of 1.9 percent of GDP, with its composition shifting in 2020 towards healthcare in the wake of the COVID-19 pandemic (Text Table 6). Staff suggested that the authorities should use the current juncture to further strengthen the social protection framework in line with the EFF-supported reforms, for which the adoption of an appropriate social protection law, currently in the drafting stage, would be beneficial. To advance implementation of a mobile transfer system to distribute social benefits, priorities include strengthening the payment acceptance network and digital inclusion (Text Chart 3).

  • Financing Issues. The authorities are also reducing non-priority expenditures, which will help create room for rehabilitation and reconstruction and COVID-related spending. The authorities indicated that they will cover the new financing needs through RFI assistance and other emergency support, including from the African Development Bank (AfDB). They indicated that discussions with other institutions are currently ongoing to determine the size and timing of this support. The authorities are also reducing government deposit accumulation at the BEAC and cash payments on domestic arrears, compared to the December 2019 program. The lower deposit accumulation will be accompanied by the repatriation of government financial assets held abroad between 2021 and end-2023—with the authorities making efforts to repatriate them as soon as they become available (this action was an end-2020 commitment under the EFF-supported arrangement).3 The authorities indicated that, if downside risks materialize or external financial support is lower than expected, they stand ready to further reduce non-priority current and capital expenditures and revise the budget. These issues will be revisited in the context of discussions for the first review under the off-track EFF-supported program, for which the authorities have indicated their continued commitment in their program relationship with the Fund.

  • SDR Allocation. A balance of payments gap remains even after approval of the SDR allocation by the IMF Board of Governors. Notably, the size of the 2021–22 residual external financing gap is higher than the SDR allocation (even before any regional decision on BEAC reserve accumulation), with a projected external residual financing gap of about $335 million (compared to an SDR allocation of about $215 million) assuming that the projected RFI, EFF, and AfDB disbursements are made over 2021–22 (Table 6). At this stage, the authorities have not decided the potential specific use of the SDR allocations resources. As in other CEMAC countries and in line with the recently concluded discussions on CEMAC’s regional policies, the possible use of SDR allocations resources will be discussed in the context of the first review under the EFF. These potential uses will need to be consistent with regional policy objectives, including rebuilding regional reserves, while taking into account any possible additional urgent pandemic-related needs and domestic financing constraints.

Text Table 6.

Composition of Social Spending

(In percent of GDP)

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Source: Equatoguinean authorities and IMF staff calculations.
Table 1.

Equatorial Guinea: Selected Economic and Financial Indicators, 2018–26

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Sources: Data provided by the Equate Quintan authorities; and staff estimates and projections.

Including oil, LNG, LPG, butane, propane, and methanol.

Includes a one-time clearance of outstanding arrears through securitization in 2021.

Excluding oil revenues, and interest earned and paid.

Outstanding public debt includes domestic arrears, which amounted to 12.4 percent of GDP in 2020.

The SDR allocation is not included in this figure.

The local price of crude oil is the Brent and includes a quality discount.

Table 2a.

Equatorial Guinea: Balance of Payments, 2018–261

(Billions of CFA francs, unless otherwise specified)

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Sources: Equatoguinean authorities; and staff estimates and projections

The BOP data in this table are not compiled in accordance with the IMF's Balance of Payments Manual, fifth edition. The historic data have not been derived from customs and bank records' data, but from estimates of BEAC. Fund staff have made ad hoc adjustments to the data.

Including private sector consumption and non-hydrocarbon sector investment imports.

Including investment income of oil companies, which includes reinvested earnings (with an offsetting entry in foreign direct investment).

The SDR allocation is reflected via a neutral double entry of higher reserves and higher long-term liabilities.

Since 2000, entries represent changes in government deposits in commercial banks abroad.

Consists only of items on the balance sheet of the BEAC (i.e., excluding government bank deposits abroad.)

Table 2b.

Equatorial Guinea: Balance of Payments, 2018–261

(Percent of GDP, unless otherwise specified)

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Sources: Equatoguinean authorities; and staff estimates and projections.

The BOP data in this table are not compiled in accordance with the IMF’s Balance of Payments Manual, fifth edition. The historic data have not been derived from customs’ and bank records’ data, but from estimates of BEAC. Fund staff have made ad hoc adjustments to the data.

Including private sector consumption and non-hydrocarbon sector investment imports.

Including investment income of oil companies, which includes reinvested earnings (with an offsetting entry in foreign direct investment).

The SDR allocation is reflected via a neutral double entry of higher reserves and higher long-term liabilities

Since 2000. entries represent changes in government deposits in commercial banks abroad.

Consists only of items on the balance sheet of the BEAC (i.e., excluding government bank deposits abroad).

Table 3a.

Equatorial Guinea: Summary of Central Government Financial Operations, 2018–26

(Billions of CFA francs, unless otherwise specified)

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Sources: Data provided by the Equatoguinean authorities; and staff estimates and projections.

Includes social benefits and oilier transfers.

Includes a one-time clearance of outstanding arrears through securitization in 2021. Since approval of the extended arrangement under the EFF, the amount of expected arrears clearance has declined to 718 billion CFAF from 1,535 billion CFAF. This change is due to the following: (i) a comprehensive audit, which reduced the figure by about CFAF 440 billion: (II] settlement of a portion of arrears through securitization (CFAF 290 billion); and. (iii) payments in 2020.

2021 -2023 refers to repatriation of financial assets.

Statutory advances are assumed to be repayed in 10 years, starting in 2022. Includes amortization of advances in 2022–26, and payment of arrears in 2021–26.

Equal to the overall balance minus interest and hydrocarbon revenues.

Outstanding public debt includes domestic arrears.

The SDR allocation is reflected via an increase in government deposits with BEAC

Table 3b.

Equatorial Guinea: Summary of Central Government Financial Operations, 2018–26

(Percent of GDP, unless otherwise specified)

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Sources: Data provided by the Equatoguinean authorities; and staff estimates and projections.

Includes social benefits and other transfers.

Includes a one-time clearance of outstanding arrears through securitization in 2021. Since approval of the extended arrangement under the EFF, the amount of expected arrears clearance has declined to 718 billion CFAF from 1,535 billion CFAF, This change is due to the following; (i) a comprehensive audit, which reduced the figure by about CFAF 440 billion; (ii) settlement of a portion of arrears through securitization (CFAF 290 billion); and, (iii) payments in 2020.

