## cr17246 — Executive Summary and Program Overview ## Source details **Canonical URL:** [cr17246 — Executive Summary and Program Overview](https://www.imf.org/-/media/files/publications/cr/2017/cr17246.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17246.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17246.pdf.json) --- ### Context and Request - Chad requests a three-year arrangement under the Extended Credit Facility (ECF) in the amount of SDR 224.32 million (160 percent of quota) after cancellation of the existing ECF. - Objective: address protracted balance of payments problems by supporting policies to stabilize and revive the economy. - Recent shocks: oil price and security shocks and a heavy external debt service burden have intensified development challenges. - GDP per capita: peaked at $1,241 in 2014 and fell to $852 in 2016. - Over the past two years (to end-2016), non-oil economic activity, non-oil revenue, and government spending declined by about 9 percent, 17 percent, and 50 percent respectively. ### Main Program Policies and Objectives - Reestablish debt sustainability through external debt restructuring. - Achieve gradual fiscal adjustment while maintaining a tight spending envelope. - Mobilize non-oil revenue and implement tax and customs reforms. - Create space for domestic arrears clearance. - Strengthen public financial management and diversify the economy to support fiscal consolidation and boost the non-oil sector. ### Staff Views and Program Role - Staff supports the authorities’ request for the new ECF arrangement. - The arrangement is expected to catalyze increased external assistance and better balance financing and adjustment. - Authorities’ commitment to external debt restructuring and envisaged policies considered adequate to balance risks. ### Recent Economic Developments — Key Findings and Indicators - Real activity: - Real non-oil GDP: contracted by 2.9 percent in 2015 and by 6 percent in 2016. - Oil GDP: contracted by 8.4 percent in 2016. - Average inflation: about 1 percent deflation in 2016. - Fiscal and revenue: - Non-oil tax revenue dropped to 7 percent of non-oil GDP (lowest since 2009). - Exceptional receipts from old tax disputes: CFAF 40 billion (0.8 percent of non-oil GDP) in 2016. - Net oil revenue available for the budget (after Glencore service and operational costs) fell to CFAF 34 billion. - Primary spending and investment declined by more than 5 and 3 percent of non-oil GDP respectively in 2016. - Arrears and banking: - Non-performing loans rose to about 21 percent at end-2016. - Domestic and external payment arrears emerged in 2015 and 2016. - External sector and reserves: - Current account deficit: 9.2 percent of GDP in 2016. - FDI halved in 2016. - Imputed international reserves at end-2016: negative $323 million (equivalent to about negative 1 month of imports). - CEMAC pooled reserves fell from $15.3 billion at end-2014 to $4.1 billion at end-2016 (about two months of imports). - Real effective exchange rate estimated overvalued by 12–16 percent. ### Performance under the 2014–17 ECF Arrangement - August 2014: ECF approved with access of 57 percent of quota; later augmentations brought total disbursements to 70.1 percent of quota (SDR 98.34 million). - Compliance through June 2016: most quantitative performance criteria (PCs) and structural benchmarks (SBs) met; non-oil primary balance floor met in all four reviews. - End-2016: three of six PCs not met; non-oil primary balance floor missed; ceiling on net domestic financing exceeded; two SBs not met (including delayed submission of National Development Plan). ### Program Strategy under the Proposed New ECF (high-level) - Reestablish debt sustainability through external debt restructuring (notably with Glencore). - Achieve gradual fiscal adjustment while protecting social spending floors. - Mobilize non-oil revenue via tax and customs reforms. - Strengthen PFM and structural reforms to improve competitiveness and diversify the economy. - Intention to catalyze external assistance and rebalance financing and adjustment needs. ### Projections and Outlook (selected) - Oil production expected to grow by about 3.6 percent in 2017. - Inflation: increase from -1.1 percent to 0.2 percent in 2017; move towards 3 percent CEMAC-wide target by 2020. - Non-oil activity: projected to stabilize in 2017 and gradually grow thereafter. - Risks: short-term growth underperformance if fiscal stabilization delayed; fiscal risks from deterioration in banks' liquidity undermining rollover of domestic public debt; international oil market and regional security as key risks. - Priority fiscal measures include gradual wage bill reduction, control of new hiring, streamlining transfers and subsidies, and gradual increase in domestically financed investment. ### Medium-Term Projection Highlights (selected rows from Text Table 3) - Real GDP growth (percent per year): 2014 6.9; 2015 1.8; 2016 -6.4; 2017 0.6; 2018 2.4; 2019 3.1; 2020 3.9. - Oil growth: 2014 5.7; 2015 32.1; 2016 -8.4; 2017 3.0; 2018 6.1; 2019 5.8; 2020 5.4. - Non-oil growth: 2014 7.1; 2015 -2.9; 2016 -6.0; 2017 0.1; 2018 1.6; 2019 2.6; 2020 3.6. - Current account balance, including official transfers (percent of GDP): 2014 -8.9; 2015 -12.3; 2016 -9.2; 2017 -2.2; 2018 -3.2; 2019 -3.5; 2020 -3.3. - Government revenue and grants (percent of GDP): 2014 23.2; 2015 17.1; 2016 14.9; 2017 19.9; 2018 19.2; 2019 19.2; 2020 19.5. - Gross official reserves (billions of USD): 2014 1.2; 2015 0.4; 2016 -0.3; 2017 0.0; 2018 0.1; 2019 0.3; 2020 0.5. - Memorandum: Chadian crude oil price (US$/barrel): 2014 94.0; 2015 39.9; 2016 36.2; 2017 50.4; 2018 49.9; 2019 49.0; 2020 48.9. ### Debt, Arrears, and Restructuring - Glencore debt background: - 2013 loan: $300 million, increased by $300 million; 2014 loan: $1.356 billion to purchase Chevron’s 25 percent share. - Consolidated/rescheduled in December 2015 at $1.448 billion; end-2016 value $1.369 billion. - 2016 oil sales revenue after costs: $271 million; debt service to Glencore $231 million; $40 million to the treasury. - External arrears accumulated in 2016–17; about $88 million (0.9 percent of non-oil GDP) remained outstanding at end-April 2017. - External debt service would be about 40 percent of revenue in 2017 and 2018 without restructuring (about 82 percent of which is to Glencore). - Authorities engaged debt advisors and expect agreement on restructuring by September 2017. - Program envisages restructuring generating about $815 million in financing during 2017–2020 (in line with program parameters). ### Monetary and Banking Sector Measures - BEAC policy rate: increased in March from 2.45 percent to 2.95 percent. - BEAC refinancing ceiling for Chad reduced from CFAF 300 billion to 240 billion (20 percent reduction). - Chad reached ceiling of statutory and exceptional advances from BEAC in 2015: CFAF 420 bn. - Fiscal strategy: repay government debt to BEAC beginning in 2018 and advances in 2019 to eliminate by 2028. - Government deposits at BEAC to increase starting in 2017 (about CFAF 5 billion) to reach CFAF 40 billion (0.7 percent of non-oil GDP) by 2021. - Strategy to address bank liquidity pressures: reestablish confidence to rollover CFAF 192 billion maturing securities in 2017; reduce government’s domestic debt to banks by 9 percent in 2017 and a further 7.5 percent in 2018. ### Domestic Financing from Banks (Text Table 4, In billion of CFAF — selected items) - Use of deposits: 2016 -11.2; 2017p 0.0; 2018p 0.0. - Banks loans: 2016 -31.6; 2017p -13.8; 2018p -7.7. - Auctioned securities (net): 2016 239.1; 2017p -8.0; 2018p -20.3. - Treasury Bills (net): 2016 79.7; 2017p -23.5; 2018p -6.2. - Treasury Bonds (net): 2016 159.4; 2017p 15.5; 2018p -14.1. - Issuances: 2016 159.4; 2017p 41.0; 2018p 125.3. - Amortization: 2016 0.0; 2017p -25.5; 2018p -139.4. - Syndicated securities: 2016 -26.9; 2017p -36.1; 2018p -18.1. - Total banks financing: 2016 169.4; 2017p -57.9; 2018p -46.1. - Total banks exposure to Central Government: 2016 579.3; 2017p 527.5; 2018p 487.6. ### Fiscal Policy and Revised 2017 Budget - Draft revised 2017 budget: maintains nominal spending envelope at 2016 level; expected Cabinet approval by mid-June 2017. - Main differences: lower wage bill (by about 5 percent) and higher investment spending (about 35 percent). - Social spending set to slightly increase to 4.2 percent of non-oil GDP in 2017. - Revised budget projects higher net oil revenue reflecting planned restructuring of the Glencore debt. - Draft budget reverses planned reliance on domestic financing: negative net domestic financing from banks about CFAF 58 billion compared to positive net financing of over CFAF 169 million in 2016. - Revenue measures: new tax on oil products yielding CFAF 2.5 billion for first two months; 18 percent excise tax on communications showing promising results (yield CFAF 2.4 billion in first two months). ### Tax, Customs, and PFM Reforms - Non-oil tax system: - 2016 non-oil revenue: 6.8 percent of GDP. - CEMAC average: 11.3 percent of GDP; SSA average: 13 percent of GDP. - Staff and FAD TA estimate non-oil tax revenue potential around 10–13 percent of non-oil GDP (2 to 5 percentage points higher). - FAD TA estimates VAT exemptions at about 3 percent of GDP in 2016. - Key measures: - Establish a unit in charge of tax policy (SB) to identify and advance reforms. - Decree moratorium on new exemptions and identify exemptions to remove. - Modernize customs administration; establish single customs window at Ngueli (SB). - Modernize excise goods management system; broaden VAT base; implement VAT refund system. - Explore simplification of personal income tax and increase property tax revenues via better registration. - PFM reforms: - Strengthen commitment, validation, authorization, and payment via enhanced use of computerized system (CID). - Cash Plan Committee operational; integrate additional spending categories and strengthen responsiveness. - Audit of unverified expenditure payment arrears to be launched (SB) and comprehensive repayment strategy to be defined. - Authorities committed to regularize spending executed through emergency procedures (DAO) as soon as possible (indicative target). ### Transparency and Oil Sector Monitoring - Oil revenue monitoring: - Oil revenue defined comprehensively (gross sales net of operational and transportation costs, royalties, profit tax, dividends, bonuses, etc.). - Authorities committed to prepare and publish quarterly oil sector note (SB) and remain in compliance with EITI. - IMF provided an Excel-based template and delivered presentations on oil sector structure in December 2016. - Distribution of government oil sales revenue: - 2015 (Gross Sales: US$528 mn): Operating Cost 37%; Interest and Fees 21%; Amortization 12%; Amount to the Treasury 30%. - 2016 (Gross Sales: US$377 mn): Operating Cost 28%; Interest and Fees 40%; Amortization 21%; Amount to the Treasury 11%. ### Program Financing, IMF Access, and Disbursement Schedule - Authorities cancel existing ECF and request new ECF of SDR 224.32 million (160 percent of quota). - With credit outstanding of SDR 89.85 million as of end-April 2017, proposed access brings total access for Chad to 224.1 percent of quota, net of repayments to the PRGT. - Financing assurances obtained from donors (World Bank, European Union, African Development Bank, and France) for next 12 months. - Proposed phasing of IMF disbursements (percent of quota): - 50 percent each year in 2017 and 2018, 40 percent in 2019, and 20 percent for last review in 2020. - Detailed scheduled disbursements (percent of quota / Million SDR / Available Date / Condition): - 25.0 / 35.05 / Date of Board Approval / Executive Board approval of the three year ECF arrangement. - 25.0 / 35.05 / September 15, 2017 / Observance of the performance criteria for June 30, 2017 and completion of the first review under the arrangement. - 25.0 / 35.05 / February 15, 2018 / Observance of the performance criteria for December 31, 2017 and completion of the second review under the arrangement. - 25.0 / 35.05 / August 15, 2018 / Observance of the performance criteria for June 30, 2018 and completion of the third review under the arrangement. - 20.0 / 28.04 / February 15, 2019 / Observance of the performance criteria for December 31, 2018 and completion of the fourth review under the arrangement. - 20.0 / 28.04 / August 15, 2019 / Observance of the performance criteria for June 30, 2019 and completion of the fifth review under the arrangement. - 20.0 / 28.04 / February 15, 2020 / Observance of the performance criteria for December 31, 2019 and completion of the sixth review under the arrangement. - Text Table 5: Financing needs and sources (In million of US dollars): - 1. Financing gap under new Program: 521 531 431 390. - 2. Commercial debt rescheduling: 174 249 192 200. - 3. Budget support: 252 187 163 153. - 4. Residual financing gap (1-2-3): 95 95 76 37. - 5. IMF financing (160 percent of quota): 95 95 76 37. - Percent of quota by year: 50 50 40 20 for 2017 2018 2019 2020. - Capacity to repay IMF: - Outstanding obligations would peak at 3.7 percent of GDP and 11.3 percent of exports of goods and services in 2020. - Annual repayments will peak at 0.5 percent of GDP and 5 percent of tax revenue in 2025. ### Conditionality, Benchmarks, and Monitoring - Conditionality status (selected from unit): - 1. Floor on non-oil primary budget balance: MetMetMetMetNot Met. - 2. Ceiling on net domestic government financing: Not MetMetMetMetNot Met. - 3. Ceiling on accumulation of domestic payment arrears: MetNot MetNot MetNot MetMet. - 4. Ceiling on accumulation of new external payment arrears: MetMetMetNot MetNot Met. - 5. Ceiling on contracting or guaranteeing new non-concessional external debt: MetNot MetMetMetMet. - 6. Floor for poverty reducing social spending: Not MetMetMetMetMet. - Prior actions ahead of Board meeting: - (i) Approval by council of ministers of a 2017 revised budget in line with program parameters. - (ii) Issuance of a ministerial decree reinforcing the moratorium on extension of tax and customs exemptions. - Structural benchmarks (selected and due dates): - Submit National Development Plan to National Assembly — End-July 2017 — High. - Set up unit in charge of tax policy — End-Aug 2017 — High. - Publication of quarterly oil sector note starting end-September 2017 — Medium. - Launch audit of unrecognized expenditure payment arrears — End-October 2017 — High. - Establish single customs window at Ngueli — End-Dec 2017 — Medium. - Adopt action plan to improve wage bill management — End-Dec 2017 — High. - Launch audit to identify savings in transfers and subsidies — End-Mar 2018 — High. - Create special court for economic and financial crimes — End-June 2018 — Medium. - Quantitative program targets (selected test-dates, CFAF billion): - Floor on customs revenue: End-June 2017 35; End-Sept 2017 70; End-Dec 2017 110. - Ceiling on stock of domestic payment arrears: End-June 2017 270; End-Sept 2017 263; End-Dec 2017 240. - Floor on regularization of DAO (Percent of total DAO): 90 (applies to all test dates listed). - Memo item — Oil Revenue: End-June 2017 135; End-Sept 2017 214; End-Dec 2017 310. ### Debt Sustainability Analysis (DSA) — Key Findings - Core finding: Chad is in debt distress and debt is unsustainable without external commercial debt restructuring. - Without restructuring, debt service projected about 40 percent of revenue in 2017–18 and remains high into 2019–21. - Public external debt-to-GDP: 2013 total 1,410.7; 2014 2,010.2; 2015 1,616.6; 2016 1,619.0 (percent of GDP: 2013 22.0; 2014 29.1; 2015 25.0; 2016 27.1). - External arrears: stock estimated about US$88.21 million at end-April 2017. - Public domestic debt rose to about 24 percent of GDP in 2016; projected decline starting in 2017 under program assumptions. - Stress tests: highest vulnerability to adverse shocks to exports and combined macro shocks; one-time 30 percent nominal depreciation shock generates further vulnerability. ### Staff Appraisal and Policy Recommendations - Diagnosis: crisis deepened in 2016 due to oil price shock, security shock, and heavy external commercial debt; no signs of improvement early 2017. - Strategy: - Reducing external debt burden through restructuring of Glencore debt is critical. - Fiscal policy should rely primarily on non-oil revenue mobilization while maintaining a tight spending envelope to allow gradual clearance of domestic arrears. - Strengthen PFM and diversify the economy to support fiscal consolidation and non-oil growth. - Banking sector: reduce banks’ exposure to the government in 2017–2018 while establishing credible liquidity-provision frameworks in coordination with BEAC and regional regulators. - External financing: intensify mobilization of donor budget support; IMF program to play catalytic role. - Risks: delays in external debt restructuring, social pressures, and high turnover among officials could complicate implementation; mitigating factor is authorities’ strong commitment. *Source: IMF staff report content excerpt (cr17246).