Republic of Equatorial Guinea: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Republic of Equatorial Guinea
Author: International Monetary Fund. African Dept.
Publication Date:
07 Feb 2024
eISBN:
9798400265181
Language:
English
Keywords:
renewed commitment; government deposit; headline inflation; IMF staff calculation; return on equity; Arrears
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1. A secular decline in oil production has led to macroeconomic imbalances. Over 2014–21, real GDP fell by a compound growth rate of -5 percent per year. Revenues and exports also decreased, straining the fiscal and external balances as reflected by Equatorial Guinea’s declining contribution to the regional reserves, and elevated domestic arrears, which translated into high levels of non-performing loans (NPLs) in the banking sector. While macroeconomic conditions improved somewhat in 2022 owing to elevated hydrocarbon prices, prospects remain gloomy, with hydrocarbon production projected to decline by a further 50 percent between 2023 and 202831. Without strong policy responses, all the gains in per capita income achieved over the last two decades are expected to fully unravel by 2028 (Figure 1).

Abstract

1. A secular decline in oil production has led to macroeconomic imbalances. Over 2014–21, real GDP fell by a compound growth rate of -5 percent per year. Revenues and exports also decreased, straining the fiscal and external balances as reflected by Equatorial Guinea’s declining contribution to the regional reserves, and elevated domestic arrears, which translated into high levels of non-performing loans (NPLs) in the banking sector. While macroeconomic conditions improved somewhat in 2022 owing to elevated hydrocarbon prices, prospects remain gloomy, with hydrocarbon production projected to decline by a further 50 percent between 2023 and 202831. Without strong policy responses, all the gains in per capita income achieved over the last two decades are expected to fully unravel by 2028 (Figure 1).

Background

1. A secular decline in oil production has led to macroeconomic imbalances. Over 2014–21, real GDP fell by a compound growth rate of -5 percent per year. Revenues and exports also decreased, straining the fiscal and external balances as reflected by Equatorial Guinea’s declining contribution to the regional reserves, and elevated domestic arrears, which translated into high levels of non-performing loans (NPLs) in the banking sector. While macroeconomic conditions improved somewhat in 2022 owing to elevated hydrocarbon prices, prospects remain gloomy, with hydrocarbon production projected to decline by a further 50 percent between 2023 and 20283 1. Without strong policy responses, all the gains in per capita income achieved over the last two decades are expected to fully unravel by 2028 (Figure 1).

Figure 1.
Figure 1.

Equatorial Guinea: Hydrocarbon and Growth Developments

Citation: IMF Staff Country Reports 2024, 025; 10.5089/9798400265181.002.A001

Sources: Equatoguinean authorities, IMF database, and IMF staff calculations

Equatorial Guinea is also grappling with governance and corruption vulnerabilities. Voice and accountability, regulatory quality and control of corruption are the institutional areas with the biggest needs for improvements (Figure 2). While the country stands below LICs and the SSA region in measurements of the Rule of Law and Government Effectiveness, it fares similarly to other CEMAC countries. In the area of Political stability and the absence of violence or terrorism the country performs better relative to comparators.

2. Against this backdrop, the authorities responded with a reform agenda supported by an Extended Fund Facility (EFF) arrangement approved in 2019. However, the EFF lapsed at end-2022 without a review completion. The fiscal consolidation efforts fell short of objectives largely due to a series of shocks (Covid-19 and Bata explosions); many governance reforms were not implemented on time due to insufficient ownership; and the banking system vulnerabilities were not addressed. Still, there have been important strides in key reforms since late 2021 as easing of the pandemic freed up the authorities’ capacity for reform implementation. For the first time since September 2019, Equatorial Guinea’s net foreign assets (NFA) at BEAC improved steadily and turned positive in 2022. 2 A significant part of the 2022 hydrocarbon revenue windfall was saved, as reflected in the large fiscal surplus. Progress was made on the governance agenda with the passage of an Anti-Corruption law in late 2021, the completion of the audits of the largest state-owned oil and gas companies and the payments of part of audited domestic arrears. Further progress was also achieved in implementing the 2022 Article IV recommendations, including the macroeconomic policies, select PFM measures, banking sector restructuring, and domestic arrears clearance (see Annexes I and II).

Figure 2.
Figure 2.

Equatorial Guinea: There is a Need to Strengthen Most Governance Areas

(WGI Indicators, 2021, point scale, -2.5 to 2.5)

Citation: IMF Staff Country Reports 2024, 025; 10.5089/9798400265181.002.A001

Note: Showing standard errors bars for Equatorial Guinea.Sources: Daniel Kaufmann and Aart Kraay (2023). Worldwide Governance Indicators Database. The WGI is a perception-based indicator which aggregates data from more than 30 think tanks, international organizations, nongovernmental organizations, and private firms. The accuracy of perception-based indicators can be biased by experts’ views. Non-IMF indicators provide qualitative information about corruption, they do not represent IMF’s assessment of the level of corruption.

