News Brief: IMF Completes Fourth Review of Performance Under Chad's PRGF Arrangement
Country's Policy Intentions Documents
of Intent, Memorandum of Economic and Financial
Policies, and Technical Memorandum of Understanding
Mr. Horst Köhler
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). This memorandum describes economic developments during the first half of 2002 in the context of the second annual program supported by an arrangement under the Poverty Reduction and Growth Facility (PRGF), and outlines the government's objectives and economic policies for the third annual program, which covers the period July 1, 2002-June 30, 2003.
2. As explained in the MEFP, Chad met all quantitative performance criteria at end-March 2002 and all quantitative benchmarks at end-June 2002, with the exception of the continuous performance criterion on the nonaccumulation of external arrears. This criterion was not observed in June 2002, owing to a lack of coordination between the Debt Directorate and the Treasury. Since then, the government has cleared all arrears and is now current on its external obligations. Moreover, it is firmly committed to preventing the recurrence of such administrative coordination problems. On the basis of these elements, the government requests a waiver for the nonobservance of this quantitative performance criterion.
3. Progress was made in areas covered by structural conditionality, notwithstanding some delays incurred mainly for reasons outside the government's control. The generation of tables to monitor budget execution by tracing the four stages of the expenditure process started with the preparation of the tables as of March 31 and April 15, 2002.1 Ex post control procedures for imports exempted of taxes and duties under the Doba project were adopted by March 15, 2002; accordingly, the associated structural performance criterion was met. The results of the audit of companies that were awarded public contracts in 2000 for an amount exceeding the ceiling of the general lump-sum tax were published in the Public Procurement Bulletin—a structural benchmark for March 31, 2002—albeit with a few weeks delay, owing to capacity problems at the print shops in the period leading up to the legislative elections. The action plan for the reform of the customs administration could not be adopted on May 31, 2002 as scheduled, because the international audit, on the basis of which the action plan should be designed, was not completed at that time; accordingly, the associated structural benchmark was not observed. Adoption of the action plan by October 31, 2002 is now a structural performance criterion.
4. In early May 2002, an internal investigation revealed irregularities in the case of two public contracts involving resources resulting from HIPC Initiative debt relief, particularly with regard to contract pricing. In addition to canceling these two contracts, the government took a number of immediate measures, as described in the MEFP. Several of these measures became prior actions for the completion of the fourth review, while others are covered under World Bank conditionality. In particular, an audit of all contracts financed by resources resulting from HIPC Initiative interim assistance was requested to be carried out by the Accounting Office of the Supreme Court. This audit revealed other irregularities and proposed a set of recommendations, with a view to preventing a recurrence of such slippages. The government has started implementing these recommendations and, hereby, reiterates its commitment to good governance and transparency in the use of public resources.
5. In January 2002, the government signed a peace agreement with the armed rebel movement that has been operating in the north of the country for several years. The exact modalities of the agreement are still being negotiated, but the government has already prepared a draft plan, which includes (i) the demobilization of half of the 4,000 former rebels and the provision of a social safety package to them; (ii) the integration of the other half into the national army; (iii) the clearing of mines in vast areas in the north of the country; (iv) emergency assistance for the population in the affected areas; and (v) the return of refugees. The plan's estimated cost is about CFAF 6.0 billion (excluding the cost of demining), of which CFAF 2.9 billion would be incurred in 2002 and the remainder in 2003. Given the emergency character of these expenditures and pending possible financial support from its partners, the government has prepared a revised budget that was submitted to parliament in August 2002.
6. The full PRSP is now expected to be completed by end-September 2002, somewhat later than envisaged in our PRSP preparation status report of November 2001. The main reason for this delay is the insufficient coordination among the main stakeholders in the PRSP process, particularly government institutions. The government has decided to modify the PRSP's coordination structure so as to strengthen government representation and overall coordination among the key stakeholders. As part of this initiative, a unit set up at the Prime Minister's Office has been put in charge of overseeing the implementation of the PRSP and preparing its periodic update.
7. On the basis of Chad's recent economic performance and the policies for the next one-year period, as described in the MEFP, the government requests the release of the seventh disbursement under the PRGF arrangement in an amount of SDR 5.4 million. Given the broadly satisfactory implementation of the second annual program, the authorities wish to revert to a biannual program monitoring and review. The fifth review will be completed by end-April 2003 and will focus, inter alia, on the execution of the budget in 2002, fiscal structural reforms, and governance. The sixth review will be completed by end-October 2003 and will focus on the execution of the budget in the first half of 2003 and structural reforms, in particular with regard to the preparation for the petroleum era. As the three-year arrangement under the PRGF will formally expire on January 6, 2003, the government of Chad hereby requests the Fund, as Trustee under the PRGF Trust Instrument, to extend the period of the arrangement by 11 months until December 6, 2003, so as to allow time to achieve the objectives of the program and permit the last two disbursements under the arrangement, which are essential given the balance of payments need in 2003. The government of Chad will provide the Fund with all information that the Fund requests in connection with the implementation of the MEFP. The government will also 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 objectives of the program.