2021–2023 refers to repatriation of financial assets.

Statutory advances are assumed to be repayed in 10 years, starting in 2022. Includes amortization of advances in 2022–26, and payment of arrears in 2021 -26.

Equal to the overall balance minus interest and hydrocarbon revenues.

The SDR allocation is reflected via an increase in government deposits with BEAC.

Table 4.

Equatorial Guinea: Monetary Survey, 2018–26

(Billions of CFA francs, unless otherwise specified; end of period)

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Source: Equatorial Guinea authorities and IMF staff estimates.

The SDR allocation is reflected via a neutral double entry of higher reserves and higher long-term liabilities, which has zero impact on reported net foreign assets.

Table 5.

Equatorial Guinea: Fiscal Financing Requirements, 2019–22

(In billions CFA francs, unless otherwise indicated)

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Source: Fund staff estimates and projections.
Table 6.

Equatorial Guinea: External Financing Requirements, 2019–22

(In millions of U.S. dollars, unless otherwise indicated)

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Source: IMF staff estimates

Includes the SDR allocation

12. The authorities continue working to clear government arrears, despite the challenges posed by the COVID-19 pandemic. They agree that it is imperative to finalize the settlement of validated do mes tic arrears through securitization, which will be accompanied by cash payments on small debts. With the assistance of legal and financial advisors they expect to conclude this process and issue securities at market rates by the second half of 2021. They share staff’s assessment that the timely settlement of these obligations is key to reducing NPLs and helping strengthen banks’ liquidity and solvency positions, thus ensuring that the banking system can function effectively as well as support the recovery of the non-hydrocarbon sector. The authorities are committed to ensuring the full recapitalization of the country’s largest bank, as well as ensuring its independent governance, at arm’s length from the government. On external arrears, the authorities are advancing talks with Spain and Belgium, with the aim of clearing arrears to Spain and Belgium before the first review of the extended arrangement under the EFF. The authorities also have external arrears to a Chinese commercial entity with which they are in good faith discussions on a new repayment calendar. In particular, the authorities and their Chinese counterparts are engaged in negotiations to revise key parameters of the borrowing framework agreement. In 2021, the authorities already made two of three debt service payments to the Chinese commercial entity that had been outstanding at end-2020, and by end-2021, at the conclusion of the negotiations, the outstanding payment would be made to the Chinese commercial entity.

13. The authorities re-iterated their commitment to maintaining fiscal sustainability by pursuing required reforms. They remain committed to stay the course of growth-friendly fiscal adjustment to bring the no n-hydrocarbon primary deficit to sustainable levels, once the crisis passes. At the core of this plan is improved revenue administration and the rationalization of capital spending, while safeguarding social spending. On revenue administration, with new leadership at the ports/customs, they are introducing customs IT reform (introduction of UNCTAD’s Automated System for Customs Data—operational in Malabo since mid-July 2021) that would be accompanied by reform of the customs structure. Also, ongoing reforms at the tax administration include (i) unification of the management of large taxpayers, (ii) separation of management and operation functions, (iii) reform of the audit function, and (iv) development of the tax information system. Most of these reforms are being supported through continued technical assistance from the Fund and are expected to be completed by end-2022. Over the medium term, large envisaged hydrocarbon projects could slow the pace of decline in hydrocarbon output and revenue growth. In addition, the authorities are pursuing a plan for economic diversification under the recently-approved development strategy Agenda 2035, which, along with the proposed privatization of government assets, would help improve resource allocation, efficiency and growth, and make the economy and public finances less dependent on the fortunes of the hydrocarbon sector.

14. The authorities agreed with the essential importance of advancing reforms to improve governance and fight corruption. In April 2021, Parliament passed the anti-corruption law in line with the 2020 decree-law and with international obligations under the UNCAC. The law was signed by the President in May 2021 and it was published in June 2021 (prior action). The authorities plan to issue a Presidential decree requiring senior public officials to submit their asset declarations for publication prior to the first review of the EFF-supported program. Further, with Fund technical assistance, the authorities will prepare the implementation regulation(s) related to the asset declaration regime for senior public officials and the governance of the Anti-Corruption Commission within the 60 days specified in the anti-corruption law. They continue to work to complete the five outstanding SBs for 2020 (Text Table 2):

  • (i) On the securitization of domestic arrears, the authorities continue to work closely with staff and their advisors. In this context, they have recently completed a tax reconciliation of construction companies’ past-due tax obligations (to be netted out before the securitization) in preparation of the securitization operation. The aim is to complete the execution of the securitization transaction during the second half of 2021.

  • (ii) The audit of the government-owned oil and gas companies is being facilitated by a local consultant hired by the authorities to render credible accounts for the gas company.

  • (iii) A website for the Official Gazette has been set up, and the authorities have started uploading the relevant legal documents. They remain committed to uploading all laws, orders and decrees applicable in Equatorial Guinea since 2000. This had been initially delayed by COVID-19 restrictions that impacted the importation of necessary IT resources. The process ha s b een further constrained by IT difficulties and issues in identifying the laws and hardcopies in sufficiently good physical state for scanning and uploading. In the meantime, the authorities have published on the Ministry of Finance’s website a comprehensive set of laws and regulations governing economic activity.

  • (iv) Building on the June 2020 list shared by the government, the authorities and staff will continue discussions on the list of assets for privatization and private management, inclusive of highly liquid assets of high market value, with the aim to finalize this for submission to the Council of Ministers prior to the first review of the EFF-supported program.

  • (v) A hydrocarbon data and information report is close to finalization. The report was expected to be published by mid-2021.

Work on other reforms beyond SBs has also advanced. In particular, the authorities recently developed a draft for their first National Strategy for the Development of Sta tis tics, aimed at strengthening statistics and providing timely and higher quality data for policymaking. The authorities have also re-iterated their commitment to implementing other measures laid out in the EFF-supported program to foster transparency and good governance and combat corruption.

