I. Introduction

On behalf of our authorities, we would like to express our deepest gratitude to Executive Directors and Management for the continued support to Equatorial Guinea. We extend our appreciation to staff for the excellent policy advice and fruitful discussions held in Malabo in May 2022 and in Washington during the Spring Meetings.

The 2020 COVID-19 pandemic and accidental massive explosions at Bata’s military compound in March 2021 struck at a time when Equatorial Guinea was implementing a wide range of measures to stabilize its economy following a lengthy period of economic contraction.

To address the imbalances created by the multiple shocks, the authorities have drastically consolidated fiscal spending and revised their development program following the April 2019 Third National Economic Conference, drawing lessons from development experts, as well as the Fund’s Extended Fund Facility (EFF) and the Rapid Financing Instrument (RFI). Such recalibration was necessary to ensure fiscal sustainability, increase non-hydrocarbon revenues and boost social spending. The authorities broadly concur with staff’s analysis and main policy recommendations and are committed to comply with CEMAC regional strategy agreed upon in 2016.

II. Recent Economic Development

Overall macroeconomic conditions have gradually improved. Real GDP is expected to grow by 5.8 percent in 2022 compared to negative 3.2 percent in 2021. The lower-than-expected gas production in 2021, the start of Bata reconstruction, the authorities’ gradual ease of pandemic containment measures consistent with a deceleration of COVID cases, together with recent fiscal adjustments, program implementation and improving international oil prices led to an improvement in overall economic conditions. However, inflation is estimated to have risen to 6 percent in 2022, driven by higher international oil and food prices, fueled by global recovery from the pandemic and supply shocks caused by war in Ukraine. The non-hydrocarbon primary fiscal balance is estimated to have improved by 2.4 percentage points of GDP in 2021, led by a decline in capital spending and purchases of goods and services. Nonetheless, increased fiscal spending related to Bata reconstruction, support to the banking system, and higher other spending are anticipated to negatively offset such improvement in 2022.

The external and fiscal sectors are expected to recover considerably this year. The improvement is led by higher hydrocarbon prices, which should strengthen the balance of goods trade and reduce the current account deficit in 2022 by 1.6 percent of GDP. As a result of limited capital spending, increased hydrocarbon revenue resulting from improved oil prices, an overall fiscal surplus of 3.7 percent of GDP is expected in 2022.

III. Outlook and Risks

The outlook is expected to remain challenging amid continued depletion of hydrocarbon output linked to mature fields and a lack of new investments on the sector. Overall GDP is projected to contract in 2023 and through the medium term, dragged by continued declining hydrocarbon yield, stalled structural reforms, subdued business confidence, and a fragile banking sector. The authorities are aware of this challenging outlook and remain committed to address it forcefully. They will enhance their efforts to accelerate the implementation of their 2035 development plan and related reforms to diversify the economy away from oil and gas sectors and boost inclusive growth. The work underway to improve governance, and the banking sector will be intensified. The non-hydrocarbon sector is expected to recover gradually with enactment of the online tourist visa and other measures to strengthen private sector confidence and enhance the business climate. The authorities will continue to address structural rigidities to unleash supplemental sources of revenue.

Risks to the outlook are titled to the downside. The authorities will proceed with their targeted measures to mitigate risks, including by diversifying sources of imports of basic goods against the backdrop of increased domestic inflation. Health authorities also remain attentive to any resurgence of the pandemic and are committed to act swiftly with targeted measures to keep the pandemic under control and preserve the flow of economic activity. Similarly, structural reforms remain a top priority on the authorities’ development agenda aimed at improving the health of the financial sector, and they will continue to work closely with their development partners to boost capacity, enhance governance, and further improve non-hydrocarbon growth.

IV. Fiscal Policy

Fiscal policy in the near-term seeks to stabilize the economy while providing support to vulnerable populations, repaying domestic arrears, and rehabilitating Bata’s critical infrastructure. Thus, part of the hydrocarbon revenue windfall will be used to rebuild macroeconomic buffers and protect the economy from future adverse shocks, while protecting the most vulnerable population from the increase in food prices with targeted measures. The authorities reiterate their resolve to maintaining fiscal sustainability by reducing the non-hydrocarbon primary deficit and are adopting measures to increase revenue collection from VAT, customs, and other sources. They are also advancing on their goals aimed at boosting domestic food production and expanding social safety net programs implemented during the COVID-19 pandemic to a wider set of vulnerable population. To this objective, they are working closely with UNICEF, and other international financial institutions to progressively make such spending sustainable and cost-effective.