Very truly yours,
Memorandum of Economic and Financial Policies
N'Djaména, September 17, 2002
I. Recent Developments under the PRGF-Supported Program
1. During 2001 and the first half of 2002, the government of Chad implemented 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 in an amount of SDR 36.4 million. This amount was augmented twice by SDR 5.6 million each, to SDR 47.6 million, to help address famine-related balance of payments needs, as well as mitigate the impact of the decline in the world market price of cotton. The third review of the arrangement was completed on January 16, 2002, when the Executive Board of the IMF approved the disbursement of the fifth loan. On April 5, 2002, the Executive Board reviewed Chad's economic performance as of end-December 2001 and approved the disbursement of the sixth loan. On May 16, 2002, the Executive Board approved, on a lapse of time basis, Chad's request to extend the Fund's interim Initiative for Heavily Indebted Poor Countries (HIPC Initiative) assistance by another year.
2. Preliminary data indicate that economic performance has been broadly in line with projections under the program. After reaching 8.5 percent in 2001, real GDP growth has remained strong in 2002, supported by investment in the oil sector, and it is projected to reach 10.9 percent this year. In June 2002, the end-of-period consumer price inflation rate was 0.9 percent, and the annual average inflation rate had declined to 4.7 percent from 12.4 percent in December 2001.
3. Overall, program implementation continued to be broadly satisfactory, notwithstanding instances of weak governance. Chad met all the quantitative performance criteria at end-March 2002 and all quantitative benchmarks at end-June 2002, except the performance criterion relating to the nonaccumulation of external arrears. The primary fiscal balance target, which excludes expenditures related to famine and elections, was met at end-March and end-June as revenues exceeded their targeted levels—satisfying the associated performance criterion and benchmark—while expenditures remained within the programmed level. However, at end-March, the structure of expenditures was unfavorable, with spending in priority sectors significantly below the program target and expenditure on defense somewhat higher than programmed. The lower-than-targeted level of social sector spending was due to recurring problems related to the weak administrative capacity in the line ministries. The higher spending on defense was mainly on account of costs associated with the negotiations for the peace deal signed in January 2002. At end-June, the structure of current expenditure had been rectified, as spending in priority sectors was almost back to the program target and spending in other sectors was contained at the programmed level. The continuous performance criterion on the nonaccumulation of external arrears was not observed, owing to insufficient coordination between the Debt Directorate and the Treasury. In the first half of 2002, the government accumulated CFAF 1.1 billion in external arrears toward the European Investment Bank, the Islamic Development Bank, the Arab Bank for Economic Development in Africa, the Saudi Fund for Development, and the Organization of Petroleum Exporting Countries' Development Fund. The government has cleared all these arrears and is now current with respect to its external obligations. Moreover, it is committed to preventing the recurrence of such administrative coordination problems in the future.
4. In the structural area, progress has been broadly satisfactory. Ex post control procedures for imports exempted from taxes and duties under the Doba project were adopted by March 15, 2002, and thus the related structural performance criterion was met. The structural benchmark concerning the publication in the Public Procurement Bulletin of a report on the results of the audit of companies that had been awarded public contracts in 2000 for amounts exceeding the ceiling of the general lump-sum tax was also observed, albeit with some delay. While this report had been prepared before March 31, 2002, as envisaged under the program, and sent to IMF staff, it was published only in early May, owing to capacity problems at the print shops in the period leading up to the legislative elections. The functional and financial audit of the customs administration was carried out in May 2002, and the auditor has produced a first draft report that confirms the government's preliminary assessment of widespread serious irregularities, including fraud, corruption, and the flaunting of procedures. However, as the audit had not been finalized, the government was unable to adopt by May 31, 2002, as initially envisaged, an action plan that was to have been prepared on the basis of the audit's recommendations; accordingly, the related structural benchmark was not observed. The adoption of the action plan along the lines described in paragraph 22 is now scheduled for end-October 2002 and will be a structural performance criterion. In addition, the international audit of the five largest public procurement contracts awarded in 2001 was launched in July 2002. The first report on poverty-reducing spending, as of December 2001, has been finalized. The report assesses the increase in poverty-reducing spending in recent years and the progress made in achieving the HIPC Initiative completion point triggers, and also addresses governance-related problems (see below).
