Public Information Notice: IMF Concludes Article IV Consultation with Equatorial Guinea

August 30, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On August 23, 1999, the Executive Board concluded the Article IV consultation with Equatorial Guinea.1


Recent economic developments have been dominated by the coming on stream of important oil fields in 1996, and subsequent sharp increases in government expenditure. Oil production rose from 17,000 barrels per day at end-1996 to 83,000 barrels per day at end-1998, and boosted real GDP growth to 71 percent in 1997 and 22 percent in 1998. Consumer price inflation increased from 4 percent in 1997 to close to 7 percent in 1998, on an end-of-year basis. The external current account deficit, which narrowed from 104 percent of GDP in 1996 to 38 percent of GDP in 1997, widened to 82 percent of GDP in 1998, reflecting mainly major new oil-related direct investment.

Fiscal policy was marked by sizable spending overruns. Government expenditure (excluding interest payments) increased from 19 percent of non-oil GDP in 1995 to 69 percent in 1998, including large extrabudgetary investments, partly related to the June 1999 regional summits held in Malabo, which were financed through advances made by oil companies. Public investments also covered road construction and other infrastructure improvements in the country, including schools and health centers.

During 1997-98, government revenue increased by close to 9 percentage points of GDP to 25 percent of GDP, owing to the continued expansion of oil output and revisions in production-sharing contracts with oil companies in 1998 in favor of the government. Government oil revenue improved significantly, from 13 percent of oil exports in 1997 to 20 percent in 1998, although this share is still small by international standards, with inadequate fiscal control on the payments accruing from the oil companies. Non-oil revenue collection also improved steadily, reflecting primarily the impact of logging activity, and the increased effectiveness in the collection of consumption and import taxes on petroleum products that followed the privatization of the national petroleum distribution company in 1998. However, because of ad hoc exemptions and tax evasion, the collection of other import taxes deteriorated significantly. The overall fiscal balance (excluding grants) turned from a surplus of 1.4 percent of GDP in 1997 to a deficit of 2.1 percent of GDP in 1998. In early 1999, as large repayments were made by government on oil company advances through deductions withheld by these companies at source from government oil revenue, the treasury ran into financial difficulties and resorted to central bank financing, reaching its statutory borrowing limit in April 1999, and the government continued to accumulate domestic and external payments arrears.

Monetary developments in 1997 and 1998 were characterized by a significant improvement in the net foreign assets position of the banking system, reflecting rapid growth in broad money and a modest increase in credit to the private sector, mostly in the form of short-term loans to timber and cocoa exporters. With the recapitalization of Société Générale, the largest commercial bank, in September 1998, Equatorial Guinea's two banks now both meet the prudential and solvency ratios established by the regional banking commission (COBAC); they maintain large excess liquidity in other Central African Economic and Monetary Community (CEMAC) countries on the regional interbank money market.

In the area of structural reforms, the authorities adopted a new law in December 1997 that aims at improving the supervision and monitoring of forestry activity and at scaling down timber production to a sustainable level. The government also privatized and liberalized the distribution of petroleum products in December 1998. In addition, the trade regime has been significantly liberalized since August 1994, as the implementation of the CEMAC tax and trade reforms has substantially reduced the levels and dispersion of tariffs and eliminated all quantitative restrictions. However, the authorities have not reduced tax and customs exemptions to broaden the tax base, as called for under the CEMAC reform, and they continue to impose a customs duty on imports from other CEMAC countries. In the areas of civil service reform and privatization, little progress was made in 1997-98, with the exception of petroleum products distribution.

Executive Board Assessment

Directors noted that the coming on stream of important new oil fields in 1996 and the intensification of logging activity had brought about unprecedented rates of real GDP growth, but at the same time had led to an increasing reliance of the economy on oil exports and, to a lesser extent, on timber production. Directors were concerned by the persistent weaknesses in economic policy performance, macroeconomic management, and governance in Equatorial Guinea. They pointed to the large extrabudgetary expenditures undertaken by the authorities in 1996-98 and during the first quarter of 1999, and financed through advances made by oil companies on nonconcessional terms; the continued accumulation of domestic and external payments arrears; and the heavy recourse to bank financing to cover the fiscal deficit during the first part of 1999.