3. On the political front, presidential and legislative elections were held in November 2022. President Obiang Nguema Mbasogo and the ruling coalition won in those elections. The participation of women in Parliament has improved compared to the 2017 election. The international community’s reaction to the electoral process was mixed. With the elections behind, political space for reforms appears to have increased as reflected by the authorities’ request at the highest level for strong engagement with the Fund through a UCT program and technical assistance.

Recent Developments and Reform Progress

4. The macroeconomic situation improved in 2022, but this was short-lived as shown by some high-frequency indicators in the first half of 2023.

  • After seven consecutive years of contraction, real GDP grew by 3.2 percent in 2022, reflecting a recovery in the non-hydrocarbon sector following the lifting of COVID-19 containment measures and Bata reconstruction, as well as a temporary boost in hydrocarbon production spurred by high energy prices. 3 While the growth momentum continued in the non-hydrocarbon sector, hydrocarbon real GDP collapsed by 18.9 percent year-on-year in the first half of 2023 due to an accident at one of the platforms in the largest oil field.

  • In 2022, average inflation rose to 4.9 percent (against –0.1 in 2021), driven by increased food prices stemming from the global shocks. Inflation (year-on-year) declined to 2.3 percent through October 2023.

  • The overall fiscal surplus jumped from 2.6 percent of GDP in 2021 to 13.6 percent of GDP in 2022, higher than projected at the 2022 Article IV consultation, owing to a larger hydrocarbon revenue windfall. However, the non-hydrocarbon primary fiscal deficit deteriorated to 13.1 percent of non-hydrocarbon GDP in 2022 from 8.6 percent in 2021, reflecting underperformance of non-hydrocarbon revenue collection and large capital spending linked to the Bata (major city) reconstruction. Budget execution through 2023 H1 was characterized by a drop of 34 percent in total revenues compared to the same period of 2022, reflecting a sharp decline in hydrocarbon revenue, and a lower execution of the spending envelope.

  • The current account surplus declined from 4.2 percent of GDP in 2021 to 2.4 percent of GDP in 2022 primarily driven by a deterioration in the income balance deficit due to increased outflows related to the repatriation of retained earnings. Equatorial Guinea’s NFA BEAC turned positive in 2022 for the first time since 2015 driven by record FDI inflows in the petroleum sector. Equatorial Guinea’s 2022 external position is assessed to be substantially weaker than medium-term fundamentals and desirable policies. In 2023, the external sector has experienced a significant deterioration, with volume of hydrocarbon exports in the first half of the year decreasing by approximately 25 percent year-on-year.

Figure 3.
Figure 3.

Equatorial Guinea: Food and NonFood Inflation Rate

(Percent, YoY)

Citation: IMF Staff Country Reports 2024, 025; 10.5089/9798400265181.002.A001

Sources: Equatoguinean authorities and IMF staff calculations

5. The banking sector remains under severe stress. At end-July 2023, non-performing loans (NPLs) stood over 55 percent of total loans due to domestic arrears. Banks representing 60 percent of total assets were significantly undercapitalized. While liquidity ratios show consistent and increasing improvements since 2022 due to an increase in government deposits, one systemic bank is structurally dependent on liquidity provision from the central bank.

Text Table 1.

Equatorial Guinea: The Banking Sector Remains Significantly Undercapitalized

(Financial Soundness Indicators, 2020–23, Percent)

article image
Source: Banking Commission of Central Africa (COBAC).

Calculated according to the Basel I guidance.

Billions CFAF

Return in ROE is calculated based on annualized net profit before tax.

6. The authorities have advanced some overdue structural reforms since the last Article IV and the expiration of the EFF program. The 2024 budget phases out most of the existing fuel subsidies and the authorities are preparing a plan for their complete elimination. They repaid a part of domestic arrears and are finalizing a comprehensive domestic arrears clearance plan with the support of an international auditor. Other reforms include a law limiting the recourse to non-competitive tender in the public procurement code, a law establishing a treasury single account, and deployment of the IT customs system ASYCUDA in the Luba port (in addition to Malabo). To foster non-hydrocarbon economy, they operationalized the online visa platform and signed management contracts for the Malabo airport and Bata port. Good progress was made in advancing the new debt IT management system. On restoring the soundness of the banking sector, the authorities finalized an agreement with a private investor interested in acquiring a large stake in the banking sector. Among governance measures, funding has been appropriated for the anti-corruption commission. The authorities have also intensified their fight against corruption, including in several high-profile cases.

