Economic Health Check
Gabon Seeks to Diversify its Economy as Oil Revenues Decline
March 21, 2016
- Oil price decline significant shock to the economy
- Country needs to diversify economy, contain spending
- Infrastructure crucial for economic transformation
Hit hard by the recent oil price decline, Gabon can build resilience and revive growth by continuing to diversify its economy, says the IMF.
In its annual assessment of the economy, the IMF also welcomed the government’s plan to improve the level and quality of infrastructure, and raise the quality of human capital—the key constraints to economic growth.
IMF Survey sat with Montfort Mlachila, IMF Mission Chief for Gabon, to discuss the country’s economic outlook and ways to adapt to the challenges it faces.
IMF Survey: The IMF just finished its annual assessment of the Gabonese economy. Could you tell us how is Gabon doing now?
Mlachila: The recent collapse in oil prices, following significant declines from the middle of 2014, is a major challenge for the Gabonese economy and its resilience. As you know, oil prices have declined by about 75 percent over the past 18 months. They used to be a little over $100 per barrel. Now they’re about $30 per barrel. It’s a significant shock for the economy. It also means that government revenues have declined significantly, and so have exports.
In practice, there’s less money circulating in the economy and that has affected the growth rate of the economy, which has declined to about 4 percent in 2015. And this year it is expected to decline further to just over 3 percent—about 3.2 percent. So, the overall effect is quite significant compared to the level of growth rates that were observed before 2014. Between 2010 and 2014, the growth rate was around 6 percent, so it has had a significant impact for the Gabonese economy.
IMF Survey: In these circumstances, how should Gabon adapt to this new environment?
Mlachila: The impact, obviously, has been mostly on government revenues, and the authorities are fully aware of the issues. The government can adapt in several ways. The key strategic objective over the long run is to diversify the economy so that it is less dependent on oil, which will make the economy more resilient. In the short run, the government needs to live within its means by doing two things.
First, it needs to raise additional revenue outside of the oil sector, notably, for example, by reducing the extent of tax exemptions; and then on the spending side the government can take a number of measures to control better the growth of the wage bill.
Second, it needs to reprioritize capital spending to focus on projects that have the highest benefits or the highest economic returns so that it can live within its means. So, those are the key areas that the government can adapt to the fall in the commodity prices.
IMF Survey: But isn’t there a risk that the poorest segments of society will be hurt if the government reduces spending?
Mlachila: Indeed, and the government is aware of these challenges. The issue is to adjust spending in line with what is available in terms of revenue. On the one hand, the government can potentially raise additional revenue from the rest of the non-oil sector. So, the oil revenue loss can be, to some extent, compensated by additional measures which can mobilize additional revenues.
On the other hand, the government can put in place or strengthen its social safety net by doing a number of things. For instance, for people in the rural areas it can develop further the agricultural sector. This is an area where Gabon can do a lot more given that the country still imports a lot of food, and can produce some of the food more cheaply locally. The government is already working on addressing this issue. This can be done, for instance, by improving rural access roads or improving the availability of inputs in the agricultural sector.
At the same time, especially in the urban areas, the government can improve its social safety net by introducing or expanding cash transfers for the most vulnerable segments of the population. So it can do both, actually. It can definitely reduce some of the spending, but, at the same time, reinforce the social safety net by getting additional revenues from the non-oil sector.
IMF Survey: You also talked about the need for Gabon to be less dependent on oil. How do you see Gabon diversifying its economy?
Mlachila: Certainly, Gabon has been highly dependent on the oil sector, which in 2014 has contributed to about 45 percent of government revenue and about 85 percent of exports. So it is an important sector in the economy. But, there is a need to diversify the economy so that it is less dependent on oil and therefore oil prices.
To this end, the authorities have put in place a strategic plan. It’s called PSGE, Plan Stratégique Gabon Emergent. First, it focuses on development of infrastructure, especially in the area of transport such as roads, ports, and railways, and, at the same time, also paying attention to improving availability of electricity. So, that’s one area in which the government has been spending a considerable amount of money.
The government is also trying to increase the amount of value added in the economy by creating a Special Economic Zone. There’s a Special Economic Zone called Nkok near Libreville, the main function of which is to develop various industries, notably in the wood processing industry where there can be additional value added. More generally, the government needs to improve the business climate throughout the country to promote investment.
Finally, in the area of education, for instance, the government is fully aware that there’s a shortage of qualified manpower in various economic activities. So by investing more in training, especially in vocational training, there’s potential to improve the performance of the economy, including through developing skills to help diversification into other new areas.
IMF Survey: To conclude, if you had three key priorities to identify for Gabon going forward, what would those be?
Mlachila: The key priority is for Gabon to boost its growth rate because without growth there’s no improvement of people’s incomes and livelihoods. For that, Gabon needs to implement structural reforms to elevate the level of growth over the long run.
The second priority is to diversify the economy so that it is more resilient to external shocks and therefore less likely to be hit by reductions, for example, in oil prices or other commodity prices.
And finally, Gabon needs to pay attention to ensure that long-run fiscal sustainability is safeguarded, without which there could be a significant increase in public debt levels in the economy, and it would make it difficult for Gabon to meet its key strategic objectives over both the short run as well as the long run.