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Chad has been enduring the intensifying effect of oil price and security shocks as well as a heavy external debt service burden. - The authorities are requesting a three-year arrangement under the Extended Credit Facility (ECF) in the amount of SDR 224.32 million (160 percent of quota) after the cancelation of the existing ECF. - The new ECF arrangement is expected to address the country’s protracted balance of payments problems by supporting policies required to stabilize and revive the economy. ### Policies and objectives - Main elements of the program: - Reestablishment of debt sustainability through external debt restructuring. - Achieving gradual fiscal adjustment by maintaining a tight spending envelope. - Better mobilizing non-oil revenue. - Creating space for domestic arrears clearance. - Aims: - Stabilize the fiscal position. - Help achieve a durable economic recovery while supporting the regional stabilization efforts. - Strengthen public financial management and diversify the economy to support fiscal consolidation and boost the non-oil sector. ### Staff views - Staff supports the authorities’ request for a new ECF arrangement. - The arrangement would help catalyze increased external assistance necessary to better balance the mix of financing and adjustment. - The authorities’ strong commitment to external debt restructuring and to the envisaged policies adequately balance the risks. ### Background and macroeconomic context - Chad is a low-income fragile country with significant development challenges, which have recently intensified due the oil price and security shocks. - Estimated GDP per capita that peaked at $1,241 in 2014 fell to $852 in 2016. - The oil price shock and heavy external commercial debt (primarily debt to Glencore) necessitated dramatic spending cuts, producing an adjustment in the non-oil primary deficit of almost 12 percentage points of non-oil GDP in two years. - Over the past two years (to end-2016), non-oil economic activity, non-oil revenue, and government spending declined by about 9 percent, 17 percent, and 50 percent respectively. Box: The Glencore Debt - First $300 million loan with Glencore contracted in 2013 and subsequently increased by $300 million. - Another $1.356 billion loan contracted in 2014 to purchase Chevron’s 25 percent share in the Doba consortium. - The two loans were consolidated and rescheduled in December 2015 with a value of $1.448 billion. - At end-2016, this debt stood at $1.369 billion. - In 2016, out of $271 million oil sales revenue (after operating and transportation costs), debt service to Glencore was $231 million leaving $40 million to the treasury. ### Recent economic developments (key findings and indicators) - Real activity: - Real non-oil GDP contracted by 2.9 percent in 2015 and by another 6 percent in 2016. - Oil GDP contracted by 8.4 percent in 2016. - Agriculture (about one third of non-oil GDP) benefitted from a favorable season, but sectors reliant on public procurement were highly impacted. - Average inflation: about 1 percent deflation in 2016. - Fiscal and revenue developments: - Non-oil tax revenue dropped to 7 percent of non-oil GDP, its lowest level since 2009. - Exceptional receipts associated with old tax disputes brought about CFAF 40 billion (0.8 percent of non-oil GDP) in 2016. - Net oil revenue available for the budget (after Glencore service and operational costs) fell to CFAF 34 billion (includes net sales revenue, profit tax and other fees). - Primary spending and investment declined by more than 5 and 3 percent of non-oil GDP respectively in 2016. - Salaries for November and December 2016 were paid only in early 2017 after donors’ budget support disbursements. - Arrears and banking sector: - Domestic and external payment arrears emerged in 2015 and 2016 despite spending cuts. - Non-performing loans rose to about 21 percent at end-2016 due to accumulation of domestic arrears by the government to private companies. - Liquidity pressures emerged on some banks and increased rollover risk for the government. - External sector and reserves: - Current account deficit remained large in 2016 at 9.2 percent of GDP, mainly explained by lower oil export receipts. - FDI (largely oil-related) was halved in 2016. - At end-2016, Chad’s (imputed) international reserves stood at negative $323 million (equivalent to about negative 1 month of imports), reflecting the country’s negative position at the BEAC. - The CEMAC region’s pooled international reserves fell from $15.3 billion at end-2014 to $4.1 billion at end-2016 (about two months of imports). - Based on existing methodologies, Chad’s external position is estimated to be substantially weaker than warranted by fundamentals and desirable policies; the real effective exchange rate is estimated to be overvalued by 12–16 percent. - Social and security pressures: - Tense security situation, drought in the Lake Chad region, and hosting about 700,000 refugees, displaced persons, and returnees add significant fiscal and humanitarian pressure. - Social tension rose significantly in 2016 with prolonged strikes and protests. ### Performance under the 2014–17 ECF arrangement - History and access: - August 2014: Executive Board approved an ECF arrangement with access of 57 percent of current quota. - A 19 percent of quota augmentation was approved in the first review; a second augmentation of 24 percent of quota occurred at the combined third and fourth reviews (November 11, 2016). - Total disbursements amounted to 70.1 percent of quota (SDR 98.34 million). - Compliance and outcomes through June 2016: - Most quantitative performance criteria (PC) and structural benchmarks (SBs) were met through June 2016 (test date for the 4th review). - The floor on the non-oil primary balance was met in all four reviews. - Limits on contracting or guaranteeing non-concessional loans were missed once because the Glencore debt rescheduling in late 2015 was done on non-concessional terms. - Domestic payment arrears were inevitable in 2015 and 2016 given the liquidity crunch; some external payment arrears accumulated in 2016. - Most SBs aimed at improving public finance management were met up to June 2016, with two benchmarks met with delay. - End-2016 performance: - Three of the six PCs for end-2016 were not met. - The non-oil primary balance floor was missed, largely due to shortfall in non-oil revenue. - The ceiling on net domestic financing was exceeded as domestic debt amortization was lower than projected. - Two SBs for end-2016 were not met, including delayed submission of the National Development Plan to the Assembly. ### Program strategy under the proposed new ECF arrangement (high-level) - Reestablish debt sustainability through external debt restructuring. - Achieve gradual fiscal adjustment while protecting social spending floors. - Mobilize non-oil revenue and implement tax and customs reforms. - Strengthen public financial management and structural reforms to improve competitiveness and diversify the economy. - The new ECF is intended to catalyze external assistance and re-balance financing and adjustment needs. _Approved By David Owen and Yan Sun; Discussions took place in N’Djamena (March 22–April 4, 2017) and in Washington DC (April 19–24, 2017). The staff team comprised Mr. Bakhache (head), Messrs. Delepierre, Ho, and Léost (all AFR), Mr. Quayyum (SPR), Mr. Nachega (Resident Representative) and Mr. Topeur (local economist). Mr. Bangrim Kibassim (Advisor to the Executive Director) participated in the discussions._ ### 1. Floor on non-oil primary budget balanceMetMetMetMetNot Met ### 1. Floor on non-oil primary budget balanceMetMetMetMetNot Met ### Conditionality Status and Program Indicators - Statuses reported at top of unit: - 1. Floor on non-oil primary budget balance: MetMetMetMetNot Met - 2. Ceiling on net domestic government financing: Not MetMetMetMetNot Met - 3. Ceiling on the accumulation of domestic payment arrears by the govenrment: MetNot MetNot MetNot MetMet - 4. Ceiling on the accumulation of new external payment arrears by the govenrment or public non-financial enterprises: MetMetMetNot MetNot Met - 5. Ceiling on contracting or guaranteeing of new non-concessional external debt by the government and public non-financial enterprises: MetNot MetMetMetMet - 6. Floor for poverty reducing social spending: Not MetMetMetMetMet ### Structural Benchmarks under the 2014–17 ECF Arrangement - Prepare and publish quarterly budget execution reports on the basis of existing data - Due: End-Sept 2014 - Status: Met - Adopt a regulatory framework for debt management, particularly a referral and operating procedure, in line with technical assistance recommendations by the World Bank and AFRITAC Central - Due: End-Sept 2014 - Status: Missed. Completed in December 2014 - Submission to Parliament of a 2015 draft budget targeting an NOPD of 14.1 percent of non-oil GDP - Due: End-Oct 2014 - Status: Met - Limit emergency spending procedures to no more than 17 percent of domestically financed spending in 2014 (excluding wages and debt service) - Due: End-Dec 2014 - Status: Met - Issuance of a decree for the establishment of an inter-ministerial structure in charge of consolidating and reporting all the information related to fiscal oil revenue - Due: End-June 2015 - Status: Met - Incorporation of information on fiscal oil revenue (from the inter-ministerial structure monitoring) in the quarterly budget execution reports published by the Ministry of Finance - Due: End-Sept 2015 - Status: Met - Update and expand the taxpayer database - Due: End-Dec 2015 - Status: Met - Limit emergency spending procedures to no more than 9 percent of domestically financed spending in 2015 (excluding wages, debt service, and security-related spending) - Due: End-Dec 2015 - Status: Met - Producing an annual debt management report - Due: End-June 2016 - Status: Missed. Completed in October 2016 - Establishment of a structure responsible for Treasury planning and monitoring, and preparation of cash management plans - Due: End-June 2016 - Status: Met - Enhanced reporting of gross and net oil revenue flows - Due: End-June 2016 - Status: Met - Rationalization of transfers and subsidies, based on the result of the functional and financial audit launched in 2015 - Due: End-Sept 2016 - Status: Not Met - Submission to the National Assembly of the National Development Plan 2016-2020 - Due: End-Nov. 2016 - Status: Not Met - Finalization of the terms of reference for the recruitment of an international firm to conduct the audit of domestic arrears - Due: End-Dec. 2016 - Status: Not Met ### New Policy Strategy and Medium-Term Macroeconomic Framework - Program objectives: - Stabilize the economy and lay the foundation for a sustainable recovery over the medium-term. - Arrest the vicious cycle and revive non-oil growth to support the sustainability of the regional exchange rate regime. - Recalibrate balance between financing and adjustment recognizing further sharp adjustment is not feasible. - Main elements of the strategy: - Avoid further spending cuts while maintaining fiscal prudence and allocating resources for domestic arrears clearance. - Reestablish debt sustainability by restructuring external commercial debt. - Focus on non-oil revenue mobilization to support gradual medium term adjustment. - Reduce reliance on domestic financing and liquidity pressure on banks. - Implement structural reforms to improve public financial management (PFM) and diversify the economy. - Regional context: - Strategy aligned with priorities in the regional economic reform program for the CEMAC (PREF-CEMAC). - Regional policies by BEAC and COBAC include tightening of monetary policy, elimination of monetary financing of member countries, gradual elimination of statutory advances, modernization of liquidity management, prudential regulations to restrict refinancing flows, and strengthening banking supervision. ### Projections and Outlook (Text Table 3 and accompanying text) - Oil and activity projections and inflation: - Oil production expected to grow by about 3.6 percent in 2017. - Inflation expected to increase from -1.1 percent to 0.2 percent in 2017 and move towards the 3 percent CMEAC-wide target in 2020. - Non-oil activity projected to stabilize in 2017 and gradually grow afterward. - Risks: - Short-term risk of underperforming growth if fiscal stabilization measures are delayed. - Fiscal risks include deterioration in banks' liquidity position undermining rollover of domestic public debt. - International oil market developments and regional security tensions are material upside and downside risks. - Upside potential from exceptional receipts (e.g., resolution of old tax disputes or international tenders for new oil fields). - Priority fiscal measures: - Gradually reduce the wage bill; wage bill share in total primary spending close to 50 percent in 2016 and larger than total non-oil tax revenue. - Control new hiring, freeze wage increases, reduce bonuses, audit payroll and diplomas. - Streamline transfers and subsidies; transfers and subsidies reduced from 6.3 percent of non-oil GDP in 2014 to 2.2 percent in 2016 and projected 2.5 percent in the medium term. - Gradually increase public investment spending: domestically financed investment projected to reach 1.4 percent of non-oil GDP in 2017, rising to 2.2 percent of non-oil GDP by 2020. ### Medium-Term Projections (selected rows from Text Table 3) - Real GDP growth (percent per year): - 2014: 6.9 - 2015: 1.8 - 2016: -6.4 - 2017: 0.6 - 2018: 2.4 - 2019: 3.1 - 2020: 3.9 - Oil growth: - 2014: 5.7 - 2015: 32.1 - 2016: -8.4 - 2017: 3.0 - 2018: 6.1 - 2019: 5.8 - 2020: 5.4 - Non-oil growth: - 2014: 7.1 - 2015: -2.9 - 2016: -6.0 - 2017: 0.1 - 2018: 1.6 - 2019: 2.6 - 2020: 3.6 - Current account balance, including official transfers (percent of GDP): - 2014: -8.9 - 2015: -12.3 - 