Chad and the IMF

Press Release: IMF Approves US$7 Million Augmentation of PRGF Arrangement for Chad and US$6.8 Million Disbursement

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Chad—Letter of Intent,
Memorandum of Economic and Financial Policies,
and Technical Memorandum of Understanding


N'Djaména, December 20, 2001

The following item is a Letter of Intent of the government of Chad, which describes the policies that Chad intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Chad, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431

Dear Mr. Köhler:

1.  On behalf of the government of Chad, we are pleased to transmit to you the attached memorandum of economic and financial policies (MEFP). It describes developments during the first three quarters of 2001 and the outlook for the rest of the year in the context of the second annual program supported by a Poverty Reduction and Growth Facility (PRGF) arrangement. It also outlines the government's economic, financial, and poverty-reducing objectives and policies for 2002.

2.  As explained in the MEFP, Chad met all quantitative performance criteria at end-September 2001, except those for government revenue and the nonaccumulation of external arrears. The main reason for the nonobservance of the revenue target was weak administrative capacity, while -small amounts of- external arrears reoccurred against the backdrop of some CFAF 30 billion (equivalent to 3½ percent of GDP) in shortfalls in external financing. Progress was made on the reform agenda. The audit of the use of the oil bonus was completed, thus the associated structural performance criterion at end-September satisfied, with a few weeks delay. At the same time, the structural benchmark at end-September to adopt the guidelines for the taxation and pricing of the Sédigi oil and gas field could not be observed, as discussions over this plan took longer than earlier envisaged.

3.  Against this background, the government of Chad has introduced a policy package aiming at strengthening both revenue collection and expenditure control. External arrears were also eliminated following the receipt of part of the expected external financing; Chad will remain current on its external obligations over the program period. In addition, steps have been taken to ensure a full catch-up in the structural areas. These are described in detail in the MEFP; two of them constitute prior actions for the completion of the program review. On the basis of these actions, the government of Chad requests waivers for nonobservance of the above-described performance criteria. The government of Chad believes that these measures and policies for 2002, including the submission to parliament at end-November 2001 of the 2002 budget along the lines of the understandings reached with the IMF, provide a basis for the completion of the third review under the second annual program under the PRGF arrangement.

4.  The government of Chad expresses its deep appreciation for the IMF's prompt help in addressing emergency food needs in the face of famine in the form of an augmentation of the access to quota under the second annual PRGF-supported program (equivalent to 10 percent of quota). As part of an international effort, this assistance was important in averting famine in Chad through the autumn of 2001. There is a remainder of the assistance of CFAF 3 billion, which the Chadian government wishes to use to build up food security stocks that have been depleted during 2001.

5.  The decline in the world market price of cotton (Chad's main export commodity), has created an additional financing need of US$24 million in 2002. While the gap will be reduced by an additional fiscal adjustment effort and additional financing from the World Bank, a balance of payments need of US$7.3 million will remain to be covered, for which Chad hereby requests an increase of the arrangement of SDR 5.6 million (corresponding to 10 percent of quota). This increase would be equally distributed upon the approval of the third review under the PRGF, and that of the third annual program, around May 2002. This additional support is crucial for the implementation of the ongoing cotton sector reform, as described in the MEFP.

6.  Despite the progress in recent years, not least thanks to assistance from the Fund, Chad's administrative capacity remains below what our government needs to implement its ambitious poverty-reducing program and prepare for the petroleum era. Therefore, in the context of the Fund's new Africa Capacity Building Initiative, the government of Chad hereby requests a substantial increase in Fund technical assistance over the program period in the areas described in the MEFP.

7.  The preparation of Chad's poverty reduction strategy paper (PRSP), in a fully participatory manner and involving development partners, is expected to be finalized by the end of the first quarter of 2002. A PRSP preparation status report has been completed for a joint staff assessment by the Fund and the World Bank.

8.  The fourth review under the PRGF arrangement will be completed by end-June 2002 and will consider, inter alia, budget implementation in 2002, and actions in the revenue and expenditure management areas. The government of Chad will continue to provide the Fund with all information that the Fund requests in connection with the implementation of the MEFP, and it will consult with the Fund regarding the implementation of any major policy initiatives not considered during the program discussions. During the arrangement period, the government of Chad stands ready to take any additional measures that may become appropriate to ensure the achievement of the program's goals.