15. The authorities will take steps to ensure that financial assistance is used for the intended purposes and all emergency spending is appropriately accounted for. They requested a fiscal-safeguards review (FSR) in February 2020. Staff had originally planned to conduct this review in May 2020, but this was not possible given the international travel restrictions amid staff’s judgment that it cannot be done virtually due to the high complexity of the mission, including the need to meet with myriad counterparts. Staff will continue to work with the authorities to identify the first opportunity to conduct the FSR mission, as the pandemic abates. Against this background, the authorities are committed to ensuring that financial assistance received as part of the Bata explosions and COVID-19 response is used for their intended purposes , and all emergency spending is appropriately accounted for. To support this, an independent inter national firm has been hired to work on the audit of all COVID-related spending, and the authorities have sent the first batch of documents to the audit firm (prior action). The authorities also hired an independent international firm to audit Bata emergency and rehabilitation spending (prior action). The terms of reference for the Bata-recovery-related audit were prepared in consultation with IMF staff. The authorities are committed to finishing the COVID and Bata audits and publishing the results on the Ministry of Finance’s website by end-September 2021 and end-April 2022, respectively. The authorities opened two escrow accounts at the BEAC (prior action)—one for COVID and one for Bata emergency spending—to be replenished by the existing BEAC IMF account where the RFI purchase will be made, with drawings from these three accounts subject to the BEAC’s rules, including on transparency and anti-money laundering. The authorities will also adhere to good practices in procuring and awarding contracts related to the Bata emergency and rehabilitation and pandemic response, including by issuing regulations by end-August 2021 requiring that beneficial ownership information of awarded companies is required in all procurement contracts for the Bata emergency and pandemic—with all procurement contracts (for government spending for the Bata emergency and pandemic, awarded subsequent to the issuance of the beneficial ownership information regulations) to be published on a government website by end-September 2021 and regularly thereafter. Fund technical assistance will be provided as needed to support the authorities’ commitments.

Access and Capacity to Repay

16. The authorities are requesting support equivalent to 30 percent of quota (SDR 47.25 million) under the RFI. They request that the resources be made available fully as budget support. The RFI purchase would allow the authorities to cover about 13 percent of the identified external financing gap for 2021, with this percentage increasing to up to 45 percent of the gap if adding the expected disbursements under the EFF—including the two EFF reviews that were not completed in 2020 and also the two EFF reviews scheduled for 2021. Remaining 2021 needs are expected to be filled by AfDB and other multilateral support, and by lower NFA/deposit accumulation compared to the December 2019 EFF program. The authorities have not decided the potential specific use of the SDR allocation. Equatorial Guinea meets the eligibility requirements for support under the RFI, as it has an urgent balance of payments need which, if not addressed, will result in an immediate and severe economic disruption. The urgency of the BOP need calls for an RFI before the off-track EFF can be brought back on track.

17. Capacity to repay the Fund. Equatorial Guinea has adequate capacity to repay the Fund, but this is subject to risks. Total obligations (existing and prospective credit) to the Fund remain manageable, peaking at 0.5 percent of GDP in 2026, while outstanding Fund credit peak s at 3.0 percent in 2023. Further, Equatorial Guinea maintains access to the regional CEMAC reserve pool, which remains a dequate despite the COVID-19 shock, and was recently boosted by the new SDR allocation to a projected 3.9 months of extra-regional imports in 2021. The country’s deposits at the BEAC are also projected to remain adequate, guaranteeing continued access to the reserve pool. However, risks have increased, considering the deterioration of the outlook, including from reduced deposit accumulation at the BEAC, higher Fund exposure after the RFI purchase. Nonetheless, and while overall external debt is projected to increase, it would be from a low base (14 percent of GDP in 2019), peaking at 27.7 percent of GDP in 2028. Overall public debt would decrease to about 43 percent of GDP in 2021 and would gradually decline just below 42 percent by 2026. Both public and external debt are assessed to remain sustainable, although they are subject to risks, mainly related to oil price volatility and elevated gross financing needs (Annex II).

18. Safeguards Assessment. The BEAC has implemented the priority recommendations from the 2017 safeguards assessment, including the alignment of its secondary legal instruments with the BEAC Charter and issuance of FY2019 audited financial statements in full compliance with IFRS. The RFI support will be channeled to the Treasury by the BEAC.

Staff Appraisal

19. The Bata explosions and still unfolding second wave of COVID-19 pandemic are having a severe impact on Equatorial Guinea. Before the onset of these shocks, macroeconomic imbalances were expected to narrow, and non-hydrocarbon economic activity was projected to recover in 2021. The shocks are projected to delay the recovery of real non-hydrocarbon GDP growth, widen macroeconomic imbalances, and give rise to large external and fiscal financing needs in 2021.

20. Staff supports the authorities’ immediate actions to respond to the crisis and their commitment to maintaining fiscal sustainability and continuing with reforms envisaged under the extended arrangement under the EFF. The near-term focus on fiscal accommodation and efforts to protect vulnerable groups are welcome. Measures to strengthen banking sector stability, such as the settlement of domestic arrears and the recapitalization of the largest bank, also need to be implemented without further delay. Additionally, it is important that the authorities honor their commitment to prepare and publish, in consultation with staff, a list of meaningful public assets for privatization, which should be inclusive of highly liquid assets of high market value. Once the emergency phase of this crisis passes and the pandemic abates, it is important that the authorities resume growth-friendly fiscal consolidation to bring the non-hydrocarbon primary deficit back in line with the program parameters so that public debt remains sustainable. Staff also welcomes the authorities’ commitment to continue implementing reforms to improve governance, enhance transparency and accountability, including at the country’s largest bank, and fight corruption. Reforms on revenue administration and strengthening public financial management framework also need to continue.

21. Staff welcomes the recent progress with advancing governance reforms, but emphasizes that this effort must be sustained and reforms be fully implemented. Building on the momentum created by the recent passage of the anti-corruption law, the authorities should press ahead with the issuance of the implementation decree(s) related to the asset declaration regime for senior public officials and the governance of the Anti-Corruption Commission. Staff welcomes the commitment to promptly adopt a Presidential decree requiring key high-level public officials to submit their asset declarations for publication on an easily accessible official website and urges its swift implementation.