2016: -9.2 - 2017: -2.2 - 2018: -3.2 - 2019: -3.5 - 2020: -3.3 - Government revenue and grants: - 2014: 23.2 - 2015: 17.1 - 2016: 14.9 - 2017: 19.9 - 2018: 19.2 - 2019: 19.2 - 2020: 19.5 - Oil revenue: - 2014: 11.7 - 2015: 4.9 - 2016: 3.5 - 2017: 6.4 - 2018: 6.5 - 2019: 6.3 - 2020: 6.2 - Non-oil revenue: - 2014: 9.4 - 2015: 8.3 - 2016: 8.4 - 2017: 8.1 - 2018: 8.4 - 2019: 8.8 - 2020: 9.4 - Grants: - 2014: 2.1 - 2015: 3.9 - 2016: 3.0 - 2017: 5.4 - 2018: 4.3 - 2019: 4.1 - 2020: 3.8 - Total expenditure (commitments basis): - 2014: 29.4 - 2015: 22.9 - 2016: 18.0 - 2017: 18.8 - 2018: 18.5 - 2019: 18.7 - 2020: 18.2 - Current expenditure (except interests): - 2014: 15.7 - 2015: 13.5 - 2016: 11.7 - 2017: 11.2 - 2018: 11.1 - 2019: 11.0 - 2020: 10.9 - Investment: - 2014: 12.8 - 2015: 7.3 - 2016: 3.7 - 2017: 4.7 - 2018: 5.3 - 2019: 6.0 - 2020: 6.1 - of which: Domestically financed investment: - 2014: 9.9 - 2015: 4.4 - 2016: 1.1 - 2017: 1.4 - 2018: 1.7 - 2019: 2.1 - 2020: 2.2 - Overall fiscal balance (commitment basis): - 2014: -6.2 - 2015: -5.9 - 2016: -3.0 - 2017: 1.1 - 2018: 0.7 - 2019: 0.5 - 2020: 1.3 - Non-oil primary balance (commitment basis, excl. grants): - 2014: -16.2 - 2015: -9.7 - 2016: -4.4 - 2017: -4.6 - 2018: -4.3 - 2019: -4.2 - 2020: -3.6 - Gross official reserves (billions of USD): - 2014: 1.2 - 2015: 0.4 - 2016: -0.3 - 2017: 0.0 - 2018: 0.1 - 2019: 0.3 - 2020: 0.5 - (In months of imports of goods and services): - 2014: 2.1 - 2015: 1.0 - 2016: -1.0 - 2017: -0.1 - 2018: 0.4 - 2019: 0.8 - 2020: 1.3 - Memorandum item: Chadian crude oil price (US$/barrel): - 2014: 94.0 - 2015: 39.9 - 2016: 36.2 - 2017: 50.4 - 2018: 49.9 - 2019: 49.0 - 2020: 48.9 ### Debt, Arrears, and Restructuring - Domestic arrears: - Program envisages gradual repayment of domestic arrears starting with those recognized by the Treasury (“Restes à payer”) at end-April 2017. - Repayment of other arrears to follow a comprehensive strategy: verification, prioritization, and repayment. - External debt and restructuring: - Chad is in debt distress and without restructuring debt would be unsustainable (see DSA). - External arrears accumulated in 2016–17; about $88 million––(0.9 percent of non-oil GDP) remained outstanding at end April 2017. - External debt service set to be about 40 percent of revenue without debt restructuring in 2017 and 2018 (about 82 percent of which is to the commercial creditor, Glencore). - Authorities engaged debt advisors and expect to reach agreement on a restructuring by September 2017 (MEFP ¶22). ### Monetary and Banking Sector Measures - Regional monetary stance: - BEAC increased policy rate in March from 2.45 percent to 2.95 percent. - 20 percent reduction in overall refinancing ceiling for Chad from CFAF 300 billion to 240 billion. - Reduction not likely binding currently as banks have not engaged in refinancing of private sector debt. - Repayment of BEAC advances and build-up of deposits: - Chad reached ceiling of statutory and exceptional advances from the BEAC in 2015: CFAF 420 bn. - Fiscal strategy incorporates repayment of government debt to the BEAC beginning in 2018 and of advances in 2019 to eliminate them by 2028. - Government deposits at the BEAC to be gradually increased starting in 2017 (about CFAF 5 billion) and expected to reach CFAF 40 billion (0.7 percent of non-oil GDP) by 2021. - Strategy to address short-term liquidity pressures among some domestic banks: - Aim to reestablish banks’ confidence to rollover securities maturing in 2017 (total CFAF 192 billion). - Reduce government’s domestic debt to banks by 9 percent in 2017 and a further 7.5 percent in 2018. - IMF MCM Technical Assistance to BEAC to put in place a credible framework for liquidity assistance consistent with regulations and regional stability objectives. ### Domestic Financing from Banks (Text Table 4, In billion of CFAF) - 2016, 2017p, 2018p (selected items): - 1. Use of deposits: - 2016: -11.2 - 2017p: 0.0 - 2018p: 0.0 - 2. Banks loans: - 2016: -31.6 - 2017p: -13.8 - 2018p: -7.7 - 3. Auctioned securities (net): - 2016: 239.1 - 2017p: -8.0 - 2018p: -20.3 - Treasury Bills (net): - 2016: 79.7 - 2017p: -23.5 - 2018p: -6.2 - Treasury Bonds (net): - 2016: 159.4 - 2017p: 15.5 - 2018p: -14.1 - Issuances: - 2016: 159.4 - 2017p: 41.0 - 2018p: 125.3 - Amortization: - 2016: 0.0 - 2017p: -25.5 - 2018p: -139.4 - 4. Syndicated securities: - 2016: -26.9 - 2017p: -36.1 - 2018p: -18.1 - Emprunt Obligataire 2011-2016: - 2016: -26.9 - Emprunt Obligataire 2013-2018: - 2016: 0.0 - 2017p: -36.1 - 2018p: -18.1 - Total banks financing: - 2016: 169.4 - 2017p: -57.9 - 2018p: -46.1 - Total banks exposure to Central Government: - 2016: 579.3 - 2017p: 527.5 - 2018p: 487.6 - Note: Does not include bilateral loans and loans from BDEAC in CFAF. ### Fiscal Policy for the Rest of 2017 - Draft revised 2017 budget: - Prepared as a prudent revision reflecting worsening conditions since second half of 2016. - Expected Cabinet approval by mid-June 2017. - Broadly maintains nominal spending envelope at 2016 level. - Main differences: lower wage bill (by about 5 percent) and higher investment spending (about 35 percent). - Goods and services budgeted to decline primarily reflecting end of one-off 2016 spending associated with Chad’s chairmanship of the African Union. - Social spending set to slightly increase to 4.2 percent of non-oil GDP in 2017. - Revenue measures and projections: - New tax on oil products yielding an additional CFAF 2.5 billion for the first two months of the year. - 18 percent excise tax on communications (replacing several less efficient taxes) showing promising results. *Source: Chadian authorities; and IMF staff (excerpts from the IMF staff report and technical annexes).* ### 0.3 percent of non-oil GDP in 2017. Regarding oil revenue, reflecting the planned restructuring of ### cr17246 - 0.3 percent of non-oil GDP in 2017. Regarding oil revenue, reflecting the planned restructuring of ### Revised Budget, Oil Revenue, and Financing - The revised budget projects higher net oil revenue reflecting the planned restructuring of the Glencore debt. - The draft revised budget reverses the originally planned reliance on domestic financing: - Allocates resources to pay arrears to banks that emerged in 2016, all interest payment due in 2017, amortization of a syndicated bond, and other maturing non-securitized loans. - Represents a negative net domestic financing from the banking sector of about CFAF 58 billion compared to positive net financing of over CFAF 169 million in 2016. - Budget presentation: oil revenue is net of (i) operational costs linked to SHT participation in the ESSO consortium; (ii) transportation costs for exporting government oil; and (iii) service on the debt to Glencore. ### Tax and Customs Reforms and Policies - Non-oil tax system performance and potential: - In 2016 non-oil revenue represented only 6.8 percent of GDP. - CEMAC average: 11.3 percent of GDP. - SSA average: 13 percent of GDP. - Staff cross-country analysis and FAD TA reports estimate Chad’s non-oil tax revenue potential could be around 10–13 percent of non-oil GDP, i.e., 2 to 5 percentage points higher than current level. - FAD TA estimates VAT exemptions at about 3 percent of GDP in 2016. - Key measures to strengthen non-oil revenue mobilization: - Establish a unit in charge of tax policy (SB) to identify and advance reforms to improve non-oil revenue mobilization (MEFP ¶24). - Impose a decree introducing a moratorium on new exemptions and identify exemptions that could be removed. - Improve and modernize customs administration, including establishing a single customs window at Ngueli (SB), and modernize the excise goods management system for tobacco, beer, alcoholic beverages and soft drinks (MEFP ¶26 and ¶27). - Medium-term priorities: - Broaden the VAT tax base through reduction in exemptions, notably in the electricity sector, and implement an effective VAT refund system. - Explore simplification of the personal income tax system and apply a single progressive scale for all taxpayers. - Increase property tax revenues through better land and property registration and tax collection procedures (MEFP ¶28). ### Public Financial Management (PFM) Reforms - Objectives: improve fiscal controls and avoid accumulation of domestic arrears by strengthening the expenditure chain and cash management. - Expenditure chain reforms: - Strengthen commitment, validation, authorization, and payment via enhanced use of the computerized system (CID) to improve control, monitoring and transparency, especially in the payment phase. - Authorities committed to appropriately record in the budget (regularize) spending executed through emergency procedures (DAO) as soon as possible (indicative target) to limit risk of overspending and/or new arrears accumulation (MEFP ¶30). - Cash management: - The Cash Plan Committee is fully operational. - A cash management plan including monthly forecasts of revenues and main expenditures (wage bill, domestic and external debt service) has been developed. - Moving forward: integrate other spending categories and strengthen Committee responsiveness to revenue and expenditure forecast updates. - Arrears identification and repayment: - Authorities committed to adopt a comprehensive strategy for identification and payment of other potential arrears (MEFP ¶32). - An audit of unverified expenditure payment arrears expected to be launched before the end of the year (SB). - A comprehensive repayment strategy, including modalities such as securitization of some arrears and prioritization based on economic, social and financial impact, will be defined and implemented consistently with the medium-term fiscal framework. - Debt management improvements: - Target contracting and management of debt, strengthen public debt recording and monitoring capacity (MEFP ¶34). - Reform priorities include better control and enhancement of risk assessment as part of a medium-term debt strategy drawing on AFRITAC TA findings. ### Transparency in the Oil Sector - Authorities committed to further enhance transparency in the oil sector (MEFP ¶36): - Prepare and publish a quarterly oil sector note including information on financial flows that affect the budgetary oil revenue level (SB). - Commit to remain in compliance with the EITI. - Progress noted on monitoring and forecasting oil revenue flows, but better coordination and information sharing among government agencies (Annex IV) is necessary. ### Structural Reforms and Economic Diversification - Socioeconomic context: - Poverty is prevalent, particularly in rural areas. - Population: 45 percent is under 15 years and expanding by 3 percent per year. - Government is the main source of formal sector employment in urban areas. - Structural challenges and reform priorities: - Chad ranks among the worst performers on business environment, competitiveness, institutional and governance indicators. - Structural reforms should tackle impediments to private sector development, especially in sectors with job creation potential such as agriculture and livestock, mining, and artisanal crafting. - Authorities will create a special court for suppression of economic and financial crimes by June 2018 (SB) to strengthen the anti-corruption legal framework. - Financial sector deepening and inclusion: - Short-term priority: address ongoing liquidity stress in the banking sector. - Longer-term reforms: improve household access to financial services (especially rural), strengthen legal/regulatory/institutional frameworks for property and creditor rights, and develop mobile banking. - National Development Plan (2017–21): - Economic diversification is a main pillar. - The NDP is expected to be finalized soon (SB) and aims to focus on structural impediments and sectors with resources and expertise. - Authorities preparing a donor conference in September to raise official financing and encourage private sector participation. ### Program Modalities, Safeguards, and Risks - IMF financing request and arrangement: - Authorities decided to cancel existing ECF arrangement and request high access to PRGT resources under a new three-year ECF arrangement of 160 percent quota (SDR 224.32 million). - With the credit outstanding of SDR 89.85 million as of end-April 2017, proposed access brings total access for Chad to 224.1 percent of quota, net of repayments to the PRGT. - Financing and arrears regularization: - Financing assurances obtained from donors (World Bank, European Union, African Development Bank, and France), particularly for the next 12 months. - Authorities are taking steps to regularize arrears to official bilateral creditors within the next 12 months, and with multilateral creditors within the program period; arrears to the World Bank have been cleared. - Chad is making a good faith effort to reach a collaborative agreement with the private creditor to whom arrears have emerged. - Proposed phasing of IMF disbursements (disbursements in percent of quota): - 50 percent each year in 2017 and 2018, 40 percent in 2019, and 20 percent for the last review in 2020. - The share of IMF financing in total official financing is projected to be around 30 percent in 2017–19 (and about 18 percent of the total financing needed). - Text Table 5: Financing needs and sources (In million of US dollars) - 1. Financing gap under new Program: 521 531 431 390 - 2. Commercial debt rescheduling: 174 249 192 200 - 3. Budget support: 252 187 163 153 - 4. Residual financing gap (1-2-3): 95 95 76 37 - 5. IMF financing (160 percent of quota): 95 95 76 37 - Percent of quota by year: 50 50 40 20 for 2017 2018 2019 2020 (columns aligned with years in source) - Capacity to repay IMF: - Outstanding obligations to the IMF based on existing and prospective drawings would peak at 3.7 percent of GDP and 11.3 percent of exports of goods and services in 2020. - Annual repayments will peak at 0.5 percent of GDP and 5 percent of tax revenue in 2025 (Table 10). - Prior actions ahead of Board meeting: - (i) Approval by the council of ministers of a 2017 revised budget in line with program parameters. - (ii) Issuance of a ministerial decree reinforcing the moratorium on extension of tax and customs exemptions. - Debt restructuring and assurances: - Authorities appointed debt advisors developing options for restructuring and expect to achieve restructuring in line with program parameters, entailing significantly reducing external debt service and generating about $815 million in financing during 2017-2020. - Advisors indicated collateral associated with this debt is not likely to undermine government's ability to generate necessary financing. - Risks: - Potential delays in external debt restructuring could reduce resources for budget implementation unless additional resources are mobilized; critical to reduce external debt service as soon as possible. - Other risks: social pressure, high turnover among high and mid-level officials complicating implementation. - Mitigating factor: authorities’ strong commitment to the program. ### Safeguards and Institutional Measures - BEAC safeguards: - BEAC finalizing implementation of remaining priority recommendations as part of IMF safeguards “rolling measures”. - End-March 2017: BEAC Board of Directors and CEMAC Ministerial Committee adopted critical governance-focused amendments to the BEAC Charter. - Major advances for BEAC’s full transition to International Financial Reporting Standards (IFRS) during 2017. - A full safeguards assessment under the periodic