7. Authorities’ Views. The authorities broadly agreed with the characterization of recent economic developments and reform progress and the broad conclusions of the external sector analysis. They highlighted substantial reform progress made in 2023 to argue that difficulties encountered in the EFF program implementation over 2019–22 were mainly due to a series of shocks (the Covid-19 pandemic and the Bata explosions in 2021), which required the authorities to focus their limited resources on crisis management instead of the reform agenda. The impact of the shocks was exacerbated by the absence of the Fund missions on the ground and delays in technical assistance provision stemming from travel restrictions.

Outlook and Risks

8. The economy would broadly remain in recession on the back of a continued decline in oil production. Real GDP is expected to contract by 8.8 percent in 2023 and 1.4 percent on average between 2024–28, as the projected subdued growth in the nonhydrocarbon sector (average growth of 3.2 percent over 2023–28) would be insufficient to compensate the decrease in hydrocarbon output. 4 Inflation is expected to moderate to 2.5 percent in 2023 but will temporarily increase to 5 percent in 2024 driven by the removal of food and fuel subsidy programs. Inflation is projected to stay below 3 percent on average from 2025 onwards. The current account balance surplus is expected to decline to 1 percent of GDP in 2023 and average -7.6 percent of GDP over the medium term, leading to a fall in Equatorial Guinea’s contribution to international reserves at the BEAC.

9. Based on the authorities’ announced plan, fiscal accounts are projected to deteriorate in 2023 before improving from 2024 onwards. In 2023, the overall fiscal surplus would drop to 0.3 percent of GDP from 13.6 percent in 2022, while the non-hydrocarbon primary fiscal deficit is expected at 23.3 percent of non-hydrocarbon GDP, up from 22.7 percent of non-hydrocarbon GDP in 2022. In 2024, the overall fiscal surplus is projected to increase to 2.9 percent of GDP, while the non-hydrocarbon primary deficit would improve to 19.5 percent of non-hydrocarbon GDP. Over the medium term (2025–26), the baseline scenario reflects an additional cumulative fiscal adjustment of 0.9 percentage points of non-hydrocarbon GDP based on the authorities’ currently approved measures and plans.

10. The balance of risks to the outlook is tilted to the downside (Annex III). Faster-than-projected depletion of oil reserves, waning demand for hydrocarbons amid acceleration of global transition to net zero and delays in implementing key policy reforms could worsen the economic recession and the fiscal and external balances, and sharply increase public debt. Other downside risks include lower hydrocarbon prices and another global food shock. In the case downside risks materialize, the authorities would need to sharply adjust, while protecting the most vulnerable. On the upside, there are several natural gas projects under development that could cushion the projected decline in hydrocarbon production.

11. Authorities’ Views. The authorities broadly agreed with staff’s assessment of Equatorial Guinea’s outlook and risks. Over the medium term, they concurred with staff to not include, at this juncture, in the baseline scenario the impact of several hydrocarbon projects under development given elevated uncertainties. They stressed they have a plan to boost non-hydrocarbon growth and need CD and financing support of international organizations, including the IMF.

Figure 4.
Figure 4.

Equatorial Guinea: Medium-Term Outlook

Citation: IMF Staff Country Reports 2024, 025; 10.5089/9798400265181.002.A001

Sources: Equatoguinean authorities and IMF staff calculations.

Policy Discussions

Discussions focused on the need to anchor the fiscal framework on the nonhydrocarbon primary balance and embark in fiscal consolidation, as well to accelerate transformative reforms.

A. Ensuring Medium-Term Fiscal Sustainability

12. With the continuous decline in oil production, the authorities should anchor fiscal policy on nonhydrocarbon primary balance (NHPB) and consolidate public finances. This would help smooth the adjustment to the oil production decline and avoid the procyclicality of fiscal policy and the need for abrupt spending cuts when hydrocarbon revenues are exhausted. To avoid a costly sovereign stress event (Annex V of the 2022 Article IV), staff recommended a cumulative adjustment in the NHPB of 6.0 percent of non-hydrocarbon GDP (or 2.7 percent of overall GDP) over 2024–26 to maintain public debt below 40 percent of GDP during that period.