5. Progress was less satisfactory in public expenditure management and governance, but the government is making every effort to correct the slippages. A number of problems were encountered. First, owing to difficulties in the computerization of the new, streamlined expenditure process, the first set of the biweekly tables monitoring the four stages of the expenditure process was finalized only in July 2002, that is, several months later than originally envisaged; this measure has been a prior action for the completion of the fourth review. Second, in the first months of 2002, the treasury cash-flow plan was not being updated regularly twice a month as envisaged; however, its updating became regular again in mid-2002. Third, the governance strategy could not be adopted as scheduled in April 2002 because of a delay in the process of consulting with the different stakeholders. Finally, in May 2002, an internal investigation revealed serious irregularities in two contracts—financed by resources resulting from HIPC Initiative assistance—in the health sector, particularly with regard to contract pricing. As soon as the irregularities were found, the government annulled these contracts and took immediate measures, with a view to broadening the investigation and avoiding a recurrence of such irregularities. First, the Accounting Office of the Supreme Court was asked to conduct an audit of all contracts financed by resources resulting from HIPC Initiative debt relief as of May 15, 2002; the government will take disciplinary sanctions and will reimburse the HIPC Initiative account at the BEAC should this prove necessary. Second, the HIPC Initiative account held at the BEAC was reimbursed for the amounts already paid with regard to the two contracts that were annulled. Third, the Minister of Economy and Finance tightened the supervision of the procurement process by adopting two decrees that require (i) the appointment of a representative of the Commitments and Financial Control Directorate in all procurement commissions, and (ii) the Minister of Economy and Finance's approval for all contracts above CFAF 500 million (the two decrees were adopted on May 30, 2002 and July 15, 2002, respectively). Fourth, with regard to public procurement, the recourse to a limited bidding process through the use of a short list of contractors, as opposed to a fully open bidding process, will be strictly limited to well-defined circumstances. Fifth, public procurement reform will be accelerated (see below). Sixth, independent observers will be recruited in the health and education subcommissions of the Public Procurement Commission. Seventh, as of May 30, 2002, price benchmarks (mercuriales) are required in the financial evaluation of all bids for public contracts. Finally, management level staff member of the Public Procurement Directorate were replaced. The first three measures constituted prior actions for the completion of the fourth review, while the fourth, fifth, and sixth are prior actions for the presentation of a request for the fifth Structural Adjustment Credit (SAC V) to the World Bank Executive Board. The audit carried out by the Accounting Office of the Supreme Court on all contracts financed by resources resulting from HIPC Initiative debt relief as of May 15, 2002 revealed other irregularities and made recommendations that the government has started to implement (see para. 17).
6. Cotton sector reform continued broadly as scheduled, despite the difficult financial situation of the state cotton company (Cotontchad). In order to shelter cotton farmers' income from the sharp decline in the world price for cotton, the pricing mechanism that had been set up in 1997 was temporarily suspended. The producer price for the 2002/03 campaign was set at CFAF 160 per kilogram, CFAF 30 above the price that would have resulted from the application of the price mechanism. This will result in an estimated additional deficit of CFAF 5.4 billion for Cotontchad for the 2002/03 campaign, excluding the cost-saving measures that Cotontchad is expected to implement.
7. Progress in other structural reforms covered by World Bank conditionality was generally satisfactory in spite of some delays in civil service reform and privatization.
II. Economic and financial Policies for the remainder of 2002 and for 2003
A. Macroeconomic Framework
8. Growth is projected to remain vigorous as the construction of the Chad-Cameroon pipeline accelerates and its spillover effects in the other sectors broaden and deepen. Real GDP growth is projected at 10.9 percent and 9 percent in 2002 and 2003, respectively, with investment reaching 54.6 percent of GDP in 2002 and 50.6 percent of GDP in 2003. The annual average consumer price inflation rate is projected at 4 percent per year over this period.
B. Fiscal Policies
Remainder of 2002
9. The primary base deficit2 is projected to widen to 3.8 percent of GDP in 2002 from 1.7 percent of GDP in 2001, mainly reflecting an increase in spending. The overall fiscal deficit, on a commitment basis and excluding grants, is projected to rise from 11 percent of GDP in 2001 to 16.2 percent of GDP in 2002, owing to, inter alia, a postponement of some foreign-financed investment from 2001 to 2002 and an increase in domestically financed investment expenditure.3
10. Given the good performance in the first half of 2002, the originally programmed fiscal revenue target for the year will be increased by CFAF 1 billion to CFAF 108 billion; this is equivalent to 8 percent of GDP, up from the 7.8 percent of GDP achieved in 2001. Primary base expenditure will increase from 9.7 percent of GDP in 2001 to 11.9 percent of GDP in 2002, mainly reflecting (as originally programmed) an increase in domestically financed poverty-reducing expenditure and subsidies to the Chadian Water and Electricity Company (STEE) and the cotton sector, as well as expenditures associated with the peace agreement signed in January 2002. The government has prepared a demobilization and reinsertion plan that is to be implemented during 2002 and 2003; it is estimated to cost CFAF 6.0 billion (0.4 percent of GDP),4 of which CFAF 2.9 billion would be incurred in 2002.5, 6 Overall government spending will rise from 18.8 percent of GDP in 2001 to 24.2 percent in 2002, reflecting to a large extent an increase in foreign-financed public investment expenditure. This investment will include a new World Bank emergency credit to the energy sector amounting to US$ 54.6 million and to be disbursed over 2002 and 2003.
11. In 2002, net credit to government from the banking system will increase by CFAF 3 billion (0.2 percent of GDP). The remaining financing gap is expected to be fully covered by the World Bank (4.1 percent of GDP), the European Union (1.2 percent of GDP), the African Development Bank (0.3 percent of GDP), and bilateral donors (0.1 percent of GDP).
