IMF Executive Board Concludes 2008 Article IV Consultation with ChadPublic Information Notice (PIN) No. 09/11
January 30, 2009
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 January 28, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chad.1
Chad is one of poorest countries in the world. It is landlocked and wracked by conflict and political instability. Its main economic challenge is to seize the opportunity offered by oil revenues to boost growth, diversify the economy and reduce poverty. The second poverty reduction strategy paper (PRSP) adopted in 2008, sets out an economic strategy through 2011 which includes good governance and an environment conducive to growth as its main objectives.
Economic developments since the late 1990s have been dominated by the lead up to, and onset of, oil production in 2003, with sharp fluctuations in overall growth related to the oil sector. Growth has been sluggish in 2007 and 2008 due to weak non-oil growth and declines in oil production. A very difficult security situation has weakened economic activity. Real GDP in 2008 is expected to decline by ½ percent because of a further drop in oil production and the impact of the 2008 February rebel attack on economic activity over the first half of the year. After falling prices in 2007, inflationary pressures picked up in the first half of 2008 owing to rising food prices, reaching 11¾ percent on a 12-month basis at end-November 2008. Steadily increasing oil prices through mid-2008 have helped strengthen the external current account and official reserves. Import cover is expected to rise to 10½ months of imports of non-oil goods and services in 2008, from 5¼ months in 2006. However, the global economic crisis will seriously affect Chad through lower oil prices, with major implications on the fiscal position.
The fiscal position has weakened significantly over the oil era. The non-oil primary deficit deteriorated from 4 percent of non-oil GDP in 2004—the onset of oil revenues—to an expected 28 percent (commitment basis) in 2008. This mainly derives from higher spending in all areas, but particularly in security and investment spending. Fiscal management has also been problematic, with weak budget control manifested as bypassing of budget procedures, extrabudgetary spending, and limited medium-term planning. Problems have also been highlighted over absorptive capacity in some sectors, and over the composition, cost, and quality of public spending.
As a member of the CFA franc zone, Chad has no independent monetary policy. Broad money and private sector credit have been growing rapidly in 2008, driven by the build up of reserves. The banking system is subject to some vulnerabilities, stemming from its lack of depth, some undercapitalization, and the need to strengthen supervision. The fixed exchange regime has provided an important nominal anchor for macroeconomic policies. However, the real exchange has appreciated significantly (25 percent) since 2000, even though it depreciated over 2007-08.
The 2005-2008 PRGF arrangement went off track due to widening non-oil fiscal deficits, inadequate poverty orientation of spending, and slow structural reform. The decision point under the HIPC Initiative was reached in May 2001, and significant interim debt relief has been provided since.
Executive Board Assessment
Directors emphasized the opportunities offered by Chad's oil revenue to address the country's widespread poverty. They noted, however, that non-oil sector activity remains weak, despite increased budgetary allocations to infrastructure and other priority sectors. Improvements in the security environment, infrastructure and human capital, and the business climate will be essential to lay the basis for sustainable growth. Directors noted that inflation is expected to decline with an unwinding of the food price shock, but called for vigilance to ensure a rapid return to the inflation target established by the Central African Economic and Monetary Community.
Directors expressed concern over the large recent increases in the non-oil fiscal deficit, and encouraged the authorities to improve long-run fiscal sustainability through a concerted medium-term fiscal adjustment effort. They strongly supported the authorities' fiscal strategy built on improving public financial management, raising non-oil revenues, and improving the targeting and efficiency of spending. A permanent income framework that relates fiscal policy to Chad's oil wealth, reducing the impact of short-term oil price volatility, will provide an appropriate anchor for Chad. At the same time, Directors recognized that the fiscal adjustment path should take into account the country's large investment needs while being consistent with absorptive capacity and financing constraints.
Directors commended the authorities for signaling their commitment to fiscal adjustment with the 2009 budget, but called for stronger efforts. The current budget is exposed to considerable risks, notably the optimistic oil price assumptions and dependence on large reductions in security spending, which could lead to financing gaps in the course of the year. Directors therefore noted the importance of issuing a revised budget premised on realistic oil revenues and entailing stronger efforts to begin streamlining non-security outlays—such as the wage bill and transfers to inefficient state-owned enterprises—that have grown rapidly over recent years.
Directors highlighted the critical importance of improving fiscal management to achieve medium-term fiscal policy objectives, improve the quality of public spending, and eliminate budgetary overruns. Efforts are also required to strengthen medium-term budgeting, cash management, and procurement, and to enhance the role of line ministries in budget formulation and execution—supported by further technical assistance. In this context, Directors commended the authorities for starting to clear domestic arrears.
Directors expected Chad's early participation in the Extractive Industries Transparency Initiative, building on its transparent oil revenue collection regime. The authorities should work closely with the Fund and other partners in designing a new permanent oil revenue management mechanism.
Directors observed that, although the real exchange rate has appreciated significantly since the beginning of the decade, it does not appear inconsistent with external stability. As oil production becomes more established, it will be important to monitor developments in the prices of non-traded goods. Directors stressed the critical importance of improved infrastructure—particularly through reductions in transport and energy costs—as well as of strengthened governance, financial sector development, and other structural reforms in order to enhance productivity and competitiveness, and boost Chad's weak export performance.
Directors noted that the oil windfall combined with prudent debt management has improved the debt situation since the last Article IV consultation. Although the risk of debt distress is now moderate, lower exports and growth remain important risks. Directors therefore welcomed the intention to improve debt sustainability and take all actions to attain the HIPC Initiative completion point as soon as possible, including by strengthening Chad's relationship with key partners. Several Directors encouraged the authorities to refrain from non-concessional borrowing.
Directors noted the authorities' interest in a staff-monitored program. They encouraged the authorities to demonstrate the improvements in fiscal policy and management in 2009 to proceed towards such a program as quickly as possible.
Directors emphasized that the serious shortcomings in Chad's macroeconomic statistics undermine effective surveillance. The authorities should provide adequate resources to the National Statistics Institute, supported by further technical assistance in priority areas.