13. Staff highlighted the need for bold measures to raise non-hydrocarbon revenue and reduce non-priority expenditures. At about 6.6 percent of NHGDP (or 5 percent of GDP), the level of non-hydrocarbon revenue is too low to offset the declining hydrocarbon revenue and finance the development needs. Efforts to mobilize non-hydrocarbon revenue are constrained by weak revenue administration, outdated tax policy, low digitalization, and large tax exemptions. Staff advised the authorities to increase non-hydrocarbon revenue by at least 1.5 percentage points of NHGDP over 2024–26 by notably deploying the IT customs system (ASYCUDA) to all ports, fully implementing the single window for vehicle clearance, enlarging the tax base, streamlining tax exemptions, introducing a digital VAT system, and strengthening the large taxpayer’s unit. These revenue measures should be complemented by efforts to compress spending by 4.6 percentage points of NHGDP, including by phasing out of fuel subsidies, streamlining civil servants’ benefits, and reducing public investment on physical infrastructure. This rationalization will also create space for an increase in social spending to at least 2 percent of GDP per year (against 1.8 percent of GDP on average per year over the last three years) (Annex VIII).

14. Efforts to strengthen public debt management should be accelerated. Equatorial Guinea’s debt stock is estimated at 34.6 percent of GDP by end-2022. Staff assesses Equatorial Guinea’s overall risk of sovereign stress as moderate (Annex V). Completion of the new debt IT management system would improve debt management and reporting along with debt services projections. The authorities should maintain their current policy of not contracting new guaranteed debt.

15. The authorities have put forward a budget for 2024 that targets a reduction in the nonhydrocarbon fiscal deficit by 3.8 percentage points of NHGDP. The budget projects an increase in non-hydrocarbon revenue by 0.6 percentage point of NHGDP and a compression in total primary expenditure by 3.1 percentage points of NHGDP. To this end, the government has adopted a series of impactful measures (Annex VIII). On the revenue side, the authorities are finalizing a new tax law to enlarge the tax base and streamline tax exemptions (see Box 1); they are also deploying the IT customs system and the single window for vehicle clearance in Bata the IT customs system and the single window for vehicle clearance in Bata. On the spending side, they have decided to phase out most of the regressive fuel subsidies in 2024.

Overview of the New Tax Law

The government is finalizing an update of its 2004 Tax Law. The new law aims to modernize and simplify the tax system, expand the tax net through better compliance, incentivize foreign direct investment (FDI), and streamline and harmonize income tax regulations in line with CEMAC directives. Complementary tax administration measures will be crucial to ensure the law fosters domestic revenue mobilization.

The new law aims to increase the tax base through new taxes and revised policies. It proposes changes to taxes on business and employment income, and capital gains. Changes in the Value Added Tax (VAT) include reduced rates for essential goods, and the expansion of the VAT base to cover electronic commerce services. Special taxes on tobacco and alcohol remain unchanged and in line with previous Fund recommendations. The law also introduces a special regime for SMEs, taxes on property, and a financial activities tax. In addition, it updates rates and obligations for the taxation of gambling, entertainment, and recreation.

A central objective of the law is to improve the business environment, notably through reduced tax rates and a special regime. These measures include: (i) reduction of the Corporate Income Tax (CIT) rate (from 35 to 25 percent), and on capital income; (ii) adjustments in the deductibility of general expenses; (iii) the introduction of a foreign tax credit; and (iv) refunds of input VAT tax credits. A special regime for non-profit entities and extractive sectors is planned, with the latter also benefiting from the lower 25 percent CIT rate. As CIT is only one component of the fiscal regime for petroleum (as natural resources are location-specific rents that can be taxed at a higher rate), an assessment of the lower rate can only be done considering the interaction with the other fiscal elements (notably royalties and profit petroleum sharing).1

Enhancing revenue administration capacity remains crucial to improve compliance and boost revenue collection. The new law provides a framework to modernize the tax system and introduces policy measures to broaden the tax base. However, it provides little information of complementary administrative efforts to effectively implement the new taxes and enhance compliance, particularly for income taxes (businesses and individuals), and VAT. A medium-term strategy focusing on revenue administration measures would provide greater credibility and assure effective implementation capacity to increase revenue yield.2 Strengthening the Large Taxpayer Unit, improving VAT administration, and enhancing property registries are crucial measures and require coherent strategies to ensure their effectiveness.

1 Tools like FAD’s Fiscal Analysis of Resource Industries (FARI) model can help provide such an assessment.2 The importance of revenue administrative is exemplified by recent developments in customs, with the deployment of ASYCUDA leading to large increases in taxes collected.

