Press Release No. 12/369

Press Release No. 12/369
September 27, 2012

An International Monetary Fund (IMF) mission led by Mr. Jaroslaw Wieczorek, Mission Chief for Chad, visited N’Djamena during the period September 12-27, 2011 to conduct consultations under Article IV of the IMF Articles of Agreement.

At the conclusion of the mission, Mr. Wieczorek issued the following statement in N'Djaména today:

In 2011, GDP growth slowed to 1.7 percent, while average inflation was lower than 2%. Oil production has resumed its downward trend and agricultural production has declined due to the drought in the Sahel region, which has also caused an increase in food prices and the overall price index at year end. Helped by the high price of crude oil on the international market, the overall balance of payments posted a surplus.

There was an improvement in the underlying fiscal stance in 2011 and the overall fiscal balance went from a double-digit deficit in 2010 to a small surplus in 2011. The non-oil primary deficit (NOPD) was reduced from 30.6 percent of non-oil GDP in 2010 to 27.9 percent in 2011, as a result of a reduction in exceptional security spending and some contraction in investment spending.

Economic activity rebounded in 2012 with the Gross Domestic Product growth expected to reach about 6 percent, driven by the several industrial projects’ first full year of production. Favorable weather conditions should lead to a recovery in agricultural output and inflation is expected to decline to 5 percent at end-2012 due to lower food prices.”

In the medium term, owing to the new oil fields coming on stream, oil production is expected to increase substantially with a significant positive effect on fiscal revenues and the external current account. This favorable outlook features an increase in oil production from 120,000 barrels per day in 2012 to 160,000 barrels per day on average during 2013-2017.”

The execution of the 2012 budget at end-August was characterized by a lower than expected collection of non-oil tax revenues and an accelerated pace of expenditures relative to the objectives set in the 2012 budget. Consequently, the non-oil primary deficit at end-August reached 495 billion CFA francs (more than 80 percent of the annual target of the budget). Nearly a quarter of the domestically financed spending through end-August was carried out without prior authorization.

The expansionary fiscal policy since July is reflected in the draft supplementary budget, adopted by the Council of Ministers in mid-September, with the NOPD target of 28 percent of non-oil GDP (compared to 19.7 percent in the original budget) and the overall deficit (on a commitment basis) exceeding 8 percent of non-oil GDP, which will be financed, among others, by drawing down the savings made in 2011.

The lack of progress in fiscal discipline is a concern. From one year to another, the budget does not accurately reflect the government's economic policy because of the significant extra-budgetary spending. The treasury’s lacking the cash flow plan entails substantial financial costs and procurement without competitive tender process increases the cost of public investment and purchases of goods and services.

The 2013 budget should be anchored on the objective of fiscal sustainability in the medium term. With oil revenues expected to exceed the amounts projected last year, the NOPD target of 25 percent of non-oil GDP in 2013, declining gradually to 14-15 percent of non-oil GDP in 2017, seems appropriate. This NOPD path is compatible with the objective to accumulate savings needed to cope with a possible downward shift in oil prices.

“The reforms in public finance management should aim at increasing non-oil revenue and improving the execution of expenditure. These reforms should include the integration at the national level of the new directives by the Economic Community of Central Africa (CEMAC) regarding the management of public finances, knowing that this integration must be completed before December 31, 2013.

“Given that subsidies for the state-owned enterprises have become a significant burden for public finances, consolidation of the financial situation of these companies is needed urgently, preferably, by adopting a policy framework for these enterprises based on market prices.

“Although its debt level is relatively low, Chad remains vulnerable to volatile oil prices. The increased recourse to external debt presents significant challenges in terms of debt sustainability in a context of limited absorption capacity. Therefore, a solid evaluation of the viability and the economic impact of debt-financed projects is recommended. In addition, being a low income country, Chad should seek concessional terms for external loans.”

“As a result of the drought last year, more than a million Chadians found themselves in a situation of food insecurity. This crisis has been contained due to the mobilization of development partners and the involvement of the authorities. The response to the recent floods has been prompt, but requires concerted action between various government agencies involved in ensuring food security. It is also important to provide sufficient budget resources to address this emergency.

The health of the banking sector has improved with the recapitalization of troubled banks. However, the high exposure of banks to government and its suppliers represents a significant risk for the banks. Bank penetration remains low but may increase with the "mobile banking" and other modern means of payment emerging in Chad. The banking system would also benefit from a more rigorous application of the rules of the Organization for the Harmonization of Business Law in Africa (OHADA).

 The business climate remains unfavorable to the development of the private sector with the majority of the private enterprises operating in the informal sector. To change this situation, the mission urges the authorities to implement the recommendations of the "White Paper" issued by the employers association and strengthen efforts to promote the Chadian economy.

The mission thanks the Chadian authorities, the employers’ association and civil society, as well as the development partners, particularly the World Bank, for the excellent collaboration and high-quality discussions with the mission during the visit.”