12. In 2003, the government will adopt a more restrictive fiscal stance because of an expected decrease in external budgetary support. Both the primary base deficit and the overall fiscal deficit, excluding grants, are projected to decline, falling from 3.8 percent of GDP and 16.2 percent, respectively, in 2002 to 1.5 percent and 11.7 percent of GDP in 2003.7 Total revenue, excluding grants, is projected to reach CFAF 125 billion (8.2 percent of GDP), owing to the full impact of actions already taken to broaden the tax base and strengthen tax collection, as well as new measures that the government intends to implement, including in the area of customs administration (see para. 15 below). Primary base expenditure and overall government expenditure will be reduced from 11.8 percent of GDP and 24.2 percent of GDP in 2002 to 9.7 percent of GDP and 19.8 percent of GDP, respectively, in 2003. This reduction in spending from 2002 will be achieved by, inter alia, implementing of a cautious wage policy, winding up the exceptional subsidy to the energy sector, and cutting by half the subsidy to the cotton sector. However, the government will ensure that spending on priority sectors for poverty reduction will continue to expand significantly in real terms. Spending on goods and services in priority sectors, excluding those financed by HIPC Initiative interim assistance, will increase by 16 percent in real terms, compared with a reduction in real terms in nonpriority current spending.8
13. The 2003 budget includes a subsidy to Cotontchad amounting to CFAF 5 billion, in order to help Cotontchad finance the projected additional deficit of CFAF 5.4 billion (see para. 6 above). The exact amount of the subsidy will be discussed at the time of the fifth review under the PRGF arrangement. It will be revised downward if the measures that Cotontchad is expected to implement with a view to reducing its costs and increasing its productivity yield savings exceeding the CFAF 400 million currently assumed in the 2003 budget projections. The government will also be seeking financial support from its partners to contribute to the financing of the subsidy and to alleviate the compression of other spending. In the same vein, the authorities will seek the support of the international community to help finance the cost of implementing the demobilization and reinsertion plan under the peace accord. A modified budget law would allow these changes to be adopted in the course of 2003.
14. In 2003, net credit to government from the banking system will decrease by CFAF 1.5 billion (0.1 percent of GDP). The financing gap in this restrictive version of the budget is expected to be fully covered by financial support from the World Bank (0.9 percent of GDP), the European Union (0.9 percent of GDP), and the African Development Bank (0.5 percent of GDP).
C. Governance and Other Structural Reforms
15. To achieve the revenue objectives for 2002 and 2003, the government will strengthen the revenue effort under way through additional measures. First, on the basis of the results of the recently completed audit of the customs administration, the government will adopt by end-October 2002 an action plan that will include, inter alia, (i) a strengthening of actions against fraud and corruption through an increase in the means provided to the new Fraud Control and Repression Unit; (ii) better training for customs staff; (iii) screening of customs staff in order to prevent the infiltration of bogus customs officers; (iv) implementation of a financial incentive mechanism for customs staff; (v) the extension of the SYDONIA system to all main customs entry points; and (vi) the limitation of access to customs' buildings to licensed customs brokers and actual importers. Second, a tax procedure handbook for the public will be published by end-September 2002 in order to improve the relations between taxpayers and the tax administration. Third, the ex post verification of tax exemptions will be enhanced by involving, by end-December 2002, the joint tax-customs control brigade in the control process. Fourth, an interministerial task force will be set up under the leadership of the Prime Minister's Office, with the objective of designing by end-September 2002 an action plan to enhance the collection of taxes on domestic sales and exports of livestock consistent with objectives of the overall policy on livestock. Fifth, in the context of the medium-term plan to electronically link the large taxpayer unit and the units in charge of budget execution (notably the Commitments and Financial Control Directorate), the latter will communicate weekly to the tax directorate the list of companies that remain without taxpayer identification numbers. In addition, starting in mid-2002, the mechanism for value-added tax (VAT) credit reimbursement has been reinforced in order to avoid an accumulation of tax credits in the future. Specifically, an account has been opened at the BEAC in which 5 percent of the collected VAT will be deposited each month as a provision for the reimbursement of VAT credit to companies. Finally, the VAT credit of Cotontchad that was accumulated in 2000 and 2001, and which amounts to CFAF 1.9 billion, will be reimbursed by end-September 2002.
16. The government is committed to strengthening public expenditure management, in particular with regard to budget preparation, execution, and monitoring. First, the table monitoring the execution of the budget in the four stages of the expenditure process will be regularly generated once a month. To this end, on June 3, 2002, the Minister of Economy and Finance appointed a senior official to supervise the implementation of the new, streamlined expenditure process and its computerization. In addition, the new expenditure process handbook will be distributed widely. Second, meetings for establishing the treasury cash-flow plan will continue to be held regularly. Third, the Ministry of Economy and Finance will centralize all information on public investment execution. Fourth, the government will continue its policy of gradually increasing the number of civil servants and government suppliers paid through electronic bank transfers, rather than through cash payments. Fifth, the budget preparation for 2003 will be enhanced through (i) the introduction of medium-term expenditure programs in the health and education sectors (this will constitute a structural benchmark on December 31, 2002); and (ii) the preparation of a budget itemized by nature, function, and geographic zone, with a view to helping monitor expenditures on education, health, and basic infrastructure. Sixth, ex post control of budget execution will be facilitated by an early preparation of the 2001 budget settlement law and its submission to parliament by end-October 2002.
17. The government will make every effort to restore rigorous public resources management practices, following the discovery of irregularities with respect to two HIPC Initiative-financed public procurement contracts. In addition to the immediate actions described in the letter of intent (para. 4), the government is implementing a number of measures based on the recommendations of the Accounting Office of the Supreme Court in the context of the audit of HIPC Initiative-financed public contracts in the health, construction, and livestock sectors. These include (i) designating one person in each line ministry to be in charge of, and accountable for, inventory management; (ii) requiring supportive documentation for any direct order for an amount close to the ceiling above which open bidding procedures are compulsory, and rejecting any direct order without such supportive documentation, with a view to preventing public procurement contracts from being split into smaller contracts under the threshold for open bidding procedures; and (iii) applying strictly the rule that the members of the open bidding commission must be replaced every two years in order to avoid collusion between these members and suppliers. Furthermore, the government is committed to prosecuting under Chadian law any person involved in the misuse of public resources, and companies that were granted fraudulent contracts will be barred from the list of suppliers used by the government.