Very truly yours,

/s/
Idriss Ahmed Idriss
  /s/
Nagoum Yamassoum
Minister of Finance   Prime Minister

Memorandum of Economic and Financial Policies

N'Djaména, December 20, 2001

I. Developments in 2001 Under the PRGF-Supported Program

1.  During 2001, the government of Chad has aimed at implementing a comprehensive program of economic, structural, and poverty-reducing reforms. This program received support from the International Monetary Fund (IMF) under a Poverty Reduction and Growth Facility (PRGF) arrangement, approved on January 7, 2000. The second review of the arrangement was completed on May 16, 2001. On that occasion, the Executive Directors of the IMF also decided that Chad had reached the decision point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC). In June, the Paris Club provided a flow debt rescheduling of Chad's external debt on Cologne terms. On September 28, 2001, the Executive Board of the IMF evaluated Chad's economic performance at end-June 2001 and approved the disbursement of the fourth loan.

2.  Program implementation has been broadly satisfactory, despite often difficult circumstances. These included weak food production in 2000/2001, which raised the threat of famine, and recurrent rebel fighting in the northern part of the country. Program implementation has been further complicated by a substantial shortfall in external financing, including from the European Union, as well as continued weaknesses in administrative capacity. At the same time, the medium-term economic outlook has improved considerably, following the acceleration of the Doba oil project. As a result, real GDP is now expected to grow by 8.9 percent in 2001, compared with 8.2 percent, as originally programmed. The current account deficit, excluding official transfers, is projected to widen to 42.4 percent of GDP, compared with 40.7 percent under the program, reflecting primarily higher imports associated with the Doba project. Much of the deficit is financed by foreign direct investment. Consumer prices are expected to increase by 12.4 percent, mainly owing to the food shortages.

A. Performance Through End-September 2001

3.  Despite the above-mentioned difficulties, overall economic performance through the first three quarters of 2001 was broadly satisfactory. Chad met all quantitative criteria at end-September 2001, except for fiscal revenue and the continuous criterion for the nonaccumulation of external arrears. A CFAF 6.2 billion shortfall in revenue was more than offset by cuts in expenditure, so that the performance criterion on the primary current balance was observed. However, the structure of expenditure was unfavorable, as defense spending (related to the above-mentioned rebellion in the north and to the fight against organized crime) was somewhat above projection, while spending on social sectors was below the program target. The latter reflected the fact that spending from the virtual Poverty Fund--which combines resources from HIPC Initiative interim assistance and the remainder of the oil bonus--reached only CFAF 1 billion, considerably lower than programmed, owing to administrative start-up difficulties.1 Net bank credit to government was limited to CFAF 6.0 billion, against the target of CFAF 15.7 billion, thus the associated performance criterion was met. At the same time, the government had accumulated CFAF 8.7 billion of domestic arrears. In the face of the continued shortfall in external financing, some external arrears also accumulated, reaching CFAF 0.9 billion by end-October, thus the associated continuous performance criterion was not met.2

4.  Progress was made in structural reforms, albeit slower than programmed. In the fiscal area, the value-added tax (VAT) administration has been strengthened and the SYDONIA computer system has been installed at N'Djaména airport and at the custom's entry point of N'guéli. The assignment of tax identification numbers (TINs) to all identified economic agents has progressed as scheduled. The 12-month treasury cash plan has regularly been updated twice a month. The new, streamlined expenditure circuit has been prepared for adoption, and the related procedures handbook has also been compiled. Moreover, 27 inactive government accounts in the banking system have been closed. In the governance area, the audit of the use of the oil bonus as of end-December 2000 has been completed in conformity with its terms of reference, albeit later than expected; thus the associated structural performance criterion has been satisfied with a few weeks delay. The bidding procedures to recruit an internationally reputable firm for the functional and financial audit of the customs and the bidding procedures for the audit of the five biggest procurement contracts signed in 2001 have both been launched as scheduled. The first procurement bulletin has been published, albeit with some delay. Moreover, the government has requested technical assistance from the World Bank to reconsider its planned contract with the consortium IECI to exploit the gas of the Sédigi field. In addition, the soundness of the banking system has been strengthened, owing to the increase in capital of a private bank in a difficult financial situation. In contrast, the principles guiding the pricing and taxation mechanisms of the oil and gas of the Sédigi field could not be adopted by end-September, as discussions within the government took more time than earlier envisaged; thus the associated structural benchmark was not observed. Progress in areas covered by World Bank conditionality--reforms of the civil service, the procurement system, and the cotton sector, and the government's privatization program--has been good. Moreover, an action plan in the area of governance was prepared and transmitted to the High Interministerial Committee.3