16. The authorities’ efforts to clear domestic arrears are welcome but more transparency in the repayment process is warranted. From 2019–23, a total of CFAF 572.2 billion (9.5 percent of GDP) out of CFAF 1,382.5 billion (20.8 percent of GDP) was paid to construction companies, of which CFAF 65.3 billion (1.1 percent of GDP) were paid using the SDR allocation (Annex VI). As of August 2023, the net audited debt owed to construction companies (gross value minus fiscal obligations) was CFAF 479.3 billion (or 7.9 percent of GDP). A key concern is the lack of clear criteria for the repayment of these domestic arrears. The authorities agreed with and are implementing staff’s recommendation to adopt a comprehensive arrears’ clearance plan. This plan would set the criteria and contain strong safeguards to ensure the transparency of the repayment process, including an annual progress report produced by an international auditor. On external arrears, staff encouraged the authorities to resolve external arrears with Belgium and Spain. Staff has no reports of arrears with other external creditors.

17. Authorities’ Views. The authorities were receptive to staff recommendations on ensuring fiscal sustainability. They agreed to anchor the fiscal framework on the nonhydrocarbon primary balance and embark on upfront fiscal consolidation. With respect to domestic arrears clearance, they indicated that a comprehensive plan with all the safeguards is being finalized with the support of an international auditor.

B. Strengthening the Banking Sector and Financial Inclusion

18. Banks representing 60 percent of total assets are significantly undercapitalized. Authorities are currently advanced in implementation of measures to address solvency and liquidity issues of half (by asset size) of the troubled portion of the banking sector according to a plan developed in consultation with the BEAC and COBAC. Staff insisted that this plan needs to be paired with efforts to recover distressed assets, including the creation of a special unit within any recapitalized bank and the strengthening of debt enforcement framework. Staff highlighted that clearance of audited domestic arrears to construction companies would help restore the capital position of remaining troubled banks. As of end-March 2023, bank-financed domestic arrears amounted to CFAF 334.2 billion (or 4.5 percent of GDP).

19. The Government is finalizing the National Financial Inclusion Strategy. This national strategy is a transposition and an adaptation of the regional strategy prepared at the CEMAC level. It covers elements related to financial literacy, financial inclusion indicators and mobile payments and is expected to be adopted very soon.

20. Authorities’ Views. The authorities agreed with the need to strengthen the banking sector and promote financial inclusion. They will ensure that their restructuring and recapitalization plan is executed as foreseen. They are committed to reducing the cost of this restructuring and recapitalization plan to the state by stepping up efforts to recover assets. However, they do not intend to prioritize the clearance of domestic arrears linked to non-performing loans at banks outside the scope of their current plan but intend to include them in the general arrears clearance strategy that is currently being prepared. They viewed promoting financial inclusion as an important policy goal.

C. Fostering Inclusion and Non-Hydrocarbon Growth

21. Social spending should be increased to boost human capital development. Equatorial Guinea’s social spending is significantly lower than peers. Despite significant inequalities and human capital needs, the government spends less than 2 percent of GDP on social sectors. In contrast, average social spending in Sub-Saharan Africa and CEMAC is almost 5 and 3 times higher than in Equatorial Guinea, respectively (Text Table 2). In the education sector, efforts should be directed to (i) addressing low completion rates, high repetition and drop-out, and improving teachers’ training; (ii) construction of public pre-primary, primary, and secondary schools in growing urban and peri-urban centers; and (iii) ensuring that higher education centers are fully operational to develop human capital domestically. In the health sector, priority spending areas include supporting the expansion of “Distritos Sanitarios” and starting of the second demographic and health survey. Water, sanitation, and hygiene (WASH) policy should prioritize investments in schools and remote districts with lower access to safe WASH services.

Text Table 2.

Equatorial Guinea: Social Spending is Very Low by Regional Standards

(Percent of GDP)

article image
Sources: Equatoguinean authorities; World Bank; WHO; and IMF staff calculations.

Based on latest available data. Figure on Drinking Water consists of expenditure on water and sanitation.

Based on latest available data in CEMAC countries excluding GNQ. Figure on Drinking Water consists of expenditure on water and sanitation for Gabon.

22. Equatorial Guinea needs to enhance its social protection system. The successful completion of the ongoing national household survey will help reduce the significant gaps in socio-economic indicators and define social policy priorities. Ratifying the social protection law is a priority toward the creation of a flagship social safety nets (SSNs). The successful implementation of SSNs will be key in supporting energy subsidy reform.

23. Authorities’ Views. The authorities concurred with staff on the importance of increasing social spending and strengthening the social protection system and highlighted their recent efforts in that regard. In late 2022, they hired 2,748 new public sector workers in social sectors, with about 80 percent aimed at pre-primary and primary education. They are building 8 new hospitals and 31 health centers, 1 university and 32 schools. A national household survey is being completed with the support of the World Bank, and the results will help reduce the significant gaps in socio-economic indicators and define social policy priorities. The social protection draft law is under review.