four-year cycle for regional central banks is scheduled for June 2017. - Monitoring and program performance: - Program performance monitored through semi-annual QPCs, indicative targets (ITs), and SBs (MEFP, Tables 1 and 2). - QPCs and ITs set on the non-oil primary balance, customs revenue, net domestic government financing (excluding BEAC), net government financing from BEAC, stock of recognized arrears, external arrears, and non-concessional external debt. - ITs set for social spending and regularization of spending through emergency procedures. - Potential variation in budget support, exceptional receipts, and oil revenue to be handled through adjustments to non-oil primary balance, stock of recognized arrears, and net domestic government financing. ### Staff Appraisal: Diagnosis and Strategy - Crisis assessment: - Economic crisis deepened in 2016 due to oil price shock, security shock, and heavy burden of external commercial debt. - Economic activity contracted sharply in 2016; fiscal pressures deepened; banking sector under pressure; social tension risen. No signs of improvement so far in 2017; budget being implemented under acute liquidity constraints. - Program performance and strategy: - Performance under ECF was broadly satisfactory until June 2016; implementation undermined by deepening crisis in second half of 2016. - Fiscal policy should aim for a more gradual approach to adjustment relying primarily on improving non-oil revenue mobilization while maintaining a tight spending envelope to allow room for gradual clearance of domestic arrears to boost activity and support the banking sector. - Strengthening PFM and diversifying the economy are main pillars of the 2017–21 National Development Plan and expected to support fiscal strengthening and non-oil sector growth. - Debt restructuring importance: - Reducing external debt burden through restructuring of the Glencore debt is critical for success. - Authorities have taken steps: contacting creditor, publicly announcing intention to restructure, appointing financial and debt advisors. - Staff considers adequate assurances are in place to restore debt sustainability and ensure the program is fully financed. - Authorities are in compliance with the Fund’s arrears policies based on plan to regularize arrears to official creditors and good faith efforts with private creditor. *Source: IMF staff report content excerpt (cr17246).* ### 53. Measures to address short-term liquidity pressures among some domestic banks are ### cr17246 - 53. Measures to address short-term liquidity pressures among some domestic banks are ### Banking-sector liquidity and exposure - Banks’ high exposure to the government should be reduced in 2017 and 2018. - An adequate framework for liquidity provision to banks is needed while exposure is reduced. - Implementation should be in close cooperation between the national authorities, the BEAC, and the relevant regional regulators. - Objective: ensure banks continue to have the necessary confidence to rollover maturing government securities and lend to the private sector. ### External financing, donor support, and IMF program - Strong and timely support from donors, complemented by IMF disbursements, is critical given the sizeable financing needs over the 2017–20 period. - Authorities need to intensify efforts in mobilizing budget support, including by showing progress in the reforms required to enable development partners to proceed with their budget support operations. - The program supported by the IMF and its associated disbursements will continue to play a catalytic role. - Staff notes the Chadian authorities’ cancellation of the existing ECF arrangement and supports their request for a new 3-year ECF arrangement with access of 160 percent of quota. - The program would also contribute to restoring external stability of the region. - The authorities’ strong commitment to the program, including to the debt restructuring, adequately balances the risks to the program. ### Key program financing and disbursement schedule (from the ECF arrangement) - Total access: 160.0 percent = 224.32 Million SDR (Total160.0224.32). - Scheduled disbursements (percent of quota / Million SDR / Available Date / Condition): - 25.0 / 35.05 / Date of Board Approval / Executive Board approval of the three year ECF arrangement - 25.0 / 35.05 / September 15, 2017 / Observance of the performance criteria for June 30, 2017 and completion of the first review under the arrangement - 25.0 / 35.05 / February 15, 2018 / Observance of the performance criteria for December 31, 2017 and completion of the second review under the arrangement - 25.0 / 35.05 / August 15, 2018 / Observance of the performance criteria for June 30, 2018 and completion of the third review under the arrangement - 20.0 / 28.04 / February 15, 2019 / Observance of the performance criteria for December 31, 2018 and completion of the fourth review under the arrangement - 20.0 / 28.04 / August 15, 2019 / Observance of the performance criteria for June 30, 2019 and completion of the fifth review under the arrangement - 20.0 / 28.04 / February 15, 2020 / Observance of the performance criteria for December 31, 2019 and completion of the sixth review under the arrangement ### Selected fiscal and macro projections and indicators (highlights) - Overall fiscal balance (incl. grants, commitment basis): 2017 -6.2; 2018 -5.9; 2019 -3.0; 2020 1.1; 2021 0.7. - Non-oil primary balance (commitment basis, excl. grants): 2017 -16.2; 2018 -9.7; 2019 -4.4; 2020 -4.6; 2021 -4.3. - Revenue and grants (percent of non-oil GDP): 2017 23.2; 2018 17.1; 2019 14.9; 2020 19.9; 2021 19.2. - Oil revenue (percent of non-oil GDP): 2017 11.7; 2018 4.9; 2019 3.5; 2020 6.4; 2021 6.5. - Non-oil revenue (percent of non-oil GDP): 2017 9.4; 2018 8.3; 2019 8.4; 2020 8.1; 2021 8.4. - Expenditure (percent of non-oil GDP): 2017 29.4; 2018 22.9; 2019 18.0; 2020 18.8; 2021 18.5. - Investment (percent of non-oil GDP): 2017 12.8; 2018 7.3; 2019 3.7; 2020 4.7; 2021 5.3. - IMF planned disbursements under ECF (from fiscal operations table): 2017 59; 2018 59; 2019 47; 2020 23 (row: IMF planned disbursements under ECF59594723). ### Policy implications and priorities - Reduce banks’ government exposure in 2017 and 2018 while building a robust liquidity-provision framework. - Coordinate closely with BEAC and regional regulators to preserve market confidence and avoid disruptions to rollover of government securities. - Accelerate mobilization of donor budget support by demonstrating progress on required reforms to unlock such assistance. - Use IMF program and disbursements as catalyst to restore external stability and support debt-restructuring efforts. *Source: Chadian authorities; and IMF staff estimates and projections.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### A. Balance of Payments and Exchange Rate Developments - Current account: - The external current account deficit averaged 9 percent of GDP between 2010 and 2016. - Projected to improve to around 2 percent in 2017. - With pick up in oil prices and recovery in oil production, the current account deficit is expected to be around 3 percent in 2017–21. - Non-oil exports averaged around 5 percent of GDP and are expected to remain steady over the medium term. - Goods and services balance: - Deteriorated from -8 percent of GDP in 2011 to -15 percent of GDP in 2016, driven especially by the drop in oil exports despite significant reduction in imports of goods and services in the last two years. - Foreign Direct Investment (FDI): - FDI concentrated in the oil sector and fluctuated between 2 and 5 percent of GDP in the period 2010–16 (except in 2014 when it recorded a negative value associated with the government’s purchase of a share in the country’s largest oil consortium, financed with external debt). - Investment from oil companies is envisaged to increase slightly in 2017, driving FDI to around 3.2 percent of GDP. - Real and nominal exchange rates: - The real effective exchange rate (REER) has recently depreciated; since 2013 the REER path has broadly tracked the nominal effective exchange rate (NEER). - The recent depreciation of the REER is mostly driven by the negative inflation in 2016. - Lack of export diversification and limited potential for import substitution suggest limited benefits from gains in price competitiveness. - Reserve adequacy and debt sustainability: - CEMAC analysis found that by end-March 2016 reserves were below an adequate level for a resource-rich monetary union with a fixed exchange rate. - The level of pooled reserves imputed to Chad fell to negative levels in 2016 (equivalent to -1 month of imports). - The debt sustainability analysis (DSA) shows that Chad is in external debt distress and debt is unsustainable without external debt restructuring. ### B. Model-Based Real Exchange Rate Assessment - Approaches used: - Araujo et al. (2013) approach: - Suggests a current account norm of 3.4 percent of GDP in 2021. - Corresponds to a REER overvaluation of 12 percent. - This model accounts for external borrowing constraints and inefficiencies and absorptive capacity constraints in investment. - Bems and Carvalho (2009) constant real annuity approach: - Text reports that this approach "suggests a current account norm of 5.2 percent of GDP in 2021, corresponding to a REER overvaluation of 16 percent." - Text Table 1 reports for "Constant real annuity - Bems and Carvalho Filho, 2009" a CA norm of 5.6 (percent of GDP) and an implied Real Exchange Rate adjustment of 16 (percent). - The higher current account norm in this methodology arises because the model ignores external borrowing constraints, implying a larger current account surplus as the optimal response to a natural resource windfall. - Numerical inputs and methodology note: - The current account elasticity used in Text Table 1 is noted as CA Elasticity: -0.6. - Araujo et al. model-based results were obtained in collaboration with Nathalie Gonzales Prieto (RES). ### C. Structural Competitiveness - Key constraints: - Chad faces significant structural competitiveness challenges across business environment, institutional, and governance indicators, ranking among the worst performers in the world. - These constraints are key impediments to export diversification and attracting FDI. - Policy focus: - Given Chad’s membership in a currency union, bold structural reforms are necessary to strengthen competitiveness and the external position. - Structural reforms should focus on improving the business climate and enhancing sectors with high potential for inclusive growth. - Priority reform areas are discussed in Annex II. *Prepared by Saad Quayyum and Marwa Ibrahim; IMF staff estimates and projections for 2017 as cited in the source document.* ### 2.4 billion in revenue, more than twice the amount collected last year (MEFP ¶25). ### 2.4 billion in revenue, more than twice the amount collected last year (MEFP ¶25). ### Customs revenue: objectives and measures - Government objectives for 2017: - Improve control on the transaction value. - Modernize the customs administration. - Enhance exchange of information between the Directorate General of Customs and the Directorate General of the Treasury. - Measures the authorities aim to implement (based on recent IMF TA missions): - Activate the ASYCUDA module for the bonded warehouses. - Start controlling imported goods from their point of origin. - Set up a single window in Ngueli for custom operations. - Enhance enforcement and control of existing exemptions. - Make it mandatory to make import duties payment through bank account. - Fiscal impact of exemptions: - In 2016, customs exemptions alone are estimated to have generated CFAF 140 billion loss in revenue. ### VAT performance and priorities - Current situation: - VAT rate: 18 percent (in line with CEMAC Directive). - VAT revenue currently standing between 1 and 1.5 percent of GDP. - Exemptions, notably on water and electricity, narrow the tax base and lead to important loss in VAT revenue collection. - Potential and target: - VAT revenue could increase to 5 percent of GDP according IMF financed TA report. - Two main priorities: - Broaden the tax base through a reduction in exemptions, notably in the electricity sector. - Implement an affective VAT refund system. ### Other revenue measures and sectoral reforms - Excise taxes: - Improve collection on tobacco, beer, alcoholic beverages and soft drinks. - Revenue performance from excise on these products has been very weak, averaging 0.1 percent of GDP since 2010. - As much as 50 percent of production could evade excise tax on these products (estimates are difficult). - Authorities aim to modernize the excise goods management system, including by using stamp technology to monitor collection. - Personal income tax: - Current system is complex, with different scales and diverse tax reliefs. - Reform priorities: (i) simplify the system, and (ii) apply a unique progressive scale for all wages, taking into account its impact on different categories of revenues. - Land and property tax: - Property and land taxes represented only 2 percent of total non-oil revenue in 2015. - Only 5,000 land titles registered in Chad. - Significant potential exists if land and property registration and tax collection procedures are enhanced (MEFP ¶28). ### Monitoring oil revenue flows: institutions, opacity, and recent actions - Main entities involved in oil sector operations: - Ministry of Petroleum (MoP): issues licenses and regulates production. - Société des Hydrocarbures du Tchad (SHT): public enterprise managing government oil assets and marketing government oils. - Ministry of Finance (MoF): collects taxes and fees from oil companies and relies on MoP and SHT data to monitor and forecast oil revenue. - Information sharing and coordination: - Coordination and information sharing largely discretionary; effective information sharing platform not yet operational. - In September 2016, authorities established a technical inter-ministerial committee (replacing a high level inter-ministerial committee) comprising MoP, MoF, SHT and other agencies; committee is set to begin its work soon. - Authorities tasked the committee to publish a quarterly note on oil sector development with detailed discussion and breakdown of oil revenues, debt service to the Glencore loan and other related costs. - Glencore debt and opacity of allocations: - Service of the Glencore debt is paid from government oil sale proceeds and is determined in an opaque manner. - Loan contract specifies payment priorities: first operating cost associated with the government stake in the oil consortium, then servicing the loan, with the residual going to the Treasury. - Exact amount of debt service per period is uncertain because it is linked to the value of oil shipments and other cost factors. - Glencore, presumably in discussion with SHT, decides on the final allocation of payments to service the loan per oil shipment; MoF does not participate and has little a priori information of the final amount paid to the Treasury, which varies significantly. - Recent transparency support and tools: - December 2016: IMF staff made presentations on oil sector structure to MoF and National Assembly. - IMF staff developed an Excel-based template on oil revenue to help MoF collect and organize information from other agencies. ### Distribution of government oil sales revenue (selected figures) - 2015 (Gross Sales: US$528 mn) - Operating Cost: 37% - Interest and Fees: 21% - Amortization: 12% - Amount to the Treasury: 30% - 2016 (Gross Sales: US$ 377 mn) - Operating Cost: 28% - Interest and Fees: 40% - Amortization: 21% - Amount to the Treasury: 11% ### Context from the Letter of Intent and MEFP (selected fiscal and program figures) - External pressures and debt: - Commercial debt servicing has heavily reduced budgetary oil revenues. - Commercial debt stock cited: about US$1.37 billion at end-2016. - ECF arrangement history and request: - Original ECF arrangement approved on August 1, 2014 (covering July 1, 2014 through June 30, 2017); arrangement extended until November 30, 2017. - Government requests a new three-year ECF arrangement for an amount of SDR 224.320 million (160 percent of quota). - New ECF arrangement would allow disbursement of the equivalent of about CFAF 59 billion in 2017 (sum of two equal installments of SDR 35.05 million, disbursed respectively after approval of the new ECF arrangement and after the conclusion of the first review), provided relevant conditions are met. - Fiscal objectives for 2017: - Adopt a revised budget with the non-oil primary deficit kept below 5 percent of non-oil GDP in 2017 (compared to 16 percent and 10 percent respectively in 2014 and 2015). - Commitments to contain public sector wage bill, spending on goods and services, and transfers and subsidies, while allowing a small increase in public investment. - Aim to start repaying arrears on spending that has gone through the spending chain and to clear arrears to official bilateral creditors within 12 months. - Policy commitments: - Reinforce moratorium on granting new tax and customs exemptions. - Improve tax and customs administrations; consider options to broaden the tax base with priority to reforms of the personal income tax, VAT and property tax. - Improve public financial management, chain of expenditure and cash management system, and adopt a comprehensive strategy for repaying audited domestic arrears. - Continue to improve transparency of the oil sector operations. *Source: IMF staff and Chadian authorities as presented in the Memorandum of Economic and Financial Policies and Annex IV (Monitoring Oil Revenue Flows).