Directors urged the authorities to steadfastly implement the corrective measures agreed with the staff and to strictly adhere to the fiscal policy stance mapped out for the remainder of 1999 and for 2000. They stressed the need to establish fiscal discipline and accountability; ensure a prudent and transparent management of public sector resources, especially the growing income from oil; and improve control over expenditure commitment and management. In particular, Directors emphasized the need to establish modalities for the systematic transfer of oil revenue to the government budget. In this connection, they underscored that the oil windfall of recent years provides Equatorial Guinea with a unique opportunity to establish the foundations for broad-based growth and poverty reduction, an opportunity that should not be missed. Oil revenues should therefore be used prudently. Directors urged the authorities to refrain from extrabudgetary spending financed by borrowing against future oil revenue, and underscored the need to contain primary expenditure, while beginning to provide adequately for education and health. They also stressed the need to broaden the tax base through the elimination of existing ad hoc tax and customs exemptions, and increased efforts to combat tax evasion and fraud. Directors urged Equatorial Guinea to strengthen debt management, remain current on its external debt service obligations falling due in 1999, eliminate all domestic and external payments arrears by 2000, and regularize relations with the international financial community.

Directors underscored the urgent need to press ahead with the structural reform agenda in order to improve the competitiveness of the economy and create an environment conducive to private sector activity. They emphasized in particular the importance of civil service reform and privatization programs, a system of three-year investment programming, and the rationalization of the timber industry. Directors also stressed the importance of strengthening human resource development and upgrading physical infrastructure, thereby establishing a basis for sustained growth, economic diversification, and poverty reduction. In addition, they drew attention to the need for the banking commission to closely monitor lending activities and bank portfolio performance.

Directors welcomed the authorities' renewed interest in a Fund-supported program. In this regard, they stressed that discussions on a program that could be monitored by the staff and pave the way, eventually, for a Fund-supported program should be initiated after a number of specific measures have been implemented successfully to demonstrate the authorities' resolve to address the weaknesses in macroeconomic management and governance. This would include the transfer of all payments by the oil companies into a single treasury account within the Bank of Central African States (BEAC), replacing the procedure of authorizing expenditures at the presidency by a genuine budgetary control over expenditure commitments in the Ministry of Finance, launching an independent external audit of oil operations, and adhering closely to the agreed revised budget for 1999. More generally, Directors stressed the need for full transparency with regard to both oil income and fiscal operations, and supported the authorities' recent efforts in this direction.

Directors observed that recommendations made by Fund technical assistance, particularly in the fiscal area, are yet to be implemented by the authorities. They urged the authorities to make full and effective use of the considerable technical assistance currently made available by the Fund and by bilateral donors, particularly in the fiscal area. This was essential in view of the country's limited administrative capacity, and the need for external assistance to carry out critical measures in the authorities' adjustment program.

Directors expressed some concern about the adequacy and availability of statistical information for effective surveillance and policy monitoring. They urged the authorities to intensify efforts to achieve lasting improvement in the quality, availability, and timeliness of statistics, and provide monthly core data to the Fund.

Equatorial Guinea: Selected Economic Indicators, 1996-99

  1996 1997 1998 1999

  In percent1
Domestic economy
Change in real GDP 29.1 71.2 22.0 15.1
Of which: non-oil real GDP 11.5 19.4 0.2 10.9
Oil production (thousands of barrels per day) 16.9 56.6 82.9 97.9
Consumer prices (end of period) 0.0 3.7 6.6 6.0
  In millions of U.S. dollars1
External economy
Exports, f.o.b. 196.6 498.4 460.8 555.0
Imports, c.i.f. 247.7 352.8 434.3 304.7
Current account balance2 -268.1 -189.3 -373.6 -105.3
Direct investment 263.9 185.4 366.5 114.0
Capital account balance 264.2 184.1 361.3 110.1
Current account balance (in percent of GDP)2 -103.5 -38.0 -81.8 -19.3
Change in real effective exchange rate (depreciation-) 1.0 3.4 9.7 ...
  In percent of GDP1
Financial variables
Gross national savings 10.1 27.6 9.6 33.6
Gross investment 113.5 65.7 91.5 52.9
Primary fiscal balance3 -1.4 4.5 1.2 8.5
Overall fiscal balance (commitment basis)4 -7.2 1.4 -2.1 5.2
Broad money (annual percentage change) 43.1 9.3 15.5 15.7
Discount rate (in percent) 7.8 8.5 7.5 ...
Outstanding medium- and long-term public debt 98.2 49.3 57.7 46.0
External public debt service5 6 7.5 3.8 4.3 3.4

Sources: Equatorial Guinean authorities; and IMF staff estimates and projections.

1Unless otherwise indicated.
2Including grants.
3Government revenue less noninterest expenditures.
4Excluding grants.
5Including obligations to the IMF.
6In percent of exports of goods and services.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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