18. Moreover, transparency will be enhanced through the publication of (i) the full results of the audit of the use of the oil bonus at end-2000; (ii) by end-October 2002, the results and recommendations of the functional and financial audit of the customs administration; (iii) by end-November 2002, the results and recommendations of the audit of the five largest public procurement contracts granted in 2001; and (iv) by end-December 2002, the results and recommendations of the audits of public procurement contracts financed by resources resulting from HIPC Initiative debt relief. Measures (iii) and (iv) will constitute structural performance criteria. In addition, minutes of the open bidding commission meetings will be made available to the public, including by publishing them on the website of the Public Procurement Directorate which is being set up. The notification of the availability of the minutes will be advertised every time a tender for bidding is published.
D. Monetary Outlook and Banking Sector Issues
19. Monetary policy is conducted at the regional level by the Bank of Central African States (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. Chad will continue to comply with the reserve coverage ratio of the UMAC (Union Économique et Monétaire de l'Afrique Centrale) zone. In view of the robust economic growth in 2002, money supply is projected to grow by 15 percent and total credit to the economy is projected to increase by 15.6 percent in that year. In 2003, broad money is expected to expand by 13.6 percent, and there will be an acceleration of credit to the economy to support the continuing high rate of economic expansion.
20. Banking supervision will continue to be strengthened by the regional Central African Banking Commission (COBAC). The banking system has been fortified by the recapitalization in mid-2002 of one of the six commercial banks. The microfinance network will continue to be developed, with donor assistance.
E. External Outlook
21. The external current account deficit, excluding official transfers, is projected to widen from 39 percent of GDP in 2001 to 52 percent of GDP in 2002 and 46 percent of GDP in 2003. This outcome reflects (i) the impact on imports of the acceleration of investment related to the Doba oil project (32.6 percent of GDP in 2002 and 31.7 percent of GDP in 2003), as well as of the aforementioned increase in public investment; and (ii) the deterioration of the terms of trade owing to the sharp decline in the international price of cotton, the main export commodity.9 However, substantial private—mainly oil-related foreign direct investment—and official capital inflows will more than cover the current account deficit in both 2002 and 2003, so that official reserves are projected to increase by US$4.4 million and US$6.8 million in the two years, respectively.
22. Following the Paris Club agreement in June 2001, the government has made progress in negotiating bilateral agreements with Paris Club creditors and has contacted all non-Paris Club creditors to seek comparable treatment. The deadline for the finalization of the bilateral agreements with Paris Club creditors was extended to September 30, 2002.
F. Other Structural Reforms
23. In addition to the fiscal structural and governance reforms described above, the government will continue its reforms in other areas covered by World Bank conditionality, as scheduled. Specifically, the reform of the cotton sector will be pursued rigorously, with the objective of completing it by end-2003. To this end, (i) following the bidding process launched in April 2002, the strategic private partner of the soap and oil division (DHS) of Cotontchad will be selected by end-September 2002, and the privatization of this unit will be completed by end-January 2003; and (ii) the study of the privatization strategy of Cotontchad will be completed by November 2002, and the High Inter-Ministerial Committee will choose, by end-February 2003, the specific privatization approach to be used.
24. The government will also pursue the reform of the civil service. The measures to be taken over the next 12 months include the following: (i) the adoption by the government of a new pay scale and a decree establishing the new grading of civil servants, by end-September 2002; (ii) the integration of this new pay scale and grading in the 2003 budget; and (iii) the introduction of a computerized system of human resources management by end-2002.
25. In view of the above-mentioned problems in public procurement, procurement reform will be accelerated, and the new procurement code will be submitted to parliament in the last quarter of 2002. The draft code and its implementation decrees will be discussed in a workshop with representatives of all stakeholders; this constitutes a prior action for the submission of SAC V to the Executive Board of the World Bank. The promulgation of the new code is expected in early 2003. In addition, standard bidding documents to facilitate the procurement process will be prepared by end-December 2002.
G. Preparation for the Petroleum Era
26. In preparation for the petroleum era, the government will determine the accounting procedures and the modalities for the management of oil revenue within the already existing framework of the Law of Petroleum Revenue Management. Transfers of oil revenue, net of debt service and payments to the Fund for Future Generations, from the offshore escrow account to local commercial banks, will be made in compliance with the foreign exchange regulations of the Central African Monetary Union (UMAC). The government will transmit monthly to the Petroleum Revenue Control and Oversight Committee reports on the transferred amounts certified by BEAC. With a view to ensuring the transparency of the transfers to and from the offshore escrow account, the government intends to reassess, in consultation with its partners, the modalities of their monitoring and control.
