Statement by Mr. Aivo Andrianarivelo, Executive Director for Gabon Mr. Facinet Sylla, Alternate Executive Director and Mr. Thierry Nguema-Affane, Senior Advisor to the Executive Director

June 27, 2022

Abstract

June 27, 2022

June 27, 2022

Our Gabonese authorities thank Executive Directors, Management, and Staff for the strong technical and financial support to Gabon during the pandemic notably through the emergency assistance in 2020 and the approval of EFF arrangement in 2021. They appreciated the candid discussions with Staff during their missions in Libreville in December 2021 and May 2022.

Program implementation under the EFF has progressed despite a difficult environment. The authorities’ efforts to contain the pandemic bore fruit as evidenced by the low infection rates. This contributed to lifting all remaining COVID-related restrictions in the country and boosting economic recovery, especially in the services sector. Reflecting the authorities’ ownership of the program, all 14 structural benchmarks under the first and second EFF reviews were implemented, albeit with some delay for half of them. However, performance on quantitative targets was mixed reflecting challenging public financial management in the context of the pandemic. Corrective actions are being taken to improve program implementation. Gabon is expected to benefit from current high oil prices, which will help rebuild fiscal buffers, advance reform implementation, and foster its contribution to reserve accumulation at the regional central bank, BEAC.

The Gabonese authorities remain committed to the program and stand ready to take additional measures if necessary to keep the program on track. In light of this, the Gabonese authorities are requesting the completion of the first and second EFF reviews and approval of related decisions.

I. Recent Developments, Outlook and Risks

The Gabonese economy rebounded in 2021 following a contraction in 2020. GDP growth reached 1.5 percent in 2021, driven by higher commodity exports and a rebound in private investment amid global recovery. Inflation remained contained below the regional convergence criterion of 3 percent, but inflationary pressures have intensified since end-2021 with the global recovery. The current account deficit also narrowed owing to higher net exports. It is worth stressing that diversification of trading partners has increased, as the share of the main three trading partners has declined by almost 20 percent over the decade.

Fiscal performance in 2021 was broadly in line with the program objectives. Both non-oil and oil revenues increased owing to further streamlining of tax exemptions and higher oil prices despite a lower production in compliance with OPEC+ quota. Expenditures were kept below targets due to under-execution of capital spending while current spending increased in the context of the fight against the pandemic. As a result, non-oil primary deficit was contained at 7.1 percent of nonoil GDP as programmed, while the overall fiscal deficit improved on the back of higher oil revenues. Public debt has declined by 12.5 percentage points to 65.8 percent in 2021 and remains sustainable. However, debt service will remain high over the medium-term although efforts are pursued to improve debt reporting, lengthen maturities, and avoid the bundling of repayments to mitigate refinancing risks.

Significant progress has been made in implementing reforms to improve revenue mobilization, public financial management (PFM), social protection, transparency in COVID-19 spending and management of oil revenue. These include the transposition in national legislation of the six regional PFM directives adopted in December 2021, the submission of a membership application to the Extractive Industries Transparency Initiative (EITI), the publication of the COVID-19 spending audit report, and the adoption of a ministerial decree requiring, among others, the disclosure of names and nationalities of ultimate beneficiaries of all public procurement contracts. The existing database of economically weak Gabonese individuals (GEF) has been updated to ensure compliance with eligibility criteria and a new GEF database based on new poverty indicators will be established by end-December 2022. The authorities developed a strategy to clear all domestic arrears and will continue to identify and assess other domestic arrears that were not included in the 2020 stock audited and validated in early 2021, including salary arrears and arrears with certain public entities, to obtain an exhaustive stock of domestic arrears.

The financial sector remains broadly stable and profitable in 2021. NPLs remained stable at 7.8 percent in 2021 albeit asset quality could deteriorate once temporary prudential measures are lifted according to the regional banking commission. The liquidation of the three public banks has advanced and will be completed in the coming months. The authorities intend to set up a special purpose entity to pursue the realization of assets and the settlement of residual liabilities in close collaboration with the Ministry of Justice. A financial inclusion strategy for 2022-2027 was developed to improve access to financial services for vulnerable and excluded populations and promote digital finance. This strategy is expected to be adopted by end-2022.