5.  Further progress has been made toward preparing a fully participatory poverty reduction strategy paper (PRSP), as described in the government's PRSP preparation status report. An updated macroeconomic framework is being prepared, and the costing of the identified priority measures has been broadly completed. Some progress has already been made toward achieving the completion point conditions under the enhanced HIPC Initiative, such as the completion of the budget cycle, and improvements in selected health, education, and transportation indicators.

B. Outlook for the Rest of 2001

6.  The government of Chad is committed to making every effort to keep the PRGF-supported program on track, and it is taking additional measures to ensure a catch-up in areas where recently program implementation has suffered some delays. Against the backdrop of the shortfall in fiscal revenue, the government has taken the following measures: (i) acceleration of the collection of tax arrears, including VAT arrears; (ii) intensification of customs control including, inter alia, daily inspection visits to the N'Djaména airport and weekly random inspection at the N'guéli import entry post; the submission to the Council of Ministers of a report on the findings of a four-week implementation of such inspections was a prior action for the completion of the review;4 (iii) restructuring and strengthening of the joint tax-customs brigade's controls, with technical assistance from the Fund; (iv) establishment of a procedure to verify ex post all exempted imports under the Doba project, so as to ensure that non eligible transactions do not benefit from the project's tax exempt status; (v) continued update of the distribution of the tax identification numbers (TINs) and strict reinforcement of the policy of not granting public contracts to firms without a TINs; (vi) acceleration of the computerization of the large-taxpayer unit; (vii) centralization of tax control by merging the two agencies in charge; and (viii) broadening of the tax base through coverage of the large informal sector, including by following up on the census of companies in greater N'Djaména through the assignment of TINs to newly identified economic agents. Nevertheless, in the short run, these measures are not expected to allow for a full catch-up in fiscal revenue, so that the revenue target for end-December has been revised downward from CFAF 96 billion to CFAF 92 billion.

7.  The government will continue to reinforce further expenditure control, although the scope for cutting or postponing spending commitments is limited, in view of the government's objective of protecting social sector outlays. To this ends, the Prime Minister will continue to be regularly informed on the cash-flow situation, so as to ensure that the revised decisions reflect the government's objective of protecting social sector outlays. However, owing to the above-mentioned administrative difficulties, the structure of expenditures will be affected by the postponement to 2002 of a large part of Poverty Fund-financed spending. The government will clear its domestic arrears accumulated in the course of 2001, including those to the National Water and Electricity Company (STEE).

8. Public expenditure management will be further strengthened. The full implementation of the new, streamlined, and computerized expenditure circuit will start on December 1, 2001. Beginning that date, no expenditure commitment will be made or executed outside the computerized expenditure circuit. In order to fully integrate the investment budget into the fiscal accounts, as well as with the use of the new expenditure circuit, the monitoring of all --both domestically and foreign-financed-- investment will be strengthened. To this ends, all project managers, including of projects financed by foreign funds, will report monthly to the Budget Department, as well as to the Treasury Department, and the monthly treasury cash plan will include the execution of investment projects, starting on January 1, 2002.

9.  In the structural area, the adoption of the principles guiding the pricing and taxation of the gas and oil of the Sédigi field constitutes a prior action. In other structural areas covered by World Bank conditionality, the national road maintenance company (SNER) will be privatized before end-December 2001; and the tender for the bids for the privatization of DHS will be launched by end-December 2001.