* ### 6. The economic and financial situation continued to worsen in the second half of 2016, ### 6. The economic and financial situation continued to worsen in the second half of 2016 ### Economic activity and inflation - Deep contraction of economic activity in the second half of 2016; economic activity contracted in 2016 for the second year in a row, more markedly than in 2015. - Sharp cuts in Government spending, investment cuts and large layoffs in oil companies had strong spillovers on the rest of the economy. - Non-oil private sector companies curtailed activity, particularly in the construction sector, an important source of employment. - Weak domestic demand and continued cross border trade disruptions led to deflation. ### Fiscal pressures and government response - Both oil and non-oil revenue underperformed in 2016; acute liquidity pressures prevailed throughout the year. - Oil revenues dropped to around one-third of the amount observed in 2014. - Government executed the budget on a cash basis for most of the year, prioritizing essential security spending, wage payment, debt service, and poverty reducing social expenditure. - Measures since mid-2016: - Reducing bonuses to contain the wage bill. - Drastically cutting investment spending to only 1.1 percent of non-oil GDP (compared to about 8 percent average between 2006 and 2015). - Significantly reducing transfers and subsidies. - Despite measures and exceptional receipts from previous tax disputes, liquidity pressures intensified in the second half of 2016 due to further underperformance of non-oil revenue. - Resulted in delays in payment of wages and salaries, and accumulation of some arrears to domestic and external creditors. ### Banking sector and real-economy feedbacks - Non-performing loans increased markedly due to accumulation of domestic arrears by the Government to private companies, which in turn could not service debts to banks. - Decline in public procurement (on which the private sector is highly dependent) contributed to decline in overall economic activity. - Some banks that increased exposure to public securities in the last two years reached the refinancing limit at the BEAC, generating liquidity pressures. - Weakened banking sector reduced credit provision to the economy; Government faced difficulties placing new debt and rolling over some existing debt. ### Performance under the 2014–17 Extended Credit Facility (ECF) - Up to June 2016, performance was broadly in line with program targets. - With the exception of the ceilings on accumulation of external and domestic payment arrears, the quantitative performance criteria (QPCs) were met. - The non-oil primary deficit target (the fiscal anchor) was met in all four reviews of the program. - The poverty-reducing social spending target, the ceiling for net domestic Government financing and the zero contracting or guaranteeing of non-concessional loans targets were met in all but one review. - Most structural benchmarks (SBs) up to the combined third and fourth reviews were observed, although a few with delays (notably adopting a regulatory framework for debt management and publishing a debt management report). - For end-2016, three of six QPCs were not met: - The non-oil primary balance floor was missed due to a shortfall in non-oil revenue. - The ceiling on net domestic financing was exceeded as domestic debt amortization was lower than projected and the Government accumulated arrears to the banking system. - External payment arrears accumulated despite efforts to stay current on external obligations. - Two structural benchmarks for end-2016 were not met: - Submission of the National Development Plan to the Assembly was delayed. - The Government waited for clarity on financing of the audit on domestic arrears before finalizing terms of reference. ### Government strategy under a new three-year ECF arrangement — objectives - Main elements of the strategy: - Ensure fiscal and debt sustainability, including by restructuring external commercial debt, preserving the bulk of fiscal adjustment of the last two years, increasing non-oil revenue, and clearing domestic arrears. - Strengthen public financial management (PFM), including efficiency of public spending to help avoid reemergence of domestic arrears. - Improve the business environment and promote economic diversification. ### Short- and medium-term fiscal policies (including 2017 prior action) - Two-pronged approach starting with a revised budget for 2017 (prior action): - Preserve much of the adjustment in current spending of the past two years and redirect resources to areas where previous cuts had detrimental social consequences and to investment spending. - Raise non-oil revenue in a gradual but determined way, allowing steady improvement in the non-oil primary deficit after an initial slight widening in 2017. - A performance criterion on the non-oil primary balance (Table 1) will serve as the main fiscal anchor under the new ECF arrangement. - Government committed to repay domestic arrears at a pace consistent with availability of resources. ### Wage bill measures and targets - Short-term measures: - Hiring freeze in the civil service including potential hires eligible to join the civil service who have not joined yet. - Freeze on wage increases. - Reduction in bonuses. - Contain the wage bill to no more than CFAF 348 billion in 2017. - Structural benchmark: adopt an action plan drawing on results of the payroll audit financed by the EU to improve wage bill management. - Objective to reduce the wage bill to about 6.5 percent of non-oil GDP and to less than 70 percent of non-oil revenue by 2020. - Payroll registry cleaning can save at least CFAF 40 billion (about 0.8 percent of 2017 non-oil GDP). - An audit of diplomas of civil servants will identify false education claims to enable dismissals or salary reductions. ### Transfers, subsidies, and PFM measures - Government committed to streamline transfers and subsidies. - Past two years’ adjustment was drastic; many transfers and subsidies go to crucial sectors (education, health, agriculture, security). - Room exists to reduce some inefficient subsidies. - Structural benchmark: audit of transfers and subsidies to be launched in 2018 to identify potential savings. - Interim measures include merger of public entities to streamline operations and potentially reduce subsidies, aiming to keep transfers and subsidies at around 2.5 percent of non-oil GDP per year (about half the level that prevailed during 2010–14). ### Social spending priorities - Poverty reducing social spending remains a high priority despite crisis. - For 2017, Government will increase poverty reducing social spending to maintain its high share (of about 30 percent) of domestically financed primary expenditure. - Government plans further increases in both 2018 and 2019. - Social spending defined with World Bank will be monitored through an indicative floor (Table 1). ### Investment spending trajectory - Investment spending will be increased gradually: - Domestically financed investment spending targeted at 1.4 percent of non-oil GDP in 2017. - Gradual increase toward 2.2 percent of non-oil GDP by 2021. - Government notes return to pre-crisis investment levels is not feasible or sustainable given prior exceptional oil revenues. ### Domestic arrears strategy and repayment plans - March 2016: operation launched to clear CFAF 65 billion out of stock of recognized arrears in the “Reste à Payer table”, financed by two bonds issuances. - Amount of arrears repayment later raised by about CFAF 20 billion, financed by additional bond issuance. - New arrears accumulated and offset much of these payments due to continuing liquidity pressures. - 2017 plan: Government plans to pay at least CFAF 30 billion in arrears with objective of clearing entire amount that accumulated in the first half of the year. - Payments will be prioritized based on economic and social impact and effects on the banking sector. - Ceiling on stock of domestic payment arrears recognized by the Treasury (performance criterion under the ECF) would be adjusted depending on availability of resources (see TMU). - Over medium term, Government determined to implement comprehensive strategy to verify and clear potential arrears and resolve arrears accumulation (see Paragraph 32 for details). ### External arrears and debt restructuring - Government committed to clear all external debt arrears and has reached out to relevant creditors. - Plan adopted to repay all external arrears pending confirmation by respective creditors: - Arrears to official bilateral creditors planned to be cleared within the next 12 months. - Arrears to multilateral creditors planned to be cleared within the program period. - Seeking clearance of arrears with a private commercial creditor in Taiwan Province of China. - Reducing burden of commercial debt is crucial to restore debt sustainability: - Large private commercial debt (Glencore debt) leads to modest oil revenue accruing to the treasury in short and medium term because of large debt service. - Government committed to seek a restructuring of this debt to provide significant reduction in debt burden in line with program parameters. - Debt and legal advisors appointed and working with IMF staff; objective to rapidly reduce debt service to revenue and reduce present value of debt. - Aim to reach necessary restructuring by time of first review of the requested program. ### Domestic debt management and BEAC interactions - Government will seek rollover of domestic debt maturing in coming months. - 2015 and 2016 domestic public securities raised CFAF 192 and 241 billion respectively through auctions in the regional market. - Given recent difficulties to raise additional financing in the regional market, Government working with banks and BEAC to: - Pay arrears that emerged last year. - Stay current on the 2013–18 Emprunt Obligataire. - Pay all interest due on treasury bills and bonds. - Rollover maturing principal in 2017. - Government committed to refrain from any new financing from the BEAC and to gradually repay its debt to the BEAC with aim of eliminating it by 2028. ### Use of higher-than-projected budgetary resources - Government committed to use prudently higher-than-projected budgetary resources (including exceptional receipts, oil revenue, and external support). - Priority to social spending and domestic investment. - If necessary, use resources to reduce debt to banks and repay additional recognized domestic arrears. - If possible, build higher Government deposits as a buffer and to support regional stabilization efforts. - In event of lower donor financing or lower oil revenue, Government would first consider repaying less domestic recognized arrears and then resort to domestic financing only if such a move does not risk undermining soundness of domestic banks (see TMU). ### Strengthening non-oil revenue mobilization - Target: gradual increase in non-oil tax revenue of about 2 percent of non-oil GDP by 2020, to a level equivalent to about 9 percent of non-oil GDP. - Fiscal measures in the 2017 budget and planned tax and customs reforms detailed in section II B. ### Rules on contracting external loans - Government committed to refrain from contracting new non-concessional external loans. - All external financing agreements, including for externally financed investment projects, will be concessional (have at least 35 percent grant element, see TMU) and consistent with debt sustainability. - All draft loan agreements to be submitted for prior approval to the National Commission for Debt Analysis (CONAD), supported by ETAVID analysis. ### Tax and customs reforms and administration strengthening - Government will set up a unit in charge of tax policy (Structural Benchmark) under direct supervision of the Minister of Finance and Budget to promote and coordinate reforms to improve non-oil revenue mobilization; may be a new unit or an existing structure with mandate to deliver. - 2017 measures showing initial results: - Additional tax on oil products yielded almost CFAF 2.5 billion in the first two months of the year. - Implementation of an 18 percent excise tax on communications (replacing a number of less efficient taxes) yielded CFAF 2.4 billion in the first two months of the year — more than doubling collections in the same period last year. - Other measures include VAT withholding tax on all contracts and public orders, and shifting to the normal taxation system of all travel agencies. - Government will explore simplifying taxation in other sectors. ### Tackling tax and customs exemptions - Cost of exemptions is high: - Cost of exemptions for the General Directorate of Customs estimated at about CFAF 140 billion in 2016. - EU study (sample of 39 out of total 150–250 “conventions d’établissement”) estimates cost of exemptions for the Tax Directorate at about CFAF 45 billion in 2015. - Government will reinforce the September 2016 moratorium on enactment of new exemptions and extension of existing ones by a new decree of the Minister of Finance and Budget (prior action). - Moratorium will remain until Government publishes a full list of exemptions provided under common law or contractual instruments (“conventions d’établissement, conventions ad-hoc”). - National workshop in March 2017 (with EU support) emphasized necessity of assessing impact of exemptions before approval. - Following finalization of ongoing TA from the EU, actions will be taken to reduce exemptions, potentially including construction and electricity sectors. *International Monetary Fund — cr17246 (chapter 6).