The near-term outlook remains positive, but downside risks remain significant. Preliminary information for 2022Q1 confirms the uptick in economic activity and signs of recovery are more visible across all sectors. Fiscal and external balances at end-March 2022 improved thanks to higher commodity exports and prices. Inflation is trending higher due to rising petroleum and food prices which could affect the living standard of the most vulnerable population. Credit to the economy has increased with the ongoing recovery in nonoil sector. Overall, these positive trends should continue throughout the year, with growth projected to reach 2.8 percent as nonoil activity further picks up. The authorities share staff’s assessment of downside risks to this outlook which include resurgence in COVID infections, lower growth in main trading partner economies and persistent geopolitical tensions. These risks, when realized, could put additional pressure on public finances and hinder social protection. On the other hand, higher commodity prices will enable further rebuilding of fiscal and external buffers.

II. Program Performance

The observance of quantitative performance criteria and targets at end-December 2021 was mixed. This reflects economic and public financial management challenges posed by the pandemic, and lower-than-projected external support, including the non-disbursement of the 2021 budget support from AfDB, which led to shortfalls in non-oil revenue collection, higher drawdowns in deposits and accumulation of external arrears. Nevertheless, the target on social spending for end-December 2021, which has been a priority in the authorities’ program, was observed. In the meantime, all external arrears accumulated through mid-June 2022 were cleared, the bulk of them in May 2022, as the fiscal situation is improving.

The authorities followed through with their commitment to implement the frontloaded conditionality measures under the first and second EFF reviews despite setbacks in their implementation. All 14 structural benchmarks –including the 13 SBs under the first review– have been implemented, although more time was needed to implement some of them. The two benchmarks on the publication of the COVID audit report and the decree on ultimate beneficiaries of all public procurement contracts were implemented in June 2022 as prior actions for the first and second reviews. The third prior action, also taken in June 2022, was the submission to the Parliament of the revised budget law for 2022 that further streamlines tax exemptions (another structural benchmark).

Corrective actions were taken to address weaknesses in program implementation. Steps were taken to enhance budget execution, improve cash management and strengthen coordination between the Treasury and Debt departments to avoid new domestic and external arrears. Interdepartmental coordination on debt payments is expected to improve through notably the establishment of a weekly meeting of an ad hoc committee.

In light of this, the authorities are requesting waivers for nonobservance of missed PCs and modification of performance criteria.

III. Policies for 2022

Going forward, the authorities remain strongly committed to the objectives of the program and intend to leverage the current favorable oil price to further strengthen buffers and advance critical reforms to improve revenue mobilization and public financial management, reinforce the financial sector, and ameliorate the business environment, while protecting the most vulnerable. The authorities remain committed to enhancing the anticorruption and AML/CFT frameworks and pursue climate change mitigation efforts. They intend to use the entire 2009 SDR allocation and only 15 percent of the 2021 allocation for domestic debt repayments and budget financing, while the remainder of the allocation will support international reserves at BEAC.

A revised budget for 2022, in line with program objectives, has been adopted by the Parliament on June 21, 2022, to account for the recent geopolitical shocks on public finances. The revised budget still targets fiscal consolidation –although at a slower pace than initially contemplated in the initial budget law– through higher revenue expected from better nonoil revenue mobilization and reprioritization of expenditures. Part of the oil windfalls will be used to mitigate, through petroleum and wheat subsidies, the impact of higher petroleum and food prices on the most vulnerable and avoid any social unrest. In particular, two petroleum products, kerosene and cooking gas, which are mostly consumed by vulnerable households, will remain subsidized. Petroleum subsidies are being contained through price adjustments on other petroleum products and the progressive resumption of the automatic petroleum setting mechanism suspended in 2021. It should be mentioned that the authorities are in the process of developing a well-targeted social transfer system towards economically weak Gabonese individuals (GEF) in collaboration with the World Bank. Priority social and infrastructure spending will be also protected. The non-oil primary deficit is projected to decline from 7.1 percent of non-oil GDP in 2021 to 6.2 percent in 2022 and the overall fiscal balance will turn positive in 2022. Acknowledging the high uncertainty over commodity prices and the risk of possible revenue or financing shortfalls, the authorities will continue to use the existing reserve mechanism to ensure the achievement of the fiscal objectives.