II. Economic and financial Policies in 2002

A. Macroeconomic Framework

10.   The economic outlook for 2002 is being reshaped by the acceleration of investment linked to the Doba oil field project and its spillover effects on the rest of the economy. Real GDP is now projected to increase by about 11 percent in 2002. Oil is expected to come onstream by the beginning of 2004, as compared to the earlier projection of 2005. Investment is also being carried out to exploit the Sédigi oil and gas field, with oil expected to start flowing by late 2003. As a share of GDP, investment is projected to increase from 43 percent in 2001 to 52 percent in 2002, with two-third of this representing private investment. The external current account deficit in 2002 is expected to be higher than earlier envisaged --49 percent of GDP, compared with 44 percent under the original program, owing to both higher imports associated with the acceleration of the Doba project and lower exports stemming from the decline in the world market prices for cotton. The deficit is expected to be covered by foreign direct investment (US$ 578 million, or 30.6 percent of GDP); official transfers (6.5 percent of GDP); and exceptional budget support and balance of payments financing (4.6 percent of GDP).

11.  Consumer prices are projected to increase by an average of 4 percent in 2002, following a return to normal food production in the 2001/02 agricultural campaign.

B. Fiscal Policies

12.  The government's fiscal policy aims at containing the primary current deficit5 (excluding elections and famine-related spending) at CFAF 17.2 billion in 2002 (1.3 percent of GDP), after CFAF 3.3 billion (0.3 percent of GDP) in 2001, reflecting the adverse impact of the cotton crisis on public finances. Achieving this target will require both a continuous revenue effort and expenditure restraint, given the available budget resources. The overall balance, on a commitment basis and excluding grants, is expected to widen from CFAF 152 billion (13 percent of GDP) in 2001 to CFAF 261 billion (19 percent of GDP) in 2002, mainly reflecting a significant increase in foreign-financed public investment.

13.  Total government revenue, excluding grants, is targeted to increase from CFAF 92.2 billion (7.8 percent of GDP) in 2001 to CFAF 107.3 billion (7.9 percent of GDP) in 2002, as a result of efforts to strengthen tax administration.6 In addition to the above-described measures taken in the last quarter of 2001, tax collection will be further strengthened through the following measures: (i) implementation of an action plan, which will be prepared and adopted by end-May 2002 on the basis of the audit of the customs administration; (ii) adoption of above-described identified ex post verification procedures for the Doba oil project imports by March 15, 2002 (a structural performance criterion under the program); (iii) a study on the reform of the general lump-sum tax (IGL-small taxpayer taxation) will be prepared by end-June 2002, with technical assistance from the Fund, with a view to introducing the reform in the context of the 2003 budget; (iv) the launching of the linking up of the computer networks of the customs administration, the large-taxpayer unit, and the expenditure circuit; (v) improving fiscal control via the following mechanism: the Public Procurement Department will transmit to the Tax Department by January 15, 2002 the list of all companies that were granted in 2000 or 2001 public contracts for an amount exceeding the ceiling for the IGL. On the basis of this information, the Tax Department will check the fiscal status of these companies and notify the tax adjustment when necessary. Reports on the findings will be published in the Public Procurement Bulletin by March 31, 2002 for the contracts awarded in 2000 and by June 30, 2002 for the contracts awarded in 2001; and (vi) the reinforcement of the collection of the tax on cattle sale.

14.  Expenditure policies will aim at making decisive progress toward achieving the HIPC Initiative completion point conditions for the priority sectors. Overall expenditure will rise from CFAF 244 billion (21 percent of GDP) in 2001 to CFAF 368 billion (27 percent of GDP) in 2002, mainly reflecting an increase in public sector investment, including those financed from the virtual Poverty Fund. The total wage bill will rise by 13.6 percent, on account of statutory promotions, a 10 percent wage increase in the health sector, and an increase in employment, concentrated in priority sectors (health, education, basic infrastructure, rural development, and governance). Goods and services spending in nonpriority sectors will be broadly frozen at their 2001 level, whereas that in the priority sectors will increase by 34 percent in real terms, as a result of the spending deferred from 2001, as explained below. Transfers will increase significantly on account of an exceptional financial support to the cotton sector and efforts to rehabilitate STEE. Public sector investment will concentrate in priority sector areas. As a result, overall priority sector spending will rise from 11.2 percent of GDP in 2001 to 15.8 percent in 2002, and the share of priority-sector spending in overall expenditure will increase from 54 percent to 58.2 percent respectively. The government will continue to clear its stock of domestic arrears by repaying CFAF 4.8 billion in 2002.