24. With hydrocarbon production in secular decline, fostering economic diversification is critical to long-term growth and macroeconomic stability (See Annex VII). The main constraints to economic diversification include a distortive business environment, lack of financing, high labor costs, and labor market rigidities, as well as weak human capital. The authorities have developed a diversification strategy that targets four sectors –agriculture, finance, fisheries, and tourism and contains a range of horizontal reforms (e.g., single window for establishing new firms, increasing access to mobile and internet service coverage, extending access to finance, developing vocational programs, internships, and secondments) and vertical policies (e.g., sector-specific tax exemptions, subsidies, special economic zones). They have published a list of state assets for privatization through outright sales or through management contracts and should prepare an asset-sales plan based on open and transparent international tenders.

Figure 5.
Figure 5.

Equatorial Guinea: Can Improve Health Outcomes Through Greater Spending Adequacy and by Focusing on Priority Areas

Citation: IMF Staff Country Reports 2024, 025; 10.5089/9798400265181.002.A001

Sources: WHO, WEO, Global Burden of Disease, and IMF staff calculations

25. The authorities should focus on reforms aimed at reducing the regulatory burden for business creation, stimulating private sector-led growth, ensuring the well-functioning and efficiency of markets and better coordination between relevant ministries. Policies aimed at supporting specific sectors need to be better justified, based on clearly identified market failures, tailored to the country’s capacity, and evaluated periodically. In this regard, the mission advised the authorities to identify the most relevant externalities that could justify direct support and include sunset clauses on sectoral support measures. The authorities should work to ensure prioritization of specific initiatives, such as for example a tourism promotion and awareness campaign, which drive the long-term goals of the diversification agenda.

26. Authorities’ Views. The authorities reaffirmed their determination to foster economic diversification through a combination of both horizontal and vertical policies. Based on a diagnostic they conducted on the progress on the diversification agenda, the authorities recognized that better coordination between relevant government agencies would further enhance policy effectiveness. The authorities are focused on attracting FDI and have a strategy to cultivate an international investor base. They presented their plan to representatives of the private sector during a conference on economic diversification held the last week of November 2023. They have signed management contracts for the Malabo airport and Bata port and are determined to accelerate the privatization process.

27. Equatorial Guinea is setting the stage for a low-carbon and climate-resilient economy. Equatorial Guinea is vulnerable to flooding, above-average rise sea-level and temperature, as well as coastal erosion. The country’s biodiversity and pollution levels are also affected by rapid infrastructure development and the drilling and extraction in the hydrocarbon sector. In 2018, the country ratified the United Nations Framework Convention on Climate Change (UNFCCC), setting out its ambitions for reducing emissions by 20 percent by 2030 (relative to 2010 levels) and by 50 percent by 2050. Environmental sustainability is a key pillar in the National Strategy for Sustainable Development “Horizon 2035”. In 2023, Equatorial Guinea developed the National Action Plan for Adaptation to Climate Change (PANA). Further, the authorities’ steps to reduce fuel subsidies and enact new taxes on vehicles are in line with their commitment to lower carbon impact.

28. The climate change agenda needs natural disasters coping mechanisms for the most vulnerable, better data tracking, and concrete action plans tied to a results-oriented budget. To that end, the authorities should:

  • Operationalize the National Council of Sustainable Development, created under the 2021 Presidential Decree 69 to oversee the National Strategy for Sustainable Development “Horizon 2035”.

  • Integrate climate change considerations in the budget planning mapped to the goals in the National Strategy for Sustainable Development “Horizon 2035” and related strategies.

  • Transition away from fossil fuel energy over time.

29. Authorities’ views. The authorities viewed building a low-carbon and climate-resilient economy as an important goal. They indicated that their mitigation efforts would focus on five sectors: (i) energy, (ii) transport, (iii) agriculture, and forestry, (iv) industrial, and (v) waste management. The authorities are committed to phasing out energy subsidy from 2024 to help strengthen price signals and encourage the use of more efficient and clean energy sources. They also committed to better integrating climate change considerations in public investment.

D. Improving Governance and Fighting Corruption

30. Improving governance and fighting corruption are critical to promoting a private sector-led growth. Equatorial Guinea has serious macro critical governance and corruption vulnerabilities and addressing them is critical to promoting stronger and more inclusive growth. Discussions focused on progress and steps in the following policy areas:

  • Public financial management. The authorities have taken steps to improve cash management and limit non-competitive bidding in public procurement. Staff recommended: (i) steadfast implementation of the law on the Treasury Single Account and the law on public procurement; (ii) timely publication of budget execution reports, under a set time schedule (two months after the end of the period); and (iii) interconnection of the expenditure tracking systems with the treasury operations IT system.