27. Furthermore, in order to ensure the efficiency of poverty-reducing spending and shelter the Chadian economy from oil price volatility, the government intends to adopt modalities of the use of oil receipts consistent with the following principles: (i) as per the Law of Petroleum Revenue Management, spending on priority sectors will be determined on the basis of the medium-term expenditure frameworks that will be prepared with the assistance of the World Bank, taking into account the absorption capacity of these sectors; (ii) revenue exceeding planned expenditures will be saved for stabilization purposes; and (iii) money saved in this way could be used when the level of world oil prices or the gradual rise of the absorption capacity would lead to a situation in which planned spending would exceed oil revenue. The adoption by the government of the exact modalities of this approach, by end-February 2003, will constitute a structural benchmark.
28. In addition, the government is committed to ensuring the true intergenerational nature of the Fund for Future Generations, into which, by law, 10 percent of all direct oil revenue will be deposited. In accordance with the loan agreement with the World Bank, the government will adopt the precise operating modalities of this fund, in consultation with World Bank staff.
H. PRSP Process
29. The poverty reduction strategy is now expected to be finalized by end-September 2002, about five months later than envisaged in the preparation status report communicated by the government to the IMF and the World Bank in November 2001. The main reasons for this delay are related to the complexity of the exercise, the need to follow a fully participatory approach, and the limited administrative and technical capacity. Better coordination among the main stakeholders, including donors, could have helped accelerate the finalization of the PRSP.
30. To address the latter concern, the government and the donors held a meeting in Brussels on May 22-23, 2002 to seek comments from donors on the draft full PRSP before its finalization and adoption by the government. With a view to ensuring an efficient implementation of the policies emanating from the PRSP and the overall effective continuation of the PRSP process, the government has decided to place the coordination of the PRSP process under the leadership the Prime Minister's Office. The government believes that this beefed-up institutional framework for the PRSP will ensure a stronger ownership by all government agencies and better aid coordination. The full PRSP will include a costing of the priority actions and their financing plan, and these will be reflected in the 2003 budget. It will also include a set of measurable indicators and targets in the social sectors.
I. HIPC Completion Point and Use of Resources of the Virtual Poverty Fund
31. Good progress is being made in achieving the conditions for attaining the HIPC Initiative completion point. Efforts will be strengthened in areas where delays have been observed, including in finalizing and implementing the full PRSP, and in the health sector, where some key indicators have recently deteriorated.
32. In addition to the measures described in paragraphs 5, 17 and 18 above, transparency and good governance in the use of the resources of the virtual poverty fund will be strengthened further through semiannual audits of the fund by the Accounting Office of the Supreme Court.
J. Capacity-Building and Statistical Issues
33. Despite some improvements made with donor assistance, overall administrative and technical capacity remains weak, particularly in the areas of macroeconomic management, including (i) macroeconomic forecasting ; (ii) budget preparation, execution, and monitoring; and (iii) the statistical database. To address the situation, the government is pursuing discussions with the donor community to establish a concerted and coherent action plan for improving domestic capacity on a sustainable basis.
34. The government is committed to improving the statistical base through an accelerated implementation of the recommendations of the May 2000 STA multisectoral mission, particularly in the areas of national accounts, price indices, and external trade statistics. To this end, resources will be allocated for the newly created National Statistics Institute, in particular in the context of the 2003 budget.
III. Prior Actions For The Fourth Review And Program Monitoring
A. Prior Actions for the Fourth Review
35. The measures included in Table 1 of this attachment constituted prior actions for the IMF staff to recommend the completion of the fourth review.
B. Program Monitoring
36. Based on Chad's broadly satisfactory track record over the past 12 months, the government is requesting that the monitoring of program implementation revert to the normal semiannual reviews, including semiannual quantitative performance criteria, and quarterly quantitative benchmarks and structural performance criteria. The fifth review under the PRGF arrangement is expected to be completed by end-April 2003; this will focus on the execution of the budget in 2002, fiscal reforms, and governance. The discussions for this review will focus particularly on the specifics of the modalities of the monitoring and use of oil proceeds; reaching an understanding on these issues would be a condition for completing the review. The sixth review is expected to be completed by end-October 2003, and will focus on budget execution at end-June 2003 and structural reforms, in particular regarding the specific measures undertaken in the preparation for the petroleum era. Quantitative performance criteria are set for end-December 2002 and end-June 2003, and quantitative benchmarks are set for end-September 2002 and end-March 2003 (Appendix I, Attachment I, Table 2). The proposed quantitative performance criteria will comprise (i) a ceiling on the increase in net credit from the banking system to the central government; (ii) a floor on the primary base 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 loans contracted or guaranteed by the government; and (vi) a ceiling on net change in external debt with a maturity of up to and less than one year. Indicative targets include (i) a floor on base expenditure on health; (ii) a floor on base expenditure on education; and (iii) a ceiling on the total wage bill (including military). In addition, the reform measures indicated in Table 3 of this attachment will serve as structural performance criteria and benchmarks.
1The preparation of these tables was a structural performance criterion for February 15, 2002 that could not be observed because of difficulties in computerization. On April 5, 2002 the Executive Board of the IMF granted a waiver for the nonobservance of this performance criterion. This measure is a prior action for the completion of the fourth review under the PRGF arrangement.
2Defined as fiscal revenue (excluding grants) minus primary current expenditure and domestically financed investment (see the attached technical memorandum of understanding).
3Based on past experience, the overall fiscal deficit projections assume that only 85 percent of all foreign-financed investments, as projected in the public investment program, will be implemented. Including grants, the overall deficit is targeted to increase by 4.8 percentage points of GDP to 10 percent of GDP in 2002.