22. Staff welcomes the financial controls and transparency arrangements that the authorities have adopted to track COVID-19 and Bata emergency and recovery-related expenditures. The authorities should follow through with their commitments to complete the ex post independent audits of the COVID-19 pandemic and Bata emergency and recovery-related expenditures and to publish the results . Staff welcomes the establishment of the escrow accounts at the BEAC for COVID and Bata emergency spending, to be replenished by the existing BEAC IMF account where the RFI purchase will be made, with drawings from these three accounts subject to the BEAC’s rules, including on transparency and anti-money laundering. Staff also welcomes government’s commitments to adhere to good practices in procurement, including issuing regulations to require that beneficial ownership information of awarded companies be requested in procurement contracts for government spending on the Bata emergency and COVID-19 responses—with these contracts being published on a government website.

23. Staff supports the authorities’ request for a purchase under the RFI. This would provide much needed resources to meet urgent funding needs arising from the widespread property destruction and loss of life caused by the Bata explosions, coupled with the growing scale and severity of the COVID-19 shock. As RFI resources will cover only a fraction of such funding needs, additional external emergency support is required to cover remaining needs. Staff urges the authorities to secure such assistance. Resumption of the EFF-supported program would help cover financing gaps, including by catalyzing donor support.

Table 7.

Equatorial Guinea: Indicators of Capacity to Repay the Fund, 2021–33

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Source: Fund staff estimates and projections.

Total debt service includes IMF repayments.

Includes the SDR allocation.

Table 8.

Equatorial Guinea: Schedule of Purchases and Timing of Reviews Under the Extended Arrangement, 2019–22

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Source: Fund staff projections

Equatorial Guinea’s quota is SDR157.5 million.

Annex I. Methodology for Quantifying the Economic Impact of the Bata Explosions

This annex summarizes the methodology and assumptions used by staff to derive a preliminary economic impact of the Bata explosions (as shown in Text Table 3, ¶5). For COVID-related expenditures, data are taken from the Ministry of Finance. In contrast, for the Bata explosions, staff devised its own estimate given that comprehensive official estimates were not available at the time of writing. Staff’s estimate is based on best available information as follows:

  • Immediate assistance to affected households: This estimate is set in line with the CFAF 10 billion allocated by the authorities to a dedicated fund for addressing humanitarian and social needs arising from the Bata explosions, including cash transfers distributed to affected households in April. The estimate is broadly aligned with the related UN estimate.

  • Cost of lost business: Staff assumes that destroyed neighborhoods within 2 km of the blast epicenter would not produce output for two months. Staff also used granular satellite data from UNOSAT on population within this radius. Finally, staff assumed that GDP would be proportional to population, with an upward adjustment as output per capita in the country’s largest two cities is expected to be higher than in rural areas.

  • Damage to non-military residential housing: This estimate is based on the UN’s Multi-cluster/sector Initial Rapid Assessment, which stipulates that 18,860 persons were affected directly by the explosions. This information is converted into affected housing units by using average household size (of 4.6 persons per household per latest census). Housing units are allocated into zones based on distance from the epicenter, based on the UNOSAT granular population data. Attributed reconstruction cost is higher in zones closer to the epicenter based on information obtained from local construction companies. The derived estimate is broadly consistent with initial but incomplete information from housing units surveyed on the ground in Bata by UNDP.

  • Damage to military housing and military non-residential buildings: Estimates are based on the authorities ‘ data of the original construction costs of these structures minus depreciation.

  • Damage to infrastructure and other damages: This component includes damages to schools and other government buildings, commercial/industrial buildings, and road, electricity, and water/sewer infrastructure. Damages are derived using proportionality assumptions where possible, such as school-age population for schools, and estimates of construction costs from local construction companies.

Annex II. Debt Sustainability Analysis1

Equatorial Guinea’s public debt remains sustainable, but its vulnerability to risks is elevated due to elevated gross financing needs. The public debt-to-GDP ratio—which is mostly domestic—is projected to fall to about 43 percent in 2021 (from 49 percent in 2020), as the economy recovers from the COVID-19 shock and oil prices recover. Stress test scenarios confirm increased vulnerability of public debt to a low growth/wide primary deficit scenario. Between 2021 and 2029, the gross financing needs ratio is about 5 percentage points of GDP higher than in the December 2019 DSA (EFF DSA), pointing to higher financing risks. Steadfast implementation of measures under the EFF-supported program— including non-hydrocarbon revenue mobilization, expenditure restraint, and sustainable growth—are essential to reduce the primary deficit and keep the public debt ratio on a firm downward trajectory while keeping gross financing needs manageable.

A. Public Sector Debt Sustainability Analysis

1. Before the Bata explosions and the onset of the COVID-19 pandemic, Equatorial Guinea’s public debt and gross financing needs (GFN) were projected to decline substantially over the medium term. Under the EFF program, after stabilizing at about 46 percent of GDP during 2019–2020, public debt was projected to gradually decline to 20 percent by 2029. At the same time, after peaking in 2020 to accommodate a planned arrears securitization operation, gross financing needs were expected to sharply fall in 2021, and henceforth average 4 percent of GDP through 2029. This performance was predicated in large part to the narrowing of macroeconomic imbalances, supported by several years of strong fiscal consolidation, that projected to continue in the EFF-supported program approved by the Executive Board in December 2019. While the largest component of public debt consists of domestic arrears (53 per cent of total do mes tic debt and 36 percent of total debt), the authorities have outlined a program for payment through securitization. The other major component of public debt is external debt, held largely under a collateralized loan facility (72 percent of public external debt) with the Export-Import Bank of China (Eximbank). Under the EFF arrangement, the authorities have committed not to contract new collateralized debt.

