IMF Executive Board Concludes 2008 Article IV Consultation with GabonPublic Information Notice (PIN) No. 08/116
September 11, 2008
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On July 28, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Gabon.1
In 2006-07, the economy expanded by 3.4 percent on average. Non-oil growth averaged 5.5 percent, spurred by high international oil prices and domestic demand; oil production recovered in 2007 after a sharp decline in 2006. However, demand pressures and increases in fuel prices led inflation to rise to 5.9 percent by the end of 2007.
Gabon's external position is considered sustainable given current commodity price trends. Buoyant commodity prices produced large surpluses in the external and fiscal accounts, which should allow Gabon to reduce its public debt to 15.6 percent of GDP by end-2008. Gabon also issued its first international bond in the amount of US$1 billion in December 2007 and its first regional bond on the Central African Economic and Monetary Community (CEMAC) market in the amount of CFAF 81.5 billion in January 2008 to prepay most of its Paris Club debt.
Fiscal policy was tightened in 2007 and early 2008, but by less than anticipated. The non-oil primary fiscal deficit dropped from 18.0 percent of non-oil GDP in 2006 to 13.3 percent in 2007-1.7 percentage points less than expected, due to a small shortfall in non-oil revenue and an overrun on non-wage spending. Nevertheless, Gabon recorded a large overall fiscal surplus in 2007 as oil revenue was much higher than projected.
Implementation of the structural reform agenda slowed in the second half of 2007. In particular, fuel prices have not been adjusted since March 2007, and the automatic price adjustment mechanism was not implemented. As a result fuel subsidies may reach 3.3 percent of non-oil GDP in 2008. However, there was notable progress in some areas. Gabon's third report under the Extractive Industries Transparency Initiative was expanded to cover most oil companies and the mining sector and was published in March 2008. The oil revenue model was also completed, which will strengthen the estimation of current and projected oil receipts.
Looking ahead, the critical challenge facing Gabon is to seize the opportunity provided by high oil prices to place macroeconomic policies on a long-term sustainable path while fostering economic diversification and preparing Gabon for the post-oil era.
Executive Board Assessment
Executive Directors welcomed broad-based growth in nonoil activities, moderate inflation, and the strengthened external position. Directors congratulated the authorities on the successful issuance of Gabon's first Eurobond and the prepayment of Paris Club debt. They regretted that, notwithstanding these positive developments and higher oil revenue, fiscal performance has turned out to be weaker than expected, leading to the delay in completing the second review of the program supported by the Stand-By Arrangement.
Going forward, Directors noted the difficult challenge of stabilizing the economy over the long run while meeting short-term popular demands, arising from increases in import prices for food and fuel. They were encouraged by the authorities' determination to take advantage of the favorable domestic environment and the opportunity provided by higher oil prices to implement the fiscal program. Bolder efforts at fiscal consolidation and structural reforms would be crucial in this regard to mitigate risks to macroeconomic stability and prepare Gabon for the post-oil era.
Directors emphasized that long-term fiscal sustainability depends critically on fiscal discipline and a building-up of government savings. They noted that Gabon's key policy challenge is to strike a judicious balance between preparing for the exhaustion of oil reserves, which requires increasing public savings, and addressing the country's pressing social and infrastructural needs. Directors regretted the delay in the adjustment of retail fuel prices and the resultant surge in fuel subsidies. They encouraged the authorities to initiate, as soon as feasible, a systematic adjustment of fuel prices toward import parity levels combined with well-targeted assistance to the most vulnerable. In response to rising food prices, better-targeted measures should also be adopted in place of the suspension of duties and value-added tax on food imports.
Directors underlined the importance of improving public expenditure management to avoid a recurrence of unplanned spending and raise the quality of public investment. In this context, they encouraged the authorities to prepare medium-term expenditure plans by sector, consistent with the overall macroeconomic framework and the priorities elaborated in the Poverty Reduction Strategy Paper (PRSP). Restoring the financial viability of the social security system and consolidating quasi-fiscal activities into the budget are among the priorities. In parallel, efforts should be sustained to strengthen revenue administration and transparency, particularly by reducing tax exemptions.
Directors noted the staff's assessment that the real effective exchange rate in Gabon is broadly in line with its long-run equilibrium. They considered that, while Gabon has benefited from currently high commodity prices, the volatility of oil prices calls for a prudent borrowing policy to keep debt at a sustainable level. The implementation of an asset and liability management strategy is important in this respect. At the same time, the recent appreciation of the real effective exchange rate heightens the need to expedite structural reform aimed at enhancing external competitiveness.
Directors underscored the importance of improving the business climate and promoting economic diversification and non-oil growth. To this end, particular attention should be given to developing infrastructure, streamlining commercial regulations, and fostering private sector competition, particularly in the banking sector. Directors welcomed the substantial progress being made in privatizing and restructuring public enterprises, and looked forward to their completion. They commended the authorities for their active role in fostering trade liberalization within the CEMAC, including by reducing the common external tariff. Directors encouraged the Gabonese authorities to work with other CEMAC members on implementing the recommendations of the 2006 Financial Sector Assessment Program (FSAP) for the region.
Directors commended the authorities for their efforts to improve governance, notably in the area of oil revenue management. They welcomed in particular the publication of Gabon's third Extractive Industries Transparency Initiative report and the development of the oil revenue model. Directors encouraged the authorities to further reduce reported discrepancies between various accounts of oil revenue, and to enhance the transparency of the operations of the Future Generations Fund.