The government is committed to containing spending, strengthening PFM while preserving debt sustainability. A system to track capital expenditures on a timely basis has been put in place and the authorities are currently working to improve the monitoring of current expenditure to enhance the overall public spending efficiency and accountability. They also envision room for fiscal saving by reducing further the still high fuel subsidies through enhanced targeting. Technical assistance from the Fund might be necessary to implement a more comprehensive reform on fuel subsidies, to ultimately incorporate an automatic pricing mechanism, while at the same time protecting low-income households with targeted measures. On public debt, Equatorial Guinea’s debt remains low and is assessed to be sustainable over the medium term. Nevertheless, it is subject to substantial risks steaming from the volatility of international oil prices and the path of the authorities’ reform agenda.

The authorities’ tax reform targets an efficient and broad-based tax system that applies equitably to all. Accordingly, the authorities have adopted measures to improve tax administration, modernize the PFM framework, increase transparency, and improve the business climate for non-oil investment, including on tourism, farming, and fishing industries. They have also adopted other tax measures including enactment of excise taxes on imported beverages, tobacco, luxury vehicles to help generate additional non-hydrocarbon revenues. Similarly, they will uphold a higher personal income tax rate for non-residents, introduced in early 2019.

V. Financial Sector

The authorities are determined to address high nonperforming loans (NPLs), undercapitalization, and low liquidity at some banks. To this end, they have financed part of their domestic arrears’ repayments with 90 percent of the 2021 SDR allocation as well as government bonds under their strategy of domestic arrears clearance and recapitalization, which is consistent with COBAC prudential regulations and governance norms. The second phase of the strategy should be completed in the coming months since the hiring of a new broker has recently been finalized, and the process of bonds issuance and treasury bills administration should be accelerated from now on. The authorities have taken robust actions to fully capitalize a major troubled bank with the support of COBAC.

To enhance financial inclusion, the authorities are closely working towards the implementation of the regional financial inclusion strategy. They have started developing the national financial inclusion strategy with the TA of the World Bank and will continue along this path to enhance financial access and inclusion, including by working with BEAC, to develop and promote mobile payments, complemented with adequate oversight and regulations. As a first step towards establishing a specialized commercial court, the authorities plan to pass relevant legislation by end-2022. They also plan to incentivize the adoption of mobile payments to make it a central and affordable instrument of payments.

VI. Structural Reforms and Governance

The authorities are promoting economic diversification to boost non-hydrocarbon growth. The economic diversification strategy based on the Third National Economic Conference in April 2019 aims to diversify the economy away from oil and gas sectors. As a result, the authorities’ revised and updated their development plan to 2035 following the conference. Some of the key actions implemented already under the strategy include the establishment of a one-stop shop for investment to boost the business environment, and the removal of the domestic partner requirement for foreign investors. Efforts to reduce costs for businesses, telecommunication prices were recently made, and a new commission to improve port operations and reduce tariffs is also in place. In April 2022, the authorities published a list of state assets for privatization through outright sale or through management contracts. The authorities ratified the United Nations Framework Convention on Climate Change in 2018, and recently launched the REDD+ program or Reducing Emissions from Deforestation and forest Degradation program, with roles for conservation, sustainable management of forests, and enhancement of forest carbon stocks. This will help to limit deforestation and forest degradation, and the first step is developing a Land Use Plan with FAO.

The authorities are committed to supporting a dynamic private sector and see their privatization strategy as key element of the government’s approach to leverage existing assets to develop a dynamic non-hydrocarbon sector. They see merit in enhancing skills of the local workforce, including through health and education. The authorities support the need for a structured and transparent framework for the sale and/or privatization of public assets. They envision plans to carefully manage the transition away from hydrocarbons and reiterate their intention to secure a financial return from the environmental services provided by their protected forest and its biodiversity program.

The government has devised a strategy to improve governance, transparency, and the fight against corruption and is currently implementing it. Their objectives under the strategy are outlined in their Action Plan published in 2019. Starting in September 2022, they plan to begin publication of semi-annual reports on implementation progress of the Good Governance and Anti-Corruption Action Plan. Recently, an anti-corruption law has also been adopted, and an anti-corruption commission and asset declaration regime are being implemented as well, reflecting their firm efforts to fighting corruption. The production of preliminary reports by the ongoing audits of COVID and Bata spending, GEPetrol and SONAGAS proves the authorities’ resolute commitment to transparency, good governance and fighting corruption. The authorities are also making good progress on their ongoing work to update their EITI membership application.

VII. Conclusion

The authorities reiterate their strong commitment to remain closely engaged with the Fund to address the country’s macroeconomic imbalances as well as the region’s. They will continue to enhance their fiscal position, improve governance, and protect the most vulnerable populations from the adverse impact of fiscal adjustment and elevated inflation. They will continue to work with the Fund and their development partners to address the daunting challenges they face.