2. The Bata explosions and unprecedented economic stress unleashed by the COVID-19 pandemic, including the cost of procuring vaccines, will cause Equatorial Guinea’s public debt ratio and gross financing needs to rise substantially. In 2021, debt is projected to fall to 43 percent of GDP (from about 49 percent in 2020). But then rises, albeit slightly to 45 percent during 2022–23, about 3 percentage points higher than in the EFF DSA projection for 2022–23. Henceforth, the debt ratio is projected to gradually fall to 27 percent by 2031. Gross financing needs are also projected to increase by about 5 percentage points compared to the EFF DSA. The authorities indicated that they will cover the new financing needs in 2021, inter alia, through RFI assistance, and by repatriating about CFAF 20 billion (0.3 percent of GDP) of government assets held abroad, along with additional loans from AfDB and other multi-lateral institutions. With discussions on the latter at an initial stage, RFI resources could help catalyze these and other resources. In this context, this DSA assumes that all residual financing needs during 2021–31 are met through borrowing from bilateral and multilateral creditors (approximately 1.9 percent of GDP in additional financing per year). That said, additional fiscal consolidation (once the Bata rehabilitation and the pandemic are over) could help lower financing needs and external funding requirements. This could include further reductions in the still somewhat-high capital spending levels.2 Under the EFF-supported program, the authorities are also preparing a substantive list of state assets to be privatized and another list of entities that will be restructured or placed under a concession regime with the private sector (a missed structural benchmark , end -June 2020). This plan would be expected to provide additional financial resources to help close the financing gap, which are conservatively not included in the DSA at this stage. The fiscal adjustment underlying the DSA projections is based on the authorities’ commitment to ongoing reforms to revenue administration and management, which is assumed to boost non-hydrocarbon revenue, as well as on their commitment to further reducing capital expenditure. Nonetheless, fiscal risks remain material, should these reforms be delayed or not deliver the expected savings.

Text Table 1.

Revisions to Baseline Debt and Gross Financing Needs Projections

(Percent of GDP, Fiscal Years)

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Sources: National authorities and Fund staff estimates.

Includes nominal debt stock adjustment for 2015–2018.

Note: Sums may not exactly equal totals due to rounding errors.

3. Gross financing needs are higher than under the December 2019 DSA. As shown in the Text Table, the weaker baselines for both the debt ratio and gross financing needs reflects three factors: (i) lower hydrocarbon-related revenues over the projection horizon; (ii) weaker non-hydrocarbon primary balance broadly in line with higher public spending to combat the COVID-19 virus and finance the explosion-related expenses; and (iii) higher debt amortizations, as a result of higher prior year deficits.

4. Despite the weaker outlook, staff assess Equatorial Guinea’s public debt as sustainable:

  • At the core is the authorities’ commitment to the EFF-supported program. Once the emergency phase of the Bata rehabilitation and the CO VID-19 crisis passes (including the cost of vaccines), resumption of growth-friendly fiscal adjustment embedded in the program would put debt on a firm downward trajectory and reduce gross financing needs. Under the EFF-supported program the authorities had committed to an ambitious but necessary adjustment to put public debt on a sustainable path, while protecting social spending. The proposed adjustment remains feasible, once the crisis passes, given the already substantial adjustment that the authorities have undertaken during 2014–2019, primarily through the reduction of capital spending, and their commitment to bring the EFF-supported program back on track.

  • Growth is expected to strengthen over the medium term. After six consecutive years of negative growth averaging -6.8 percent during 2015 to 2020, average growth is projected to become less negative for the next ten years, averaging 0.3 percent from 2021 to 2030 (compared with -0.1 percent in the EFF DSA). This improved growth outlook is driven by new projects and output projections that would slow the pace of output decline in the hydrocarbon sector. Moreover, as these projections are conservative and do not fully reflect the expected hydrocarbon output increases, overall growth over the medium term could be higher than contained in the macro framework. This would also have a positive impact on government revenue and the debt ratios.

  • The authorities have outlined a plan for economic diversification that should make the economy and public finances less dependent on the fortunes of the hydrocarbon sector. In this context, they have begun to reform the environment for doing business to make it conducive to a thriving private sector. Other plans are for the creation of an investment promotion agency and a one-stop shop for external trade.

  • The authorities continue working to clear government arrears, despite the challenges posed by the COVID-19 pandemic. The authorities continue to work on the securitization steps, including on quantifying construction companies’ past-due tax obligations (to be netted out before the securitization) in preparation for the execution of the transaction before the first EFF review. It is expected that this operation could provide a boost to liquidity in the banking system and help to revive lending to the private sector. On external arrears, the authorities indicated that they are advancing talks with Spain and Belgium, with the aim of clearing arrears to Spain and Belgium before the first review of the EFF. The authorities also have external arrears to a Chinese commercial entity.

5. Nevertheless, Equatorial Guinea faces several debt vulnerabilities:

  • External risks: Options to issue CFA-franc denominated debt to local investors remain limited and this has forced the authorities to rely increasingly on external creditors—especially the Eximbank China facility. As a result, the shares of foreign-held debt, FX-denominated debt, and external financing needs are above the lower early warning thresholds. That said, a large part of the external financing needs also reflects external current account deficits linked to foreign direct investment.

  • Secured lending: Collateralization requirements limit scope for buffer accumulation, entailing less resilience to shocks. However, these risks are also mitigated by the absence of alternative funding sources and ready availability of the Eximbank China facility, which has prevented further disruptive adjustments from financing constraints.

  • Short maturity debt: The share of short-term debt is above both the lower and upper warning thresholds —indicating increased debt roll-over risk. However, short-term debt is low (4.4 per cent of GDP) and so are rollover risks. In addition, this risk is mitigated to some extent by available deposits held by the government at the BEAC and the commercial banks, which cover the required amortization.

  • Financial sector vulnerability: The level of NPLs in the banking system is about 50 percent, with much of it concentrated in the largest bank. The government has recently acquired the majority in this bank and has commenced a revamp of its corporate governance structure and personnel and an audit in line with COBAC’s advice. These measures, together with the pending arrears securitization, will provide the authorities with a more precise figure on the recapitalization needs. Once these reforms have been implemented, the authorities stressed that they plan to privatize the Bank.

6. Other diagnostics highlight risks to the baseline debt outlook.

  • The fan charts indicate that there is significant uncertainty around the baseline. As a small, commodity-based, and open economy, Equatorial Guinea is subject to significant macroeconomic volatility—including from international fuel price movements—causing the fan charts to exhibit a wide range of potential debt outcomes. That said, in an asymmetric fan chart, an extreme downside shock that constrains growth to zero results in a slightly downward-sloping debt path, reflecting a balance of risks skewed, somewhat, to the upside.

  • High volatility has also resulted in large past forecast errors for growth, inflation, and the primary balance, though not uniformly optimistic or pessimistic (Figure 2a).