15.  Chad will continue to benefit from interim assistance under the enhanced HIPC Initiative. This assistance will be effected through the virtual Poverty Fund, whose use is explicitly identified in a separate column of the 2002 budget. Procedures to transfer resources to the virtual Poverty Fund will be strengthened: starting on January 1, 2002, the government will transfer to the Bank of Central African States (BEAC) the full amount of debt service due, and the BEAC will be in charge of transferring to the Poverty Fund the corresponding amount of resources available as a result of the interim HIPC Initiative assistance. The total expected interim assistance in 2002 amounts to CFAF 11 billion (0.8 percent of GDP). Planned expenditures are as follows: (i) health and social affairs, CFAF 2.7 billion; (ii) education, CFAF 1.9 billion, chiefly on primary education; (iii) governance, CFAF 1.8 billion; (iv) infrastructure, CFAF 1.5 billion; and (v) rural development, CFAF 3.1 billion. The unused remainder of the virtual Poverty Fund resources at end-December 2001, a projected CFAF 8.2 billion, will also be spent in the context of the 2002 budget. As a result, the total available resources of the Poverty Fund will amount to CFAF 19.2 billion in 2002. As mentioned, the 2002 budget is tailored toward meeting the quantitative conditions for the completion point under the enhanced HIPC Initiative. The government of Chad aims at meeting all those conditions by the beginning of 2003, except for the requirement of a yearlong implementation of the full PRSP (see below).

16.   The government will take major steps to strengthen public expenditure management. First, a close monitoring of budget implementation through the biweekly updating of the treasury cash plan and the new tables to monitor the expenditure circuit will help avert the recurrence of payments arrears. These new monitoring tables, which will track spending through the four stages of the streamlined expenditure chain (commitment, validation, payments order, and actual payment), will start on January 1, 2002, and their compilation for a full month will be a structural performance criterion for February 15, 2002. Second, as mentioned, starting on January 1, 2002, the monthly implementation of the investment budget will be included in the treasury cash plan. Third, the government has established an explicit contingency spending plan for an amount of CFAF 12 billion. This spending will be authorized only in the fourth quarter of 2002, and only after its financing has been fully secured. The government will agree on the composition of this spending with the Fund. Fourth, following the recommendations of the World Bank, medium-term public expenditure programming will be initiated in the first quarter of 2002. Fifth, the government will discontinue its practice of paying its suppliers in cash. Also, a committee will be set up to define the modalities under which the payment of civil servant wages can also be made by electronic bank transfer, with a view to starting the implementation of this reform in 2003. These measures will also have a positive impact on the deepening of the monetization of Chad's economy thus the development of the banking sector. Finally, starting in the third quarter of 2002, the quarterly report on budget execution will include also a functional classification of expenditure.

17.  The above-described measures are reflected in the 2002 budget, whose submission to parliament was a prior action for the completion of the third PRGF review. This prior action was met on November 29. As mentioned, the budget included, in a fully integrated manner, the government's program regarding the use of the interim assistance under the enhanced HIPC Initiative.

18.  It is envisaged that the first biannual report on poverty-reducing spending as of end-December 2001 (specifically tracking spending financed by the HIPC Initiative resources), prepared by a committee headed by the Minister of Finance, will be completed by end-March 2002, and the second report as of end-June 2002 by end-September 2002. These reports will also describe progress made toward achieving the HIPC Initiative completion point conditions.