Revenue mobilization and public financial management reforms will be pursued, with the assistance of external partners. The revised budget law for 2022 further streamlines tax and customs exemptions, and efforts will continue to modernize tax and customs administrations. The control of expenditures and the effectiveness and efficiency of public spending will be strengthened, especially regarding the wage bill and public investment. Also, cash management will continue to be reinforced with the completion of the full implementation of the Treasury Single Account (TSA) by January 2023 and the rationalization of compensation mechanisms, with a particular emphasis on the reform of the VAT escrow account. Consistent with the recommendations of the most recent PIMA report, legal and methodological refinements of the public investment management framework are ongoing, with a view to improve public investment execution and quality and address critical infrastructure gaps.

Efforts to strengthen transparency in the management of oil resources will be sustained to ensure that the government receives all oil revenues it is entitled to. In this regard, the authorities will conduct an audit of the oil sector to assess the cost oil, review the agreements between the oil companies, government, and public enterprises, evaluate the viability of the national refinery (SOGARA) and revisit the trading activities of Gabon Oil Company (GOC). They are committed to refrain from requesting prefinancing based on future oil revenues and ensure the repatriation of oil revenues by public enterprises to the TSA at the central bank.

Governance and performance of SOEs and public financial institutions will be reinforced to support revenue mobilization and reduce fiscal risks. The four main SOEs (GOC, SOGARA) and public financial institutions (Caisse de Depots et de Consignations (CDC) and Fonds Gabonais d’Investissements Stratégiques (FGIS)) are implementing the recommendations of the management audits carried out in 2021Q4. CDC and FGIS have already certified and published their 2021 financial accounts. The same is expected from GOC and SOGARA later this year. Also, a public portfolio management strategy will be prepared to enhance the monitoring of government equity in corporations.

The authorities will pursue efforts to strengthen financial sector resilience in Gabon. The ongoing clearance of domestic debt and strengthening of commercial court are expected to improve asset quality and preserve financial stability. Also, given the strong sovereign-bank nexus, the authorities are working with BEAC to widen investor base for government securities by developing a framework for non-banking investment in sovereign papers.

Progress is being made to improve the production and availability of macroeconomic statistics and modernize the national statistical system. The authorities have undertaken the rebasing of national accounts, the transition to the 2008 SNA, the production of the 2011-2022 national accounts and the production of quarterly GDP with IMF technical assistance. A database management platform is being developed to make key statistics accessible to all users and is expected to go live by end-September 2022. The Directorate General of Statistics is providing technical support in updating the GEF database. Weaknesses identified in the production of monetary and balance of payments statistics are being addressed by the regional central bank.

Gabon is following through with its climate change commitments. Gabon is net carbon absorber thanks to its large rainforest. The authorities view this natural resource as a global public good and believe that its preservation is critical to fight climate change at the global level. Efforts in this regard were already rewarded in June 2021 with a payment from the Kingdom of Norway under the CAFI. Consistent with the national climate plan and in line with the Paris agreement on climate change, the authorities adopted in September 2001 a legislation establishing a legal framework for carbon credit trading at the national level and a national climate change fund. The fund will help channel domestic and external financing to support policies and actions towards forest conservation and reduction in carbon emission, including human capacity building.

IV. Conclusion

Progress has been made in program implementation despite a challenging environment. The Gabonese authorities followed through with their reform commitments under the program and corrective actions were taken to improve program implementation. They remain committed to the program and stand ready to take further measures to keep the program on track. In light of this, they are requesting the conclusion of the first and second reviews under the EFF-supported program and approval of related decisions. Executive Directors’ favorable consideration of their requests will be appreciated.