  • The fiscal adjustment to which the authorities have committed under the EFF-supported program is ambitious by cross-country experience, both in terms of the magnitude and the resulting level of the cyclically adjusted primary balance (Figure 2b). However, the risks to the fiscal projections illustrated by these comparisons are contained by the very large adjustment over 2016–19, which suggests that these targets could still be within reach.

Figure 1.
Figure 1.

Equatorial Guinea: Public DSA—Risk Assessment

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Source: IMF staff1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white.Lower and upper risk-assessment benchmarks are:200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt4/ Bond Spread over U.S. Bonds, an average over the last 3 months, 30-Jan-21 through 30-Apr-21.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Figure 2.
Figure 2.
Figure 2.

Equatorial Guinea: Public DSA—Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Source: IMF staff1/ Plotted distribution includes program countries, percentile rank refers to all countries. Projections made in the spring WEO vintage of the preceding year2/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.Source : IMF staff.

B. Stress Tests

7. The paths of debt and gross financing needs, under some scenarios, are substantially more vulnerable to macroeconomic shocks relative to the EFF DSA, owing to the impact of the COVID-19 pandemic. Under the macro-fiscal stress-tests, debt levels and gross financing needs rise, but remain below the benchmark levels of 70 percent of GDP for debt, and the 15 percent benchmark for GFNs (except in 2021 due to the planned debt securitization). Under the alternative stress tests, a macro-fiscal shock causes public debt ratio to reach as high as 69 percent of GDP in 2026, and then gradually declines (while it never breaches the 70 percent threshold). Gross financing needs for combination shocks breaches the 15 percent of GDP threshold once in 2021 (the year with the planned debt securitization), henceforth gradually falling. That said, with GFNs above the historical average over the projection horizon, and given limited financing sources (including the likely inability of the banking sector to provide financing), financing risks have increased.

8. Steadfast implementation of measures under the EFF-supported program, once the COVID-19 shock passes, remain critical to maintaining a sustainable debt path and reducing gross financing needs to a prudent level. In this regard, the authorities would need to resume their ambitious fiscal consolidation path based primarily on increasing public revenues through improved revenue administration, and also by streamlining public spending, and improving public financial management. Particular attention would also need to be given to improving debt management and the development of an appropriate debt management strategy in line with TA recommendations.

C. External Debt Sustainability Analysis

9. A deterioration in the paths of external debt and external financing requirements, relative to the EFF DSA is also projected amid the COVID-19 shock. In 2021, the external debt ratio is projected to jump to 16.1 percent of GDP (14.8 percent in the EFF DSA), peak in 2028 at 27.7 percent, and then decline to 23 percent by 2031. External financing requirements are expected to increase in 2021 to 6.3 percent of GDP (from 5.1 percent in the EFF DSA). Henceforth, they increase rapidly to a peak of 19.8 percent in 2026 and then decline, as three large planned foreign direct investment projects in the hydrocarbon sector are implemented. Absent these projects, external financing requirements are expected to be manageable, averaging about 6 percent of GDP during the 2020–2029 period, about 3.3 percentage points of GDP higher than in the EFF DSA.

10. Stress scenarios continue to show that Equatorial Guinea’s external debt has the greatest sensitivity to the non-interest current account, combined, and real depreciation shocks (Figure 6). With external debt already having a steady upward trajectory under the baseline through 2028, the adverse scenarios cause further sharp increases. The shock that produces effects with the greatest magnitude (21 percent of GDP) is the non-interest current account shock, which reflects its historic wide volatility and causes a substantial accumulation of external debt. The inclusion of a somewhat lesser sized current account shock in the combined scenario, and the exchange rate shock also causes a sizeable effect, in each case raising external debt by about 11 percent of GDP by 2031. The growth shock also produces, sizeable effects on external debt.

Figure 3.
Figure 3.

Equatorial Guinea: Public DSA—Baseline Scenario

(Percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Source: IMF staff1/ Public sector is defined as general government2/ The SDR allocation is not included in the DSA.3/ Based on available data4/ Bond Spread over U.S. Bonds.5/ Defined as interest payments divided by debt stock at the end of previous year6/ Derived as [(r – p(l + g) – g + ae(1 +r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate or GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation7/ The real interest rate contribution is derived from the denominator in footnote 6 as r – π(1+g) and the real growth contribution as -g8/ The exchange rate contribution is derived from the numerator in footnote 6/ as ae(1 +r).9/ Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.10/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year
Figure 4.
Figure 4.

Equatorial Guinea: Public DSA—Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Source: IMF staff
Figure 5.
Figure 5.

Equatorial Guinea: Public DSA—Stress Tests

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Source: IMF staff\1 The lower growth scenario depicts a permanent negative shock of -2 percent to the baseline projection for growth and non-interest revenues to GDP. By contrast the other shock are temporary shocks.
Figure 6.
Figure 6.

Equatorial Guinea: External Debt Sustainability—Bound Tests 1/ 2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2021, 219; 10.5089/9781513595849.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shacks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2021.
Table 1.

Equatorial Guinea: External Debt Sustainability Framework, 2016–311/

(Percent of GDP, unless otherwise indicated)

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The SDR allocation is not included in the DSA.

Derived as [r – g – r(1 +g) + ea(1+r)]/(1 +g+r+gr) times previous period debt stock, with r = nominal effective interest late on external debt: r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1 +g+ r + gr) times previous period debt stock. r increases with an appreciating domestic currency (e > O) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Appendix I. Letter of Intent

July 30, 2021

Madame Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, DC 20431

Dear Madame Georgieva:

1. The government of Equatorial Guinea hereby requests emergency financing from the IMF under the Rapid Financing Instrument (RFI) in the amount of SDR 47.25 million (about US$68 million), corresponding to 30 percent of our quota. Our intention is to use these resources as budget support to finance emergency measures in response to the accidental Bata explosions and the fallout from the still unfolding COVID-19 pandemic, including purchasing vaccines. We also expect it will catalyze additional external emergency budgetary support. By maintaining our close engagement with the IMF, and with support from our other development partners, we expect to effectively respond to the humanitarian needs that have arisen from these shocks as well as the national health and macroeconomic emergency, including to help limit any negative impacts on the pursuit of our economic and development goals.