C. Governance

19.  The government reiterates its strong commitment to strengthening transparency and good governance. To this end, in the areas covered by Fund conditionality, the government is committed to follow the recommendations made by the Accountant General's Office of the Supreme Court in the context of the audit of the use of the oil bonus as of end-December 2000. In addition, another action plan will be adopted by end-June 2002 as a follow-up to the findings of the audit of the five biggest public contracts awarded in 2001; the completion of this audit is expected by end-April 2002. On the basis of this audit, a methodology will be adopted to conduct regular audits of public contracts, as well as the public procurement system. Furthermore, the government reiterates its commitment not to award any procurement contract or sale of a national assets contract, without following transparent and competitive procedures. The report on the exploitation of the gold mine of Pala will be published by January 15, 2002. Additional areas covered by World Bank conditionality include: the audit of major public contracts awarded in 2002 according to the above-mentioned methodology; the adoption of the government's national governance strategy by the end of the first quarter of 2002 and its implementation throughout the rest of the year; the adoption of a new Public Procurement Code; and the creation of an independent procurement appeals system.

D. Monetary Prospects

20.  Monetary policy is being conducted at the regional level by the BEAC. The bank's key objective is to maintain price stability over the medium term by maintaining the peg between the CFA franc and the euro, and to build up the monetary zone's official reserves. After a peak in 2001, mainly owing to food shortages, consumer price inflation is expected to return to sustainably low levels; consumer prices are projected to increase by about 4 percent on average in 2002.

21.  Banking supervision will continue to be strengthened by the regional Central African Banking Commission (COBAC). An additional increase in capital of the above-mentioned private bank is envisaged by its private stakeholder. Banks will be encouraged to diversify their deposit base, which have so far relied heavily on public deposits, as well as their lending activities, in particular in the context of the Doba oil project. Strengthening most banks' management and accelerating their computerization will also be necessary. The government, together with the COBAC and with help from its development partners, will design and adopt by end-June 2002 the policy and legal framework for microfinance in Chad, in line with the guidelines of the Central African Economic and Monetary Community (CEMAC).

E. Balance of Payments Financing Needs

22.  In 2002, the sharp decline in world market prices for cotton is projected to result in an additional balance of payments financing need of US$24 million. The government of Chad will make an additional fiscal adjustment to absorb part of this gap in the form of cuts in nonpriority sectors nonwage spending; nevertheless, a substantial balance of payments need remains to be covered, for which the government is seeking additional financing from the World Bank, and requests an SDR 5.6 million augmentation of the PRGF arrangement (equivalent to 10 percent of quota) from the Fund. Half of this amount would be distributed upon the completion the third review under the PRGF arrangement, and the second half at the time of the fourth review.

F. Structural Reforms

23.  In addition to the above-described measures in the fiscal and governance and transparency areas, the government will continue to implement its ambitious structural reform agenda in the areas covered by World Bank conditionality. The privatization agenda in 2002 is expected to include the following: (i) DHS, the oil and soap unit of Cotontchad; (ii) the reduction of the government's share in Sotexho, a hotel management company; (iii) the awarding of the third mobile phone license; and (iv) the sale of air traffic rights. Cotton sector reform, which aims at durably increasing producers' income and productivity, will continue as scheduled. In particular, a study will be launched in 2002 to identify possible scenarios for the privatization of Cotontchad. The final scenario will be adopted by end-2002 following a forum of investors and cotton producers, and a bidding process to find private stakeholders. The ultimate objective is the privatization of Cotontchad in 2003. Civil service reform will continue, with a view to completing it by 2003. After the adoption of the new civil service statutes by parliament, the merit-based advancement and competitive recruitment will start to be implemented. The harmonized and computerized payroll and civil service files will be concluded by mid-2002, and an organizational, procedural, and human resources audit will be conducted for seven pilot ministries by end-2002.

G. PRSP Process

24.  The preparation of the PRSP in a fully participatory process and involving development partners is well under way. After updating the macroeconomic framework and costing all identified measures, the steering committee in charge of overseeing the preparation of the PRSP will organize a series of seminars to discuss the work in progress and help strengthen the quality of the document. The authorities' PRSP preparation status report describes this process. It is expected that the PRSP will be finalized by the end of the first quarter of 2002.