  • Anti-Corruption. Most of the recommendations from the 2019 governance diagnostic, including operationalization of the anti-corruption commission and publication of asset declarations of senior public officials, remain to be implemented. 5 The authorities have taken steps to operationalize the Anti-corruption Commission (ACC). They have allocated funding in the recently revised 2023 budget and the budget for 2024 and are finalizing the regulations operationalizing the ACC and asset declaration process. They have also stepped up their efforts to combat corruption across the public administration as evidenced by several recent high-profile anti-corruption cases. Staff welcomed these developments and called for the full operationalization of the Anti-corruption Commission by mid-2024. The operationalization of the ACC to enable complete implementation of the anti-corruption framework, including publication of asset declarations of senior public officials.

  • AML/CFT. The GABAC, the regional Financial Action Task Force Body, has now agreed with the authorities on a comprehensive assessment mission of the effectiveness of the AML/CFT system in April 2024. Since the previous mission was cancelled, staff warned that a lack of assessment could result in Financial Action Task Force (FATF) grey listing, with negative repercussions on correspondent banking relationships and the soundness of the financial sector. Although the financial integrity risks are significant, adequate implementation of AML/CFT reforms remains a significant challenge. The National Financial Intelligence Agency (ANIF) should develop and publish a guidance for domestic financial institutions to identify and verify politically exposed persons and their beneficial ownership, and to report related suspicious transactions activities to the National Financial Intelligence Agency (ANIF).

  • Transparency in the hydrocarbon sector. The authorities need to prepare and publish a comprehensive hydrocarbon report for 2022, following the one already published for 2019. Transparency Initiative (EITI) membership, staff welcomes the authorities’ renewed commitment to the EITI, with the launch of a website and other ongoing activities by the preparatory group.

  • Transparency. The authorities need to take measures to: (i) complete the publication of beneficial ownership information of COVID- and Bata-related spending and publish related procurement documents; (ii) publish the asset declarations of senior public officials; and (iii) complete the uploading of all laws and decrees on the website of the Official Gazette.

31. Authorities’ Views. The authorities highlighted their policy efforts to improve governance and fight corruption, including the passage in late 2021 of the Anti-corruption law, the completion and publication of the audits of the state-owned oil and gas companies, the completion of audit of domestic arrears to construction companies, progress on the TSA, and the adoption of the new public procurement code. They stressed their commitment to operationalize the Anti-Corruption Commission (ACC) by mid-2024, which will set the stage for the asset declaration of public officials. The ANIF indicated that ongoing workload constraints and low capacity limit their outputs. It informed staff about current guidelines on identifying politically exposed persons and steps taken to the membership application to the Egmont Group. The authorities are taking steps to prepare to submit a new application for EITI membership to enhance transparency in the hydrocarbon sector.

Other Issues

32. Authorities need to continue advancing efforts on data provision and timeliness to facilitate surveillance and monitoring the state of the economy. Data provision have serious shortcomings that significantly hamper surveillance. Some strides have been made in the compilation and dissemination of macroeconomic data, including CPI, public finance, and national accounts. The deployment of the IT customs system (ASYCUDA) to all ports in the country is expected to strengthen statistics on external sector. However, key statistical weaknesses persist. During the Article IV mission, staff reiterated the need for prompt dissemination of BOP and IIP data, establishment of statistical services in all ministries and public agencies, and more broadly for steadfast implementation of the 2022–25 national development strategy for statistics.

33. Given the country’s limited capacity, a successful reform agenda for Equatorial Guinea must also go hand in hand with technical assistance. To this end, a list of TA priorities has been developed (see Annex VIII). Discussions continue on ways to ensure implementation of previous TA recommendations and provide enduring capacitation across agencies and beyond individuals. Staff recommended the appointment of a TA coordinator.

34. The authorities requested a financing arrangement with the Fund in June to provide external financing as well as an anchor for their ongoing reform efforts.

35. Authorities’ Views. Currently, the authorities feel that, despite its low capacity, Equatorial Guinea has been rationed out of CD given its middle-income status. The authorities are keen to receive more TA, particularly on macro-fiscal issues, statistics, and governance. They expressed their preference for long-term experts (LTXs) and offered to pay a part of the cost. The authorities do not see merit of a staff-monitored program (SMP) as a steppingstone towards a financing program that had been repeatedly proposed to them to build a track record. The authorities believe that they have built a record of reforms and implementation capacity since late 2021 and particularly in 2023.