2. Equatorial Guinea has suffered a substantial weakening of its near-term economic outlook and a sharp increase in economic and financial stress since approval of the E FF-supported program in December 2019, initially due to the COVID-19 outbreak and now the recent explosions in Bata. To mitigate the impact of the Bata explosions on the population we are increasing public spending, while the immediate effects of the blasts are reducing private economic activity in the non-hydrocarbon sector. These effects are compounding existing measures to contain the COVID-19 pandemic that are strongly impacting government non-hydrocarbon revenues, and have also impacted negatively our economy. Thus, an urgent BOP need has emerged that, if not addressed, would result in immediate and severe economic disruption. While we continue to implement our reform commitments laid out under the extended arrangement under the EFF to the best of our ability in light of the constraints, our progress has been slower than envisaged under the EFF-supported program, and the immense uncertainty of the present situation, domestic economic shocks and our urgent need for financing make it impossible at present to recalibrate the EFF-supported program.

3. The Bata explosions have put additional stress on the 2021 budget which has already had to accommodate the COVID-19 crisis. Lower non-hydrocarbon sector growth has reduced non-hydrocarbon government revenues , which are projected to fall short of our pre-COVID projection (under the EFF-supported program) by 2.0 percent of GDP for 2021. At the same time, the projected cost of our Bata emergency and rehabilitation, and pandemic response plan, including the cost of procuring vaccines, is 1.3 percent of GDP in 2021. This cost is in addition to the pandemic impact on 2020 fiscal revenues and spending, that contributed to a worsening of the fiscal balance by 2.8 percent of GDP (relative to the EFF-supported program). The combined effect of spending and revenue impacts would weaken the overall fiscal balance for 2021 by 2.4 percent of GDP (relative to the EFF-supported program), with a projected deficit of 0.8 percent.

4. The Bata explosions and the ongoing COVID-19 pandemic, including purchases of vaccines, are also expected to worsen our external accounts. Imports of supplies and construction materials to provide for the needs of the victims of the Bata explosions, and vaccines to inoculate at least 70 percent of the adult population against COVID-19 would cause imports to increase in 2021, contributing to a considerable widening of the external current account deficit. At the same time, in the financial account, foreign direct investment will be lower, reflecting project implementation delays and tighter financial conditions. This would increase external financing needs by 3.1 percent of GDP in 2021 (relative to the EFF-supported program). Imports of construction inputs and equipment would also remain higher in 2022.

5. We have taken measures to contain and mitigate the fallout from the Bata explosions and the COVID-19 pandemic on the most vulnerable segments of the population and limit the impact on economic activity. In particular, our government has allocated CFAF 10 billion as an initial amount to meet the immediate needs of the victims of the Bata explosion and also established a taskforce to draft plans for rehabilitation and reconstruction of private property and public infrastructure. To fight the COVID-19 pandemic, we have deployed a comprehensive frontline-health spending plan to bolster both prevention and mitigation. In particular, we have recently procured a substantial quantity of over 800,000 vaccine doses from China and started a national vaccination campaign on March 3, 2021. As per our recently signed agreement with the UN, we will collaborate with the United Nations to obtain 600,000 doses of COVID-19 vaccines, financed by the Equatorial Guinea Multi-Partner Trust Fund (along with other participating UN organizations) to complement our efforts to vaccinate at least 70 percent of the adult population by end-2021. Earlier in the pandemic, we established a social assistance scheme for the most vulnerable, provided resources to allow for the continuity of education, provided logistics assistance to supply food markets. Our government has also provided some limited and temporary tax relief to the private sector to help address cashflow pressures and cushion adverse effects on activity and employment. Further, with the assistance of the UN we have conducted a study to measure the socio-economic impact of the pandemic on Equatorial Guinea and continued joint work is ongoing to derive policy recommendations in a socio-economic response plan. This work will help inform our policies for recovery to a sustainable growth path over the medium term. We intend to use the RFI resources for budget support to finance the Bata emergency and rehabilitation response and COVID-19 related measures, including the purchase of vaccines. In addition, starting in 2021 we are committed to repatriate all available financial assets held abroad as soon as they become available for repatriation and no later than end-December 2023. We will keep the Fund informed of the status of the repatriation of these resources. If necessary, we stand ready to further reduce non-priority expenditures this year and revise the budget accordingly.

6. Notwithstanding the impact of the Bata explosion and the pandemic, our government remains committed to maintaining fiscal sustainability and continue to implement the policies required to support that objective. Once the shocks have abated, foreign direct investment inflows should resume, and economic growth strengthen. No n-hydrocarbon sector growth will also improve once domestic arrears are settled, a process that we expect to complete by the second half of 2021. Our government is committed to implementing fiscal reforms to continue to reduce the non-hydrocarbon primary deficit, notably with the help of improved revenue administration and continued spending rationalization. In line with these projections, public debt relative to GDP, after rising substantially in 2020, should begin to gradually decline starting in 2021. We are advancing talks with Spain and with Belgium’s export credit agency (Credendo) on the settlement of arrears and remain committed to clearing these arrears before the first review under the EFF-supported program. Likewise, regarding our arrears to a Chinese commercial entity, we are under discussions to agree on a new repayment calendar, while we have completed in 2021 two of the three overdue payments that had been outstanding at end-2020.