4Excluding the cost of clearing mines in the affected areas, which is estimated at CFAF 3.5 billion; the government has been seeking from the beginning the financing for this operation from its partners.
5A revised 2002 budget was submitted to parliament by end-August 2002, reflecting, inter alia, the cost of the demobilization plan.
6Performance criteria at end-December 2002 relating to the primary base balance and the net credit to government from the banking system will be adjusted to account for any unspent amount, should spending on the implementation of the demobilization and reinsertion plan turn out to be lower than budgeted for 2002.
7The overall fiscal deficit, including grants, is projected to decline from 10 percent of GDP in 2002 to 6.9 percent of GDP in 2003.
8Excluding the cotton and energy sector subsidies, as well as the spending on the demobilization plan.
9Including current official grants, the current account deficit is projected to decline from 51 percent of GDP in 2002 to 45 percent of GDP in 2003.
1. This memorandum provides the definitions of the performance criteria and benchmarks for the third annual program under the three-year arrangement supported by the Fund under the Poverty Reduction and Growth Facility (PRGF), which was approved by the Executive Board of the IMF on January 7, 2000. These definitions may need to be revisited at the time of the fifth review, so as to ensure that this memorandum continues to reflect the best understanding between the government of Chad and Fund staff. This memorandum also sets out the data-reporting requirements for monitoring program implementation.
I. Quantitative Performance Criteria and Benchmarks1
A. Government Finances
2. Total government revenue is defined as the sum of all tax and nontax revenues, cumulative since the beginning of the calendar year, excluding proceeds from taxation of public contracts, proceeds from sales of assets, grants, and the amount of the value-added tax (VAT) credit to be reimbursed.
3. The primary base fiscal balance is defined, for program purposes, as the difference between total revenue (as defined in para. 1) and primary base expenditure on a commitment basis. Primary base expenditure is total expenditure, cumulative since the beginning of the calendar year, excluding investment expenditure financed by foreign loans or grants, as well as interest and principal payments on debt.
4. The floor on the primary base fiscal balance at end-September and end-December 2002 will be adjusted upward for the difference between the actual level of expenditure related to the peace agreement signed on January 7, 2002 and the programmed level, should the actual level be lower than the programmed level, as shown in Table 2 of the memorandum of economic and financial policies (MEFP). At end-December 2002, the programmed level amounts to CFAF 2.9 billion, and comprises: the cost of hosting 4,000 former rebels in camps (CFAF 1.1 billion) starting in August 2002; travel costs related to the negotiation of the detailed modalities of the peace agreement (CFAF 0.6 billion); the cost of integrating up to 2,000 former rebels in the army, starting in August 2002 (CFAF 0.4 billion); benefits to be paid to former President Malloum and other former officials upon their returns from exile (CFAF 0.5 billion); and assistance to the population of Tibesti and the cost of starting surveys for mine cleaning operations (CFAF 0,3 billion).
5. Under the program, there is a continuous performance criterion on the nonaccumulation of external arrears. External arrears are defined as all obligations of the government that have not been paid when payment is contractually or legally due, unless the creditor has allowed for an additional grace period after payment is due. In that case, external arrears will arise if the relevant payment has not been made within the grace period. Are excluded from the definition arrears on external debt service pending the conclusion of debt-rescheduling agreements.
6. Reporting requirements. On a monthly basis, the following indicators will be provided through, inter alia, the provision of treasury balance sheets, with a delay not exceeding 30 days: (i) government revenue, total and main components; and (ii) primary base expenditure, by nature and by ministry, as reported in the new monthly monitoring tables that track spending through the four stages of the streamlined expenditure process. Detailed data on the repayment of domestic arrears and information on the remaining stock of arrears carried over from previous years will also be transmitted on a monthly basis, within 30 days from the end of each month. Monthly data on the public sector's scheduled external debt service and actual payments on current maturities and on arrears, detailed by creditor and compiled by the Debt Directorate of the Ministry of Finance, will be transmitted on a quarterly basis, within 30 days from the end of each quarter.
B. Net Credit to the Central Government from the Banking System
7. The ceiling on the cumulative change from January 1, 2002 in net credit to the central government from the banking system, excluding net use of IMF resources, constitutes a performance criterion. Net credit of the banking system to the central government is defined as all government liabilities minus all assets held by the government at the central bank, commercial banks, and other financial institutions, and excluding net use of IMF resources. An exhaustive list of government accounts is provided in the attached table. The government will inform Fund staff within ten days of any opening or closure of a government account.
8. Adjusters. The ceiling on the cumulative change from January 1, 2002 in net credit to government from the banking system will be adjusted upward by 75 percent of any shortfall in non-project-related external assistance cumulatively from January 1, 2002 (excluding IMF financing) relative to the programmed amounts. Underlying the calculations are average exchange rates of CFAF 695 and CFAF 661 per US$1 for 2002 and 2003, respectively.
9. The ceiling on the cumulative change from January 1, 2002 in net credit to government from the banking system will be adjusted (i) downward by any shortfall in the actual net reduction of domestic payments arrears relative to the programmed amounts, cumulatively from January 1, 2002, as shown in Table 2 of the MEFP; or (ii) upward for any repayment in excess of the targeted amounts. Changes in arrears are calculated, cumulatively from January 1, 2002, as the total amount of committed expenditures minus the total amount of paid expenditures.2
10. The ceiling on the cumulative change from January 1, 2002 in net credit to government from the banking system will be adjusted upward by 75 percent of any shortfall in the proceeds from the sales of assets relative to the programmed amount, cumulatively from January 1, 2002.