36. Safeguards assessment. The 2022 safeguards assessment found that BEAC maintained strong governance arrangements. A recent safeguards monitoring mission followed up on the implementation of remaining 2022 safeguards recommendations and an external quality assessment of internal audit.

Staff Appraisal

37. In 2022, economic indicators improved after a long recession. Real GDP expanded on account of both hydrocarbon and non-hydrocarbon economic recovery. Thanks to high oil and gas prices, both fiscal and current account balances were in substantial surpluses as part of the oil windfall was saved. Equatorial Guinea was the lead contributor to the increase in the CEMAC’s international reserves in 2022. However, the non-hydrocarbon primary fiscal deficit deteriorated somewhat in 2022 relative to 2021, reflecting the Bata reconstruction-related expenditures and the underperformance of nonhydrocarbon revenue. Headline inflation was higher than historical average. The external position is still assessed to be substantially weaker than implied by economic fundamentals and desirable policies in line with the assessment in the 2022 Article IV consultation.

38. However, the recovery was short-lived with economic indicators projected to deteriorate from 2023 onwards. The economy is expected to fall back into recession in 2023, weighed down by a sharp decline in oil production, while headline inflation is expected to moderate. In the years ahead, the economy would remain in recession due to the projected continued decline in oil production and lackluster non-hydrocarbon growth. This would put fiscal and external accounts under strain. The outlook faces downside risks linked to the secular decline in oil production and the challenging business environment.

39. Against this backdrop, fiscal policy should be anchored on nonhydrocarbon primary balance and consolidate public finances. To achieve this, the authorities need to step up efforts to raise more non-hydrocarbon revenue and reduce non-priority spending. Near-term policy priorities include deploying the IT customs system in additional offices in the country, fully implementing the single window for vehicle clearance, phasing out fuel subsidies, strengthening taxpayer segmentation centering on the Large Taxpayer Office. The 2024 budget is in line with staff advice as it targets a substantial fiscal adjustment underpinned by a series of impactful measures, notably a significant reduction in fuel subsidies and a new tax law (already approved by the council of ministers) that will enlarge the tax base and streamline tax exemptions.

40. Addressing the banking sector vulnerabilities and promoting financial inclusion are key to fostering economic diversification and inclusive growth. Steadfast implementation of the authorities’ plan to restructure and recapitalize the troubled part of the banking sector is warranted. These efforts should be coupled with actions to recover assets to limit the budgetary cost. A plan is also needed to address capital shortfalls in the remainder of the banking system. Finally, the authorities need to finalize and implement the national financial inclusion strategy.

41. Bold structural reforms are needed to foster economic diversification and support inclusive growth. Priorities include (i) advancing repayments of domestic arrears based on a comprehensive plan the authorities are developing that sets clear criteria for the repayment and contains strong safeguards to ensure the transparency of the process; and (ii) reducing the regulatory burden for business creation, boost investment in basic healthcare, education, and sanitation, to support development of human capital, and ensure the well-functioning and efficiency of markets. These efforts should be complemented by an acceleration of the privatization of some public assets based on open and transparent international tenders.

42. Efforts to address serious governance and corruption vulnerabilities need to be stepped up. The funding of the Anti-corruption Commission, the forthcoming issuance of the two implementing decrees of the Anti-corruption law and recent anti-corruption cases are welcome steps. The adoption of a law limiting the recourse to non-competitive tender in public procurement code and the signature of a decree establishing a treasury single account represent additional governance improvements. Operationalizing the anti-corruption commission is key to further the anti-corruption agenda, including the asset declaration system of senior public officials.

43. The authorities need to make great strides in their transparency framework. Staff welcomes steps taken to address feedback received from EITI International Secretariat on the prior membership application, while noting that the process will be lengthy. Staff encourages active consultation with the EITI International Secretariat in that process. Other priority actions include publishing a periodic report on the hydrocarbon sector and completing the uploading of all laws and decrees on the website of the Official Gazette.

44. Steadfast implementation of the 2022–25 national development strategy for statistics is warranted to address shortcomings that hamper surveillance. Priority actions include tackling the remaining gaps in the provision of economic statistics on the external sector and the net international investment position, establishing statistical services in all ministries and public entities and strengthening capacities.

45. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

Equatorial Guinea: Selected Economic and Financial Indicators, 2019–28

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

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

Excluding oil revenues, and interest earned and paid.

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

Refers to imputed reserves.

Table 2a.

Equatorial Guinea: Balance of Payments, 2019–281

(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, 2019–281

(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

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, 2019–28

(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 an d other transfers.

Includes a one-time clearance of outstanding arrears through securitization in 2023.

2021–2025 refers to repatriation of financial assets.

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.