7. We remain committed to the objectives and reform agenda of the EFF-supported program. In July 2020 we adopted an anti-corruption decree law in line with our international obligations under the United Nations Convention Against Corruption (UNCAC), and we published it on the Ministry of Finance website in August 2020. In line with the decree law, parliament approved in April an anti-cor ruption law and it was issued by the Presidency in May. As the decree-law, the regular law has also been published at the Ministry of Finance website (prior action). Relatedly, we will also issue the implementation decree(s) related to the asset declaration regime for senior public officials and the governance of the Anti-Corruption Commission within the 60 days specified in the anti-corruption law. In line with the anti-corruption law, we commit to adopting a Presidential decree requiring key high-level public officials to submit their asset declarations for publication on an easily accessible official website by a date prior to the first review of our EFF-supported program. To contribute toward closing the financing gap, and by a date prior to the first review of our EFF-supported program, we commit to reconsider the list of meaningful public assets for privatization, in consultation with Fund staff, and the publication of the list, which would be inclusive of highly liquid assets of high market value. We will continue to work to implement other measures contained in the EFF-supported program and the government’s action plan that seek to improve transparency, foster good governance, and fight corruption. In the area of public financial management, since the requested fiscal safeguards review could not yet take place due to the COVID-19 crisis, we are taking measures to increase transparency and accountability in the use of any emergency resources that the government receives. We are committed to adhering to good practices in procuring and awarding contracts for all government spending in relation to the Bata emergency and COVID-19 responses by issuing regulations by end-August 2021 to require for beneficial ownership information of awarded companies to be required in procurement contracts. We also commit to publishing all procurement contracts (for government spending in relation to the Bata emergency and COVID-19 responses), that are awarded subsequent to the issuance of the beneficial ownership information regulations, on the Ministry of Finance website (including the names of the companies awarded the contract and their beneficial ownership information, the specific nature of the goods or services procured, their price per unit, and the overall contract amount) with Fund technical assistance as needed by end-September 2021 and continuing to publish this information thereafter on a regular basis. We will also publish on the same website reports of ex-post validation of delivery. Further, we have hired an external, independent international firm to audit the COVID-related spending (including spending related to the November 2020 BDEAC COVID loan), and has already started this audit after sending the first batch of documents to the audit firm. Additionally, we have also hired the audit firm contracted for the COVID audit to also audit all Bata emergency response and rehabilitation-related expenditures, by extending their terms of reference. The extension to the terms of reference for the audit of the Bata emergency and rehabilitation-related spending was prepared in consultation with IMF staff. We are committed to finishing this audit by end-April 2022 and that on COVID-related spending by end-September 2021, and publishing their results on the Ministry of Finance’s website by then. To further enhance transparency in Bata and pandemic emergency spending, we opened two escrow accounts at the BEAC—one for COVID and one for Bata emergency spending—to be replenished by the existing BEAC IMF Transactions Account where the RFI purchase will be made, with drawings from these three accounts subject to the BEAC’s rules, including on transparency and anti-money laundering.

8. The Government of Equatorial Guinea values its engagement with the IMF. It does not intend to introduce or intensify exchange and trade restrictions and other measures or policies that would compound Equatorial Guinea’s balance of payments difficulties.

9. The government of Equatorial Guinea reaffirms its willingness to maintain its engagement with the IMF and uphold its commitments under this instrument. We will cooperate with the IMF in relation to any updated safeguards assessment of BEAC to be carried out by the IMF. We hereby grant our permission for the publication of this Letter of Intent, the staff report and related documents for the request for financial support under the RFI.

10. Please accept the assurances of our highest consideration and esteem.

/s/

Valentin Ela Maye

Minister of Finance, Economy and Planning

Table 1.

Prior Actions

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Source: IMF staff
1

Fund staff estimates incorporate information from the Equatoguinean government, construction firms operating locally, and the local UN office (further details in Annex I).

2

The securities would be provided to banks in exchange for overdue loans. The securities would be valued in line with the prudential framework or IFRS for those banks that have adopted IFRS. The improvement in solvency is expected from the reversal of provisions on NPLs that the new securities will be replacing. The risk weight on the securities is also expected to be lower than the ones on the NPLs. Finally, an improvement in liquidity is expected from the securities that banks will receive and can be used to obtain liquidity from BEAC.

3

The repatriation of foreign assets will partly cushion the impact of lower private sector claims and government deposit accumulation on Equatorial Guinea’s imputed reserves at the BEAC, relative to the 2019 EFF Staff Report.

1

The DSA does not reflect the SDR allocation.

2

This should have no major impact on economic growth given that capital expenditures are import-intensive, implying a low fiscal multiplier.

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Cover IMF Staff Country Reports
Republic of Equatorial Guinea: Request for Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2021: Issue 219
Publisher:
International Monetary Fund
ISBN:
9781513595849
ISSN:
1934-7685
Pages:
56
DOI:
https://doi.org/10.5089/9781513595849.002
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    Equatorial Guinea: Area Affected by the March 7 Explosions in Bata City

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    Text Figure 1.

    Equatorial Guinea: Inflation, 2019–21

    (In percent, year-on-year)

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    Text Figure 2.

    CEMAC Countries: Food Inflation, 2020–21

    (In percent, annualized)

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    Text Figure 3.

    Equatorial Guinea Mobile Transfer Diagnostic

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    Figure 1.

    Equatorial Guinea: Public DSA—Risk Assessment

  • <sup><xref rid="RA001fig05" ref-type="fig">Figure 2.</xref></sup> <sup><xref rid="RA001fig05" ref-type="fig">Figure 2.</xref></sup>
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    Figure 2.

    Equatorial Guinea: Public DSA—Realism of Baseline Assumptions

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    Figure 3.

    Equatorial Guinea: Public DSA—Baseline Scenario

    (Percent of GDP, unless otherwise indicated)

  • <sup>Figure 4.</sup>
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    Figure 4.

    Equatorial Guinea: Public DSA—Composition of Public Debt and Alternative Scenarios

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    Figure 5.

    Equatorial Guinea: Public DSA—Stress Tests

  • <sup><xref rid="RA001fig09" ref-type="fig">Figure 6.</xref></sup>
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    Figure 6.

    Equatorial Guinea: External Debt Sustainability—Bound Tests 1/ 2/

    (External debt in percent of GDP)

Equatorial Guinea: Area Affected by the March 7 Explosions in Bata City
Text Figure 1.

Equatorial Guinea: Inflation, 2019–21

(In percent, year-on-year)
Text Figure 2.

CEMAC Countries: Food Inflation, 2020–21

(In percent, annualized)
Text Figure 3.

Equatorial Guinea Mobile Transfer Diagnostic
Figure 1.

Equatorial Guinea: Public DSA—Risk Assessment
Figure 2.

Equatorial Guinea: Public DSA—Realism of Baseline Assumptions
Figure 2.

Equatorial Guinea: Public DSA—Realism of Baseline Assumptions
Figure 3.

Equatorial Guinea: Public DSA—Baseline Scenario

(Percent of GDP, unless otherwise indicated)
Figure 4.

Equatorial Guinea: Public DSA—Composition of Public Debt and Alternative Scenarios
Figure 5.

Equatorial Guinea: Public DSA—Stress Tests
Figure 6.

Equatorial Guinea: External Debt Sustainability—Bound Tests 1/ 2/

(External debt in percent of GDP)