* ### 27. The Government will pursue measures to improve Tax and Customs Administration. ### 27. The Government will pursue measures to improve Tax and Customs Administration ### Tax administration — modernization and revenue measures - Modernization and computerization of tax filing and payment procedures are underway. - Better classification of small and medium-sized enterprises for taxation purposes is being pursued. - The Government is seeking to improve excise revenue collection on tobacco, alcohol and soft drinks. - The Government recognizes the need to widen the tax base and prioritizes reforms of: - the personal income tax (current code described as complex, with different schemes and a complicated taxation scale; IMF and EU TA support sought); - the VAT (revenue from the VAT stands at about 1 percent of non-oil GDP); - the property tax (fewer than 5,000 land titles registered in Chad; revenue from tax on land ownership represents less than 1 percent of total tax revenue). - One main VAT challenge identified is the absence of a VAT refund mechanism, which has partly been responsible for weak VAT performance. - Medium-term potential: significant gains from improvements in property tax revenues through better land and property registration and tax collection procedures. ### Customs administration — controls, systems, and operational reforms - The Government welcomes recent IMF Technical Assistance missions and will follow up on their recommendations. - Focus on full activation of the ASYCUDA module for bonded warehouses to reduce revenue loss from shipments that bypass registration and control. - Implementation of a contract with BIVAC International has started for control of imported goods from their point of origin to minimize customs revenue losses. - BIVAC will contribute to implementing a single window (in Ngueli) for customs operations (structural benchmark), in collaboration with the Directorate-General of Customs and Indirect Taxes (DGDDI), to facilitate clearance and improve control and collection of customs duties. - Plan to extend mandatory payment of import duties and taxes directly to banks to all customs offices. - Given the importance of mobilizing non-oil customs revenue, a performance criterion is established under the new ECF arrangement. ### Structural benchmarks and specific timelines linked to tax/customs and related transparency - Full activation of the ASYCUDA module for bonded warehouses (implementation focus noted; linked to TA recommendations). - BIVAC-supported single window implementation in Ngueli (structural benchmark). - Audit of potential additional domestic payment claims to be launched by October 2017 (structural benchmark); Terms of Reference to align with FAD Report recommendations. - Publication of an oil sector note by end-September 2017 and quarterly thereafter (Structural Benchmark) to include production trends, exported cargoes, shipment schedule, discount of Doba Blend relative to Brent, oil revenues and detailed breakdown, cash-calls, transportation costs, and Glencore loan debt-service details. ### Arrears, DAO, and public financial management measures relevant to revenue administration - Emergency spending procedures (“dépenses avant ordonnancement”, DAO) were 22 percent of total domestically financed expenditures in 2016, excluding wages and salaries and debt service. - Government commitment: regularize 90 percent of DAOs within 45 days after each quarter; this will be monitored through an indicative target. - Government committed not to repay any more arrears other than those reported by the Treasury in the Reste à Payer table at end-April 2017 before the audit is completed. - Verified arrears reported: about CFAF 270 billion by end-April 2017. - Estimate of potential additional claims from FAD TA mission: CFAF 300 billion (estimate subject to wide variation). - In the past year, the Government repaid some arrears not included in the Reste à Payer table of about CFAF 50 billion. ### Quantitative program targets related to customs and fiscal performance (selected items from the program table) - Floor on customs revenue: - End-June 2017: 35 (billion of CFAF) - End-Sept 2017: 70 - End-Dec 2017: 110 - End-Mar 2018: 25 - End-June 2018: 45 - Floor on non-oil primary budget balance (NOPB): - End-June 2017: -139 - End-Sept 2017: -185 - End-Dec 2017: -221 - End-Mar 2018: -65 - End-June 2018: -125 - Ceiling on the stock of domestic payment arrears by the government: - End-June 2017: 270 - End-Sept 2017: 263 - End-Dec 2017: 240 - End-Mar 2018: 230 - End-June 2018: 210 - Floor on the regularization of emergency spending procedures-DAO (Percent of total DAO): 90 (applies to all test dates listed) - Memo item — Oil Revenue: - End-June 2017: 135 - End-Sept 2017: 214 - End-Dec 2017: 310 - End-Mar 2018: 79 - End-June 2018: 156 - Memo item — External concessional borrowing (US$ million): - End-June 2017: 147 - End-Sept 2017: 215 - End-Dec 2017: 235 - End-Mar 2018: 35 - End-June 2018: 70 *Source: IMF staff and Chadian authorities, CR17246.* ### 11. Incl udes $100 mi l l i on budget l oan from Angol a. ### cr17246 - 11. Incl udes $100 mi l l i on budget l oan from Angol a. ### Prior Actions and Structural Benchmarks for the Program Under the ECF Arrangement - Prior Actions: - Moratorium on the enactment of new exemptions. - Revised 2017 budget. - Structural benchmarks (with due dates and macro-criticality): - Submission to the National Assembly of the new National Development Plan — End-July 2017 — High. - Set up a unit in charge of tax policy — End-Aug 2017 — High. - Publication of a quarterly note on the oil sector, in line with the template agreed with the authorities, including detailed information on debt service to Glencore — Quarterly, starting end-September 2017 — Medium. - Launch of audit of unrecognized expenditure payment arrears — End-October 2017 — High. - Establishment of the single customs window at Ngueli — End-Dec 2017 — Medium. - Adoption of an action plan to improve management of the wage bill, drawing on the audit of payroll system to identify control weaknesses and/or ghost workers, financed by the EU — End-Dec 2017 — High. - Launch of audit to identify potential sources of saving in transfers and subsidies — End-Mar 2018 — High. - Create a special court for suppression of economic and financial crime — End-June 2018 — Medium. ### Technical Memorandum of Understanding — Scope and Reporting - Purpose and scope: - TMU spells out concepts, definitions, and data reporting procedures mentioned in the Letter of Intent (LOI) and Memorandum on Economic and Financial Policies (MEFP) of June 16, 2017. - Describes: (a) reporting procedures; (b) definitions and computation methods; (c) quantitative performance criteria; (d) indicative targets; (e) adjusters to the quantitative performance criteria and indicative targets; and (f) structural benchmarks. - Authorities will consult with the IMF before modifying measures in the TMU or adopting measures deviating from program goals. - Reporting procedures: - Data on all variables subject to quantitative performance criteria (QPC) and indicative targets (ITs) and information on structural benchmarks progress will be transmitted regularly to the IMF per Attachment 1. - For continuous QPCs, authorities will report any non-observance promptly. - Days refer to calendar days unless otherwise specified. - Revisions to data will be forwarded to the IMF within 14 days after being made. - Authorities will transmit any additional pertinent information not defined in the TMU. ### Definitions and Computation Methods (selected) - Government: - Refers to the central government of the Republic of Chad comprising all executive bodies, institutions and any structure receiving special public funds and whose competence is included in the definition of central government as defined in GFSM 2014, paragraphs 2.85 – 2.89. - Public nonfinancial enterprises (examples included for program monitoring): - Société Tchadienne des Eaux (STE), Société Nationale d’Electricité (SNE), Société des télécommunications du Tchad (SOTEL), Société Tchadienne des Postes et de l’Epargne (STPE), Société Cotonnière du Tchad (SN), Société des Hydrocarbures du Tchad (SHT), Compagnie Tchadienne de Textiles (COTEX), Sociètè Nationale de Ciment (SONACIM Tchad), CimenTchad, Société Industrielle de Materiels Agricoles et d’Assemblage des Tracteurs (SIMATRAC), Société Tchadienne d’Hydraulique (STH), Fonds d’Entretien Routier (FER). - Oil revenue (Paragraph 5): - Oil revenue is defined as the sum of: - (i) the gross sales revenue of government’s crude oils obtained through government’s equity participation in oil companies minus all costs incurred due to the equity participation (cash-call) and transportation cost associated with the sales of government’s crude oils, - (ii) royalties, - (iii) statistical fees, - (iv) profit tax, - (v) dividends, - (vi) bonuses, - (vii) revenues from exploration duties, - (viii) surface tax, and - (ix) any other flows of revenue paid by oil companies (settled in-kind and in-cash), except indirect duty and taxes. - Authorities will notify IMF staff of changes in oil taxation systems and laws that may impact revenue flows. - Exceptional receipts paid by oil companies, whose definition is given in Paragraph 7, are excluded from oil revenue. - Customs revenue (Paragraph 6): - Revenue generated from all levies and duties payable on goods or services delivered by nonresidents to residents (GFSM 2014, paragraph 5.84). - Recorded on a cash basis; for program monitoring, customs revenues are those recorded in the table “Situation des régies financières” of the Treasury. - Exceptional receipts (Paragraph 7): - Payments from resolution of protracted disputes between foreign companies operating in Chad and the Government. - Payments from the sale or placement or privatization of Government’s assets, granting or renewal of licenses. - Total government revenue (Paragraph 8): - Sum of tax revenue and non-tax revenue (GFSM 2014, Chapter 5), including oil revenue (Paragraph 5), customs revenue (Paragraph 6), and exceptional receipts (Paragraph 7), as shown in the breakdown of total government revenue report. - Total government expenditure (Paragraph 9): - Sum of: wages and salaries; goods and services; transfers (including subsidies, grants, social benefits, and other expenses); interest payments; and capital expenditure. - Recorded on a commitment basis unless otherwise stated. - Includes “dépenses avant ordonnancement” (DAO). - Dépenses avant ordonnancement (DAO) (Paragraph 10): - Expenditures which do not go through the standard spending procedure (commitment, validation, authorization of payment order, cash payment). - Two categories: - DAOs relative to a credit line in the budget — can be regularized. - DAOs regardless of existence of a credit line — regularization requires Amended Financial Law (LFR) or ministerial order. - Wages and salaries (Paragraph 11): - Compensation of all government employees, including civil servants and members of the armed and security forces. - Includes wages and salaries, allowances, bonuses, pension fund contributions on behalf of civil servants, and any other monetary or non–monetary payment. - Data computed from the document “Masse salariale”. - Subsidies and Transfers (Paragraphs 12–13): - Subsidies: government current expenditure to enterprises based on production activities; for program monitoring, those reported in “Tableau de 4 Phases”. - Transfers: government current expenditure to individuals, private nonprofit institutions, nongovernmental foundations, corporations, or government units not included in other categories; for program monitoring, those reported in “Tableau de 4 Phases”. - Debt definitions and concessionality (Paragraph 14): - “Debt” follows Guidelines on Public Debt Conditionality and includes loans, suppliers’ credits, lease agreements, penalties and judicially awarded damages that constitute debt. - Domestic debt: denominated in Central African Franc (CFAF). - External debt: denominated in a foreign currency. - Debt concessional if it includes a grant element of at least 35 percent. - Grant element defined as difference between nominal value and present value, expressed as percentage of nominal value. - Present value calculation uses a discount rate of 5 percent per annum. - Domestic payment arrears (Paragraph 15): - Sum of (i) recognized expenditure payment arrears and (ii) domestic debt payment arrears. - Recognized expenditure payment arrears: outstanding amount in a payment order that is classified as a float 90 days after issuance of the payment authorization; excludes domestic debt payment arrears and arrears on wage and salaries. - Unrecognized expenditure payment arrears: potential arrears not gone through standard procedure; amount determined by audit of domestic arrears. - Domestic debt payment arrears: difference between amount required under contract and amount actually paid after payment deadline. - External debt payment arrears (Paragraph 16): - External debt obligations of the government not paid when due in accordance with contractual terms (taking into account grace periods). - Excludes obligations for which creditor has accepted in writing to negotiate alternative payment schedules before payment due. - Non–oil primary balance (NOPB) (Paragraph 17): - Defined on a commitment basis as difference between (i) total government revenue (not including grants), oil revenue and exceptional receipts, and (ii) primary expenditure (total government expenditure minus interest payments on domestic and external debt and foreign–financed capital expenditure). - Poverty–reducing social spending (Paragraph 18): - Comprises public spending by ministries: (i) National Education and Civic Promotion, (ii) Public Health, (iii) Women, Early Childhood Protection and National Solidarity, (iv) Production, Irrigation and Agricultural Equipment, (v) Livestock and Animal Production, (vi) Environment and Fisheries, (vii) Water and Sanitation, and (viii) Professional Training and Job Promotion. - Domestic currency government financing (Paragraph 18, continued): - Issuance of any instrument in CFAF to creditors; loans from BEAC (including IMF support), BDEAC, and CEMAC Member States, or any other debt contracted in CFAF. - Net domestic currency financing subdivided into net bank financing, net securitized financing, net government financing from BEAC, and other non-bank financing. - Net bank financing: change in net government position towards domestic commercial banks. - Net government financing from BEAC: change in net government position towards the BEAC. - Net securitized financing: issuance of securitized government bonds and loans in CFAF to domestic and regional banks net of related amortizations since end of previous year. ### Quantitative Performance Criteria (selected) - General: - QPCs and indicative targets are those in Table 1 of the MEFP. - Continuous QPCs must be observed at all times; authorities will inform IMF promptly of any non-observance. - All QPCs assessed cumulatively from beginning of calendar year to applicable test-dates specified in Table 1 of the