H. Pressing Technical Assistance and Capacity-Building Needs

25.  Despite progress made in selected areas with technical assistance from development partners, including the Fund, Chad's administrative capacity remains below what is required for the fully effective implementation of the government's poverty-reducing policies. The government welcomes the Fund's new Africa Capacity Building Initiative and requests that the Fund increase its technical assistance to Chad substantially over the PRGF arrangement period. The areas of immediate assistance needs include (i) macroeconomic forecasting, including a concentrated macroeconomic forecasting seminar in N'Djaména for the staff of the main government institutions; (ii) budget preparation and budget execution monitoring; and (iii) the statistical database. In the latter respect, the government requests additional Fund assistance to help implement the recommendations of the 2000 May multisectoral statistical mission.

III. Prior Actions for the Review and Program Monitoring

A. Prior Actions for the Third Review

26.  The following measures constitute prior actions for the staff to recommend the completion of the third review under the PRGF arrangement:

  • adoption of the guidelines for the pricing and taxation of the Sédigi field's oil and gas;

  • submission to the Council of Ministers of a report on the findings of a four-week implementation of daily inspection visits to the N'Djaména airport and weekly random inspection at the N'guéli import entry post (this prior action was fulfilled on December 12);

  • submission to parliament of the 2002 budget in accordance with the above-described measure (this measure was fulfilled on November 29); and

  • clearing of all outstanding external arrears (this prior action was fulfilled on December 18).

B. Program Monitoring

27.  Program implementation will continue to be monitored in reviews that are scheduled on a semiannual basis, while performance criteria will continue to be set on a quarterly basis, with associated quarterly disbursements. The fourth review and the negotiation of the third annual program under the PRGF-supported three-year arrangement will take place before end-June 2002. Quantitative and structural performance criteria and structural benchmarks are established for end-December 2001 and end-March 2002, while indicative targets are set for end-June 2002 (Appendix I, Table 1). The proposed quantitative performance criteria will continue to be the following: (i) a ceiling on the increase in net credit from the banking system to the central government; (ii) a floor on the current primary fiscal balance; (iii) a floor on total fiscal revenue (excluding grants); (iv) the nonaccumulation of central government external payments arrears; (v) a ceiling on new medium- and long-term nonconcessional external debt contracted or guaranteed by the central government; (vi) a ceiling on net change in external debt with a maturity of up to and including one year. Indicative benchmarks are set for (i) a floor on current expenditure on health; (ii) a floor on current expenditure on education; and (iii) a ceiling on the total wage bill (including the military sector). In addition, the measures indicated in Table 2 of this appendix will serve as performance criteria and structural benchmarks.

Table 1. Chad: Quantitative Performance Criteria and Benchmarks for
the Second Annual Program Under the Poverty Reduction and
Growth Facility Arrangement, 2001–02
(In billions of CFA francs)


        Cumulative Changes from January 1, 2001
End-Dec. 2001
  Cumulative Change from January 1, 2002
End-
March 2002

Crit.
End-
June 2002

Ind. Bench.
Ind.  
Bench.
Crit.

Quantitative performance criteria
           
  Ceiling on the increase in net credit of the banking system to the central government (excluding IMF resources)1   11.2 0.7      2.1   9.3
Floor on current primary fiscal balance2   -3.3 -3.3    -3.9  -3.2
Floor on total government revenue, excluding grants3   96.0 92.2   23.7 50.9
Nonaccumulation of external payments arrears of the central government (cumulative since Jan. 1, 2001)4,5   0.0 0.0     0.0   0.0
Ceiling on new nonconcessional
external debt with maturities of more
than one year contracted or guaranteed by the central government (cumulative)6
  0.0 0.0     0.0   0.0
Ceiling on net change in external debt
with a maturity of up to and including
one year, except normal trade financing
(cumulative)
  0.0 0.0     0.0   0.0
             

Indicative benchmarks7

           
Floor on current expenditure on health8   9.4 8.7     2.6   5.3
Floor on current expenditure on
education8
  19.6 18.3     5.6 11.2
Ceiling on total wage spending by the central government (including military)   57.3 56.3   16.0 32.0
             

Adjusters

           
Net reduction of domestic payments arrears of the government   7.0 6.7     0.3   0.3
Privatization revenue   3.0 1.4     0.0   0.0
Balance of payments assistance9   46.4 55.9     8.4 11.2
Adjustment lending (excl. IMF)   21.4 28.7     3.7   3.7
Adjustment grants   21.3 15.5     3.9   5.9
Debt relief excluding HIPC Initiative   3.6 11.7     0.8   1.6