11. The ceiling on the cumulative change from January 1, 2002 in net credit to government from the banking system at end-September and end-December 2002 will be adjusted downward for the difference between the actual level of expenditure related to the peace agreement signed on January 7, 2002 and the programmed level, should the actual level be lower than the programmed level as shown in Table 2 of the MEFP and described in paragraph 3.
12. Reporting requirements. The preliminary monthly balance sheet of the Bank of Central African States in Chad (BEAC-Tchad) will be transmitted on a monthly basis, not later than 45 days following the end of each month. In addition, the preliminary and final tables on net credit to government from the banking system (position nette du gouvernement, PNG), as calculated by the BEAC-Tchad, will be submitted within seven and thirty days, respectively, from the end of each month. The government will ensure that the BEAC receives all necessary information in this regard, including with respect to its operations with commercial banks.
C. New Nonconcessional External Debt
13. The performance criterion on new noncessional external debt with maturity of more than one year contracted or guaranteed by the government applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No 12274-(00/85) adopted August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received. Nonconcessional debt is defined as debt with a grant element of less than 35 percent, calculated by using currency-specific commercial interest reference rates. For loans with a maturity of at least 15 years, the ten-year average commercial interest reference rate (CIRR), published by the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD), should be used to calculate the level of concessionality. For loans with shorter maturities, the six-month average CIRR should be used. Debt rescheduling and debt reorganization are excluded from this criterion, and so is the loan from the International Bank for Reconstruction and Development loan for the Chad-Cameroon pipeline project. There will be no new nonconcessional external debt with maturity of more than one year throughout the program period.
14. Consultation requirements. The government of Chad will consult with Fund staff before assuming liabilities in circumstances where it is uncertain whether the instrument in question is in conformity with the performance criterion. Details indicating the terms of loans and the creditors on all new external debt, including government guarantees, will be provided on a monthly basis within 30 days from the end of each month.
D. Short-Term External Debt
15. The performance criterion on the net change in external debt with maturity of up to and including one year contracted or guaranteed by the government applies to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No 12274-(00/85) adopted August 24, 2000). Excluded is normal trade financing.
16. Reporting requirements. Data on all new short-term borrowing and guarantees, including the terms of loans and the creditors, will be transmitted, with a detailed description of the terms and conditions, on a monthly basis, within four weeks from the end of each month.
E. Indicative Benchmarks
17. For program purposes, total wage spending by the government is defined as the sum of the wage bill for regular employees and contractuals (including civil servants, armed forces, and embassy personnel), and of all other personnel compensations (including subsidies, pension-related payments, representation allowances, and mission and transportation allowances).
18. Base expenditures in the health sector are total expenditures of the Ministry of Health, excluding investment expenditures financed by foreign loans or grants, as measured on a commitment basis.
19. Base expenditures in the education sector are total expenditures of the Ministry of Education, excluding investment expenditures financed by foreign loans or grants, as measured on a commitment basis.
20. Reporting requirements. Data on total wage spending, and base expenditures in the health and education sectors, will be provided on a monthly basis, within 30 days from the end of the month.
II. Structural Performance Criteria and Benchmarks
21. The publication, by November 30, 2002, of the results of the audits of the five largest contracts awarded in 20013 and the publication, by end-December 2002, of the results and recommendations of the audit of expenditure financed by the virtual poverty fund from May 15, 2001 until May 15, 2002, constitute structural performance criteria. For both of them, "results and recommendations" are understood as the entire audit report, with the exception of appendices and supportive documentation. "Publication" means (i) posting the reports on the website of the Public Contracts Directorate; (ii) making hard copies of the reports available to the public for reading on the premises of the Public Contracts Directorate; and (iii) releasing a press notice announcing the publication of the reports on the Public Contracts Directorate's website, and the possibility for the public to read hard copies on the premises of the Public Contracts Directorate.
22. The adoption by end-February 2003 by the Council of Ministers of the principles and modalities of an approach that aims to ensure an effective absorption of spending in the priority sectors and shelter these expenditures from oil prices volatility constitutes a structural benchmark. It is understood that these principles and modalities will be elaborated in close consultation with Fund staff prior to their adoption.
III. Other Data Requirements for Program-Monitoring Purposes
23. Data on exports and imports, including on volumes and prices, compiled by the BEAC will be transmitted on a quarterly basis within 30 days from the end of each quarter.
24. The monthly disaggregated consumer price index for N'Djaména, compiled by the National Statistics Institute, will be transmitted monthly within two weeks from the end of each month.
25. The twelve-month treasury cash-flow plan will be transmitted once a month, within ten days from the date of its updating.
26. Documentation of all measures taken by the government will be transmitted within five working days from the day of implementation.
1See Table 2 of the memorandum of economic and financial policies (MEFP) (appendix I, attachment I).
2With the exception of arrears to the National Pension Fund (CNRT), which are subject to a specific convention and treated as domestic debt.
3As per the terms of references of the audit, the 5 largest contracts awarded in 2001 are to be identified by the auditor.