MEFP. - Adjusters for QPCs specified in Section E. - Specific QPCs: - A floor for the non–oil primary balance (NOPB) as defined in Paragraph 17. - A floor on customs revenue as defined in Paragraph 6. - A ceiling on the net domestic government financing (excluding BEAC) relative to end-2016 — sum of net bank financing and net securitized financing as defined. - Ceiling does not apply to new agreements on internal debts restructuring and arrears securitization. - A ceiling on net government financing from BEAC relative to end-2016 (includes IMF support). - A ceiling on the stock of domestic recognized expenditure payment arrears. - As of end-April 2017, the stock of recognized expenditure payment arrears is estimated at CFAF 270 billion based on the Table “Reste à Payer” (prepared by the Treasury). - The ceiling would be adjusted to reflect developments until the date of approval of the program. - A zero ceiling on the accumulation of any new external payment arrears by the government and public non-financial enterprises — applies continuously; any non-observance reported promptly with date, amount, and creditor. - A zero ceiling on new non-concessional external debt contracted or guaranteed by the government and non–financial public enterprises, with a maturity of more than one year — applies continuously and does not include IMF financing. - Debt is non-concessional if it includes a grant element of less than 35 percent (see Paragraph 14). - Exclusions: (i) normal short–term credits for imports; and (ii) debt contracted before the ECF arrangement and rescheduled during this arrangement to the extent rescheduling is assessed to improve the overall public debt profile. _Italic: Source: Chadian authorities and IMF staff (Technical Memorandum of Understanding, MEFP and related tables)._ ### 20. The indicative targets listed below are those specified in Table 1 of the MEFP. Adjusters of ### 20. The indicative targets listed below are those specified in Table 1 of the MEFP. Adjusters of them are specified in Section E below. Unless stated otherwise, all indicative targets will be assessed ### Indicative Targets (assessment and definitions) - Indicative targets are those specified in Table 1 of the MEFP and, unless stated otherwise, will be assessed cumulatively from the beginning of the calendar year to the applicable test-dates (the assessment period) specified in Table 1 of the MEFP. - A floor on regularization of spending executed through emergency spending procedures (DAO). Regularization of DAO (as define in paragraph 10) will be done within 45 days after the end of the quarter. - A floor on poverty–reducing social spending. Poverty–reducing social spending is defined in paragraph 18. ### E. Adjustors to Performance Criteria and Indicative Targets - If the total budgetary receipts and loans are lower than the programmed amount, because of lower oil revenue or budget support, then the ceiling on the stock of domestic payment arrears can be adjusted upward up to the planned arrears repayment amount. - An increase in net domestic financing (either net domestic government financing or net government financing from BEAC) could be envisaged up to 25 percent of the shortfall. - If the total budgetary receipts and loans are larger than the programmed amount, because of higher oil revenue, additional budget support, or exceptional receipt, the floor for the non-oil primary balance can be adjusted downward by 50 percent of the excess amount. - For the purpose of the TMU, baseline oil revenue, budget support and exceptional receipts are shown in the text table below (labeled Text Table 1. Baseline Projection of Selected Variables (Cumulative on annual basis)). - Should expenditure compression be needed, poverty-reducing social spending would be adjusted to the extent that it is reduced proportionally less than other domestically financed primary spending such that its ratio increases compared to the previous year. ### Text Table 1. Baseline Projection of Selected Variables (Cumulative on annual basis) — (as presented in source) - 2018 End-Jun End-Sep End-Dec End-Mar - Oil Revenue 1 13521431079 - Budget Grants 691251780 - Budget Loans 6262880 - Exception Receipt 0000 - Total 26740157679 - 2017 Table 1: Baseline Projections of selected variables (Cumulative on annual basis) - 1 Oil Revenue is the sum of direct receipt and the sale revenue of government oil net of operating and transportation cost. - (in CFAF Billion) ### F. Structural Benchmarks (specified in Table 2 of the MEFP) - Submit the new National Development Plan to the National Assembly by end-July 2017. - Set up a unit in charge of tax policy end-August 2017. The unit will be in charge of identifying and advancing reforms to improve non-oil tax mobilization, taking stock of tax and customs exemptions, identifying those that could be removed, assessing merit of new requests for exemptions, identifying reforms to simplify existing taxes, and identifying areas of reforms to the VAT, general income tax, and property tax. - Publication of a quarterly note on the oil sector, in line with the template agreed with the IMF staff, including detailed information on debt service to Glencore, starting end-September 2017 (Table 2). The note will: - comment on recent developments in the oil sector, including production, export, and new exploration over the previous quarter, and expectations and forecast for the next 6 months; - provide a detailed account of the flow of oil revenue by categories and types of payments (in-cash and in-kind), and include information on sales of government-owned crude oils (gross sales revenue, volume sold, transaction prices, operating costs (“Cash-call”) to oil companies, transportation cost, interest payments, principal repayment, other related fees paid to service the Glencore loan and the final amount of sales revenue accrued to the Treasury). - Launch an audit of unrecognized expenditure payment arrears by end-October 2017. The Terms of Reference for the audit will be in line with the recommendation of a technical assistance mission provided by the Fiscal Affairs Department of the IMF in September 2016. - Establishment of the single customs window at Ngueli by end-December 2017. - Adoption of an action plan by end-December 2017 to improve management of the wage bill, drawing on an audit on the payroll system to identify control weaknesses and/or ghost workers, financed by the EU. - Launch an audit to identify potential sources of saving in transfers and subsidies by end-March 2018. - Create a special court for suppression of economic and financial crimes through the issuance of a draft law by end-June 2018. ### Data Reporting Requirements (Table 1. Summary of Data to be Reported) — key items and timing - Oil and Non–oil revenue, by category; collection situation; revenue position of revenue–collecting agencies: Ministry of Finance and Budget (Treasury), Monthly, within 45 days of month–end. - Quarterly Oil Sector Note: Ministry of Finance and Budget, Quarterly, within 45 days of quarter-end. - Budget execution data, including on poverty–reducing social spending, showing commitments, validations, authorizations of payment order, and cash payments; payroll table: Ministry of Finance and Budget (General Budget Directorate, DGB), Monthly, within 45 days after month–end. - Table of expenditure before payment authorization; TOFE, on a cash basis; comparative table on budget execution, consolidated balance tables; consolidated Treasury balance: Ministry of Finance and Budget (General Budget Directorate / DGTCP), Monthly, within 45 days of month–end. - Detailed budget execution information for transfers in the same classification as the budget: Ministry of Finance and Budget (General Budget Directorate), Monthly, within 45 days of month–end. - Details by project financed domestically, execution of the investment budget, organized by Ministry: Ministry of Finance and Budget (General Budget Directorate), Quarterly, within 45 days of the end of the quarter. - Details, by externally financed project; investment budget execution; organized by Ministry: Ministry of Finance and Budget (DGB) and Ministry of Plan and International Cooperation (DGCI), Quarterly, within 45 days of the end of the quarter. - Information on public procurement in the previous month and updating of payment maturity for the rest of the year: Ministry of Finance and Budget (Financial Control) / SGG (OCMP/Procurement Directorate), Monthly, within 45 days of month–end. - Table on external debt (including those in local currency) with previous month’s due payments, payments made, and projected payments due for the next 3 months broken down by creditors: Ministry of Finance and Budget, Monthly, within 45 days of month-end. - Information on external debt arrears (i) updated list of stock of arrears broken down by creditors, (ii) repayment of arrears including amount paid and date, (iii) information on any rescheduling agreement on the stock of external arrears at the beginning of the program period: Ministry of Finance and Budget, Monthly, within 45 days of month-end. - In case of missed external debt service payment, provide: (i) the date of the missed payment, (ii) amount of the missed payment, and (iii) creditor involved: Ministry of Finance and Budget, Within 14 days of occurrence. - Details on the servicing of the domestic debt and payment arrears of the government (including maturities): Ministry of Finance and Budget (Debt Directorate, DCP), Quarterly, within 45 days of the end of the quarter. - Details on the servicing of the external debt of the government (including the breakdown by currency and maturity): Ministry of Finance and Budget (DGTCP / Debt Directorate), Quarterly, within 45 days of the end of the quarter. - Details on new loans contracted or guaranteed by the government and public non-financial companies: Ministry of Finance and Budget (Debt Directorate) and Ministry of Plan and International Cooperation (DGCI), Within 45 days of transaction completion. - Monetary survey: BEAC, Monthly, within 45 days of month–end. - Provisional monetary data from the BEAC (Exchange rates, foreign reserves, assets and liabilities of the monetary authorities, base money, broad money, central bank balance sheet, consolidated balance sheet of the banking system, interest rates): BEAC, Monthly, within 45 days of month–end. - Balance of SDR account at month end: BEAC / NGP Committee, Monthly, within 3 months of month–end. - Net banking system claims on the government (NGP): BEAC, Monthly, within 30 days of month–end. - Consumer price index: INSEED, Monthly, within 45 days of month–end. - Gross domestic product and gross national product: Macroeconomic Framework Committee (SG MFB), Annually, within 180 days of year end. - Balance of payments (External current account balance, exports and imports of goods and services, etc.): BEAC, Annually, within 180 days of year end (preliminary data). - Gross external debt: Ministry of Finance and Budget (DGT / Debt Directorate), Annually, within 90 days of year end. - Notes: 1 Including maturities. 2 Including the breakdown by currency and maturity. 3 Both market-based and officially determined, including discounts, money market rates, and rates on treasury bills, and bonds and other securities. ### Table 2. Summary of Oil Revenue (structure captured in source) - Table headings and fields presented for CFAF 2018, 2019, 2020 and 2017 projection, including: - Production Volume (Barrel) - Export Volume (Barrel) - Export Value (CFAF) - Crude Oil supplied to SRN (Barrel) - Crude Oil Received By the Government (Barrel) - By SHT (Barrel) - Total (Barrel) - Total Oil Revenue (CFAF) - Direct Receipt (CFAF) - Net Sales Revenue (CFAF) - Direct Receipt Profit Tax (in Cash) (CFAF) - Statistical Fee (CFAF) - Surface Fee (CFAF) - Dividend (CFAF) - Bonus (CFAF) - Other Receipt in cash (CFAF) - Total (CFAF) - Gross Government Crude Oil Sales Revenue (Government CFAF, SHT CFAF) - Net Sales Revenue (CFAF) - Average Selling Price in FCFA (CFAF) and in USD (US Dollar) - Doba Discount (US Dollar) - Oil sales until March 2017 (Government Export Volume Barrel; Export Value CFAF; Average Selling Price CFAF; Transportation Cost CFAF) - SHT Export Volume Barrel; Export Value CFAF; Average Selling Price CFAF; Transportation Cost CFAF; SHT participation cost (Cash-call) CFAF - Glencore Debt: Interest Payment CFAF, Principal Repayment CFAF, Restructuring Fee CFAF, Net Sales Revenue CFAF - Memorandum Item: Exchange Rate CFAF/USD - Unit and labeling as presented in source. ### Debt Sustainability Analysis — key findings and projections - With the accumulation of external debt arrears, Chad is currently in debt distress and the debt sustainability analysis shows that debt is unsustainable without external commercial debt restructuring. - Two external debt indicators exhibit protracted breaches of their indicative thresholds. - The debt service to revenue ratio continues to be significantly above the threshold until 2021. - Domestic debt has increased in recent years but is projected to decline starting in 2017. - Preserving debt sustainability requires that the authorities: - maintain fiscal prudence to gradually improve the primary fiscal balance; - implement prudent debt management policies, including a comprehensive strategy for domestic arrears clearance. - The debt restructuring currently being pursued by the authorities will be critical to reducing debt to sustainable levels and lowering the risk of debt distress. - Progress in economic diversification would also strengthen debt sustainability. - Note: Chad’s average CPIA over 2013–15 is estimated at 2.7. This corresponds to a weak policy performance under the Debt Sustainability Framework for Low-Income Countries (LIC-DSA). ### Public External Debt — factual evolution and stock (selected figures) - External public debt-to-GDP: - stabilized at around 20 percent previously, increased to 29 percent in 2014. - Glencore-related borrowing: - 2013: two agreements for a total of US$600 million with Glencore. - 2014: new commercial borrowing operation for US$ 1.4 billion contracted by SHT. - 2015 rescheduling with Glencore extended maturities from 4 to over 6 years; restructuring fees increased present value of the debt. - HIPC completion point in April 2015 delivered at least US$756 million in debt relief (MDRI from IDA and AfDB, forgiveness from IMF, and 100 percent cancellation from the Paris Club). - As of end-2016, about 53 percent of Chad’s external debt was commercial debt; around 24 percent to multilateral creditors; 23 percent to bilateral creditors. - External arrears: - Stock of external arrears estimated at about US$88 million (0.9 percent of GDP) at end-April 2017. - Agreement reached with EXIM Bank China in April 2017 to reschedule overdue and upcoming maturities. - Text Table 1. Chad: External Debt Stock at Year-End, 2013–2016 (selected cells as presented): - Total (2013) 1,410.7; (2014) 2,010.2; (2015) 1,616.6; (2016) 1,619.0 - (Percent of GDP) 2013: 22.0; 2014: 29.1; 2015: 25.0; 2016: 27.1 - Multilateral (2016) 387.9 - IMF (2016) 74.7 - World Bank/IDA (2016) 110.1 - African Development Fund/Bank (2016) 55.9 - Bilateral (2016) 368.6 - Non-Paris Club official debt (2016) 368.6, of which China, People's Republic (2016) 156.0; Libya (2016) 163.0; India (2016) 30.1 - Commercial (2016) 862.5 (Glencore loan accounts for about 98 percent of commercial debt stock in 2016). - Text Table 2. Chad: Estimated External Arrears at End April 2017 (Millions of US dollar) — aggregated summary presented as Total 88.21 (detailed creditor shares listed in source). ### Public Domestic Debt — recent levels and composition - Stock of domestic public debt rose to about 24 percent of GDP in 2016. - In 2016, Chad issued CFAF 174 billion (net) in Treasury Bonds (maturities two to five years), and CFAF 67 billion (net) in Treasury Bills, bringing combined stock of Treasury Bonds and Bills to CFAF 470 billion or 7.9 percent of GDP. - Domestic debt stock components include advances by BEAC, loans from commercial banks, BDEAC, Republic of Congo (2012), Equatorial Guinea (2013), Cameroon (2016), and verified domestic arrears of CFAF 168 million or 2.8 percent of GDP at end 2016. - Under the proposed ECF program, the stock of domestic debt is projected to fall in 2017 driven by repayment of domestic arrears and an exceptional advance received from the BEAC in late 2016; program assumes no new domestic borrowing other than rollover of maturing T-bills and T-bonds. - Text Table 3. Chad: Stock of Domestic Debt at Year-End, 2011-2017 (Billions of CFA francs) — selected figures as presented: - Total: 2011 504.3; 2012 552.8; 2013 602.4; 2014 708.9; 2015 1185.0; 2016 1437.0; 2017p 1319.6 - (Percent of GDP): 2011 8.8; 2012 8.7; 2013 9.4; 2014 10.3; 2015 18.3; 2016 24.0; 2017p 21.9 - Central Bank financing: 2016 494.0; 2017p 454.6 - Exceptional advance: 2016 140.0; 2017p 170.0 (as labeled in table) - Domestic arrears: 2016 168.0; 2017p 138.0 - Memo items: Treasury Bills (table continues in source with further detail). *Prepared by the Staffs of the International Monetary Fund and the International Development Association. June 19, 2017.