Sources: Chadian authorities; Bank of Central African States (BEAC); and staff estimates and projections.
1The targets will be adjusted (i) upward for a shortfall in balance of payments assistance (as identified in the adjusters and excluding projected lending and grants) up to an amount equivalent to 75 percent of the shortfall; (ii) downward (respectively upward) to take account of a lower (higher) repayment of domestic arrears than foreseen under the program for the corresponding period; and (iii) upward for a shortfall in sales of assets revenue up to an amount equivalent to 75 percent of the shortfall.
2Defined as total revenue less grants, minus current primary spending (current spending, less electoral and famine-related outlays and less interest payments).
3Net of reimbursements under the system of treasury checks.
4Monitored on a continuous basis.
5Excluding external payments arrears incurred pending debt rescheduling.
6Nonconcessional loans defined as loans with a grant element of less than 35 percent, using discount rates based on the commercial interest reference rates (CIRRs). An exception will be made for a nonconcessional IBRD loan in an amount of US$35 million contracted by the government of Chad in the context of the Chad-Cameroon Pipeline Project.
7These indicators will not constitute performance criteria of the program.
8Including wages.
9Including the possible financing recorded in the financing gap.

Table 2. Chad: Structural Performance Criteria and Benchmarks for the Second Annual Program Under the Poverty Reduction and Growth Facility Arrangement
Criteria and Benchmarks
Test Date

Structural performance criteria  
Finalization of the first full set of the biweekly expenditure sheets with the four stages of the new, streamlined expenditure circuit (commitment, validation, payments order, and actual payment) February 15, 2002
Adoption by the Council of Ministers of procedures for ex post verification of all tax-exempted products under the Doba project March 15, 2002
   
Structural benchmarks  
Publication in the Public Procurement Bulletin of a report on the results of the inspection of companies that were awarded in 2000 public contracts for an amount exceeding the ceiling for the general lump-sum tax (IGL) March 31, 2002
Adoption of an action plan by the Council of Ministers on the basis of the recommendations of the international audit of the customs May 31, 2002

CHAD

Addendum
to the Technical Memorandum of Understanding
Relative to the Second Annual Program under
the Poverty Reduction and Growth Facility Arrangement

N'Djaména, 20 December 2001.

The technical memorandum of understanding relative to the second annual program under the arrangement supported by the Poverty Reduction and Growth Facility and attached to the letter of intent signed on April 28, 2001 and considered by the Executive Board of the International Monetary Fund on May 16, 2001 still applies for the remainder of the arrangement. However, starting December 1, 2001, paragraph 7 is modified and now reads as follows:

7. The ceiling on the cumulative change, from the beginning of the calendar year, on net credit of the banking system to the government will be adjusted downward by any shortfall in the actual net reduction of domestic payments arrears relative to the programmed amounts as shown in Table 1 attached to the memorandum of economic and financial policies, or upward for any repayment in excess of the target numbers. Arrears variations are calculated as the total amount of committed expenditures (data provided by the Department of Budget of the Ministry of Finance) minus the total amount of paid expenditures (data provided by the Department of Treasury of the Ministry of Finance).7


1These were mainly related to the fact that the Oil Revenues Control and Monitoring Board (CCSRP), in charge of approving the use of oil revenues, was not yet operational.
2All external arrears have been cleared as of December 18, 2001.
3This progress provided a basis for an agreement with the World Bank on the Fourth Structural Adjustment Credit facility (SAC IV), which was discussed by the Bank's Executive Board on December 18, 2001.
4This prior action was fulfilled on December 12, 2001.
5It is envisaged that, for the third annual program under the PRGF arrangement, which is expected to start on April 1, 2002, the program's fiscal target will be redefined as the base primary fiscal balance (which is the current primary fiscal balance minus domestically financed investment), i.e., the convergence indicator in the CEMAC zone.
6As a share of non-oil GDP, total revenue, excluding grants, would increase from 8.3 percent to 8.9 percent over this period.
7With the exception of arrears to the National Pension Fund (CNRT), which are subject to a specific convention and treated as internal debt.

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