* ### 9. The DSA incorporates historical information on external debt until 2016. The historical ### 9. The DSA incorporates historical information on external debt until 2016. The historical ### Historical data - The historical information on external debt is based on the World Bank-DRS database and information provided by Chadian authorities. ### Baseline scenario and assumptions - The DSA’s baseline scenario assumes fiscal adjustment under the proposed ECF program but does not include debt restructuring. - Assumptions in the baseline: - Stable path for oil price. - Recovery in oil production. - Policies to stabilize the fiscal position and support a sustainable recovery in non-oil activity. - Clearance of external arrears within the program period. - Substantial budget support from donors. - No restructuring of commercial debt, which is necessary to reestablish debt sustainability and fill the financing gap that emerges under the proposed program. ### Oil production and price projections - Oil production trends: - Gradual increase in oil production over the period 2017–21, and a steady decline over the longer term. - Oil export expected to rise from 122,000 bpd in 2016 to about 153,000 bpd in 2021. - Proven reserves in the new fields are much smaller than in the original Doba basin and will likely be nearly exhausted around 2030. - Oil production and exports are projected to decline steadily to negligible levels beyond 2030, unless new oil exploration activities or new extraction techniques change prospects. - Price assumptions: - Chad’s oil trades below the WEO reference price, reflecting a quality discount and transport cost of US$ 4-12 per barrel. - For 2017–21 the price of a barrel of Chadian oil is assumed to average about US$50 in 2017–21, in line with the trend projected in the WEO. - From 2021 onward, the price is assumed to increase, on average, by around 2 percent per year in U.S. dollar terms. - Memorandum table entries (selected): - Chadian crude oil price (US$/barrel): 36.25 (2016), 50.44 (2017), 49.94 (2018), 49.04 (2019), 48.94 (2020), 49.55 (2021), 50.64 (2022), 49.75 (2023), 7.9 (Avg. 2023-37) [as presented in Text Table 4]. ### Fiscal policy and public finances - Key fiscal assumptions and projections: - The substantial fiscal adjustment of the past two years is assumed to be broadly preserved. - Additional adjustment gradually implemented over the medium term through improvement in non-oil revenue. - Non-oil primary deficit (NOPD) expected to improve from 4.4 percent of non-oil GDP to 2.8 percent in 2021. - Oil revenue projected to increase to 6.4 percent of non-oil GDP in 2017 from 3.5 percent last year and then moderate over the medium and long term. - Over the longer term, dwindling oil revenues will be partly offset by: - Stabilization of total government primary spending at around 19 percent of GDP. - Gradual adjustment of the primary balance to reach a small deficit of less than 2 percent of non-oil GDP by the end of the projection horizon. - Gradually increasing non-oil revenues from about 8 percent of non-oil GDP at present to about 14 percent of non-oil GDP by 2037. - Maintaining total investment outlays around 8 percent of non-oil GDP in the long term. - Keeping recurrent spending low by streamlining transfers and subsidies to public enterprises and improving wage bill management. - The analysis assumes a comprehensive strategy for clearing domestic arrears and avoiding further accumulation going forward. - Text Table 4 (selected fiscal indicators): - Government revenue and grants: 14.9 (2016), 19.9 (2017), 19.2 (2018), 19.2 (2019), 19.5 (2020), 19.0 (2021), 19.4 (2022), 19.4 (2023), 19.1 (Avg. 2023-37). - Of which: oil revenue: 3.5 (2016), 6.4 (2017), 6.5 (2018), 6.3 (2019), 6.2 (2020), 6.1 (2021), 5.9 (2022), 6.2 (2023), 3.7 (Avg. 2023-37). - Government expenditure (commitment basis): 18.0 (2016), 18.8 (2017), 18.5 (2018), 18.7 (2019), 18.2 (2020), 17.5 (2021), 17.3 (2022), 18.2 (2023), 18.8 (Avg. 2023-37). - Overall fiscal balance (incl. grants; cash basis): -4.9 (2016), 0.1 (2017), 0.0 (2018), -0.4 (2019), 0.8 (2020), 1.1 (2021), 1.6 (2022), 0.5 (2023), 0.3 (Avg. 2023-37). - Non-oil primary fiscal balance (excl. grants; commitment basis): -4.4 (2016), -4.6 (2017), -4.3 (2018), -4.2 (2019), -3.6 (2020), -2.8 (2021), -2.2 (2022), -3.6 (2023), -1.5 (Avg. 2023-37). ### Arrears and debt payments - Arrears strategy and assumptions: - Authorities’ strategy: arrears to external creditors will be paid within the program period. - Arrears accumulated in 2017 are assumed to be repaid in the next few months. - Clearance of arrears to official external creditors is programmed within the next 12 months. - Arrears to other creditors are programmed to be cleared within the program period. - Authorities are making good faith efforts to reach collaborative agreement with the bank from Taiwan province of China. - Baseline includes a gradual reduction in the stock of verified domestic arrears. - An audit of domestic arrears is planned to start in 2017; depending on its outcome, the stock of domestic arrears and the path of repayment may change. - Domestic financing assumptions: - Most domestic debt expected to be rolled over in the near term. - Program envisages a decline in government financing from the banking system in 2017–18. - Arrears to banks from missed bond payment last year are expected to be paid this year. - Program assumes no further advances from the BEAC and repayment to BEAC is assumed to start in 2018. ### Macroeconomic projections (selected) - Real GDP growth drivers and projections: - Real GDP growth driven by recovery in oil and non-oil production in the short term and a secular decline in oil production starting 2021, with upside risk over the long run given oil exploration activities. - Non-oil GDP growth projected at 4 percent per year over the medium to long term, driven by agriculture, commerce, and transportation. - Inflation assumed to stabilize at 3 percent. - Domestically financed public investment expected to recover gradually to about 2.2 percent of non-oil GDP in 2021. - External current account deficit projected at about 3.5 percent of GDP in 2021, stabilizing at around 2 percent of GDP beyond 2030 barring new oil discoveries. - Foreign direct investment (FDI) assumptions: - Stabilize in 2018–20 at around 4 percent of GDP. - Decline to an average of about 2 percent of GDP in 2023–37. ### External DSA findings and stress tests - External financing assumptions: - Government borrowing strategy envisages a reasonable volume of project and budget support loans and no further usage of commercial loans. - External financing assumed to be on concessional terms over the medium and long term, mostly financed by multilaterals and development partners. - This leads to a grant element of an average of 36.7 percent over the projection period. - Debt sustainability without restructuring: - Without debt restructuring, debt is unsustainable, evidenced by a large breach of the debt service to revenue threshold over the next four years. - Debt service projected to be about 40 percent of revenue in 2017–18 and average above 30 percent per year during 2019–21. - High debt service and weak budgetary resources led to significant domestic and external payment arrears in 2016 despite significant fiscal contraction. - Continued high debt service would lead to further fiscal contraction and likely disorderly adjustment with severely adverse social and economic consequences. - Stress tests (key outcomes): - Stress tests highlight susceptibility of Chad’s external debt to shocks, especially in the next few years. - If main economic variables remain at historical averages, two indicators breach their indicative thresholds, including a minor breach of the debt-to-revenue ratio in 2017. - Bounds tests reveal highest vulnerability to an adverse shock to exports and to a scenario combining different macroeconomic shocks. - A one-time depreciation shock (30 percent nominal depreciation in 2017) generates further vulnerability in the debt service-to-revenue indicator. - The PV of debt-to-exports ratio is particularly sensitive to poor export performance, showing a protracted breach under that stress test. ### Public DSA and domestic debt - Domestic debt trajectory: - Domestic debt has increased in recent years but is projected to decline. - PV of debt-to-GDP ratio shows a breach in 2017–20 under the baseline scenario due to accumulation of domestic arrears and increased issuance of debt securities in the regional market. - Under the requested ECF arrangement and prudent fiscal policies, domestic debt component would fall from 22 percent of GDP in 2017 to 17 percent of GDP in 2020. - Beyond 2020, domestic debt to GDP continues to decline to about 12.6 percent of GDP in 2037. - Altogether, public debt stock projected to decrease from about 50 percent of GDP in 2017 to 30 percent of GDP in 2022, stabilizing around an average of 23 percent of GDP in 2023–37. - Stress tests indicate public debt sustainability risks in the next few years, particularly from a real depreciation shock in 2016. ### Conclusion and policy recommendations - Core conclusion: - Chad is in debt distress and debt is unsustainable without external commercial debt restructuring. - The burden of external commercial debt service is taking a heavy toll on government finances. - The government has accumulated significant domestic and external arrears despite significant fiscal adjustments. - Without commercial debt restructuring, debt service to revenue ratio breaches the indicative threshold for the next four years by a significant margin. - With restructuring and reforms: - With rescheduling of debt in line with parameters of the newly requested ECF arrangement, and the projected recovery in the oil and non-oil sector, debt ratios can decline significantly over the near and medium term, significantly reducing the risk of debt distress. - Financial and legal advisors have been appointed and discussions with the creditor are set to begin soon. - Recommended policy priorities: - Restructure external commercial debt to alleviate unsustainable debt service burdens. - Strengthen fiscal and debt management given exhaustible and volatile oil revenues. - Maintain a prudent external and domestic borrowing policy. - Make further progress in diversifying the economy. - Strengthen inter-agency coordination to improve capacity to record and monitor public debt. *Sources: Chadian authorities, and IMF staff estimates and projections.* ### 21. The authorities broadly concur with the staff assessment. They agreed that the burden of debt ### cr17246 - 21. The authorities broadly concur with the staff assessment. They agreed that the burden of debt ### Authorities’ assessment and policy commitments - The authorities concurred that the burden of debt service, particularly of the external commercial loan, was weighing heavily on budgetary resources and on debt sustainability. - They agreed that a debt restructuring is necessary to make debt sustainable. - They announced their intention to restructure the debt with Glencore and are firmly committed to achieve a restructuring that restore debt sustainability and is in line with the proposed program parameters. - They are committed to a prudent borrowing policy, including seeking external loans on concessional terms in line with program assumptions. - They are finalizing a National Development Plan aimed at diversifying the economy. ### Debt management and institutional reforms - Steps taken to improve debt management practices: - Improved interagency coordination. - Fund technical assistance (TA) to improve cash flow and debt management databases. - Started issuing annual debt management reports (with support from Fund TA). - Will undertake institutional improvements in the management of domestic payment arrears in line with Fund TA recommendations. ### Key public and external debt indicators and projections (selected) - PV of external (PPG) debt series (selected projection path): 25.9; 24.3; 20.9; 17.6; 13.9; 11.3; 10.9; 8.1; 7.5. - PV of PPG external debt, in percent of exports (selected projection path): 106.2; 74.4; 62.9; 53.4; 42.9; 35.5; 35.3; 30.0; 45.5. - PV of PPG external debt, in percent of government revenues (selected projection path): 268.8; 209.1; 175.6; 146.4; 112.4; 88.9; 82.8; 56.1; 51.9. - PPG debt service-to-exports ratio (in percent, selected path): 12.3; 14.1; 14.1; 12.7; 12.6; 9.9; 3.0; 4.0; 4.2. - PPG debt service-to-revenue ratio (in percent, selected path): 13.1; 26.2; 31.0; 39.7; 39.4; 34.9; 32.9; 24.8; 7.1; 7.4; 4.8. - Total gross financing need (Billions of U.S. dollars, selected values): 0.7; 1.0; 0.9; 0.2; 0.3; 0.3; 0.3; 0.3; 0.0; 0.2; 0.8. - Non-interest current account deficit (selected values): 8.1; 11.2; 8.0; 4.8; 6.5; 0.7; 1.9; 2.5; 2.7; 3.2; 2.6; 1.8; 2.7; 1.9. - Government revenues (excluding grants, percent of GDP, selected path): 16.5; 10.5; 9.6; 11.6; 11.9; 12.0; 12.4; 12.7; 13.2; 14.4; 14.5; 14.3. - Grant-equivalent financing (in percent of GDP, selected path): 6.1; 4.6; 4.3; 3.9; 3.2; 3.1; 2.8; 2.3; 2.7 (where reported). - Nominal GDP (Billions of US dollars, selected values): 14.0; 11.0; 10.1; 9.7; 10.1; 10.7; 11.5; 12.2; 12.9; 17.6; 31.6. ### Macroeconomic assumptions underpinning projections (selected) - Real GDP growth (in percent, selected series): 6.9; 1.8; -6.4; 4.1; 5.3; 0.6; 2.4; 3.1; 3.9; 3.6; 3.7; 2.9; 3.2; 3.3; 3.3. - GDP deflator in US dollar terms (change in percent, selected series): 0.8; -23.2; -1.5; -0.1; 12.5; -4.1; 1.5; 2.3; 3.2; 2.7; 2.3; 1.3; 2.8; 2.9; 2.8. - Effective interest rate (percent, selected pattern): 4.1; 3.1; 4.3; 5.0; 1.3; 5.6; 4.8; 4.3; 3.3; 1.8; 1.3; 3.5; 1.2; 1.2; 1.2. - Growth of exports of G&S (US$ terms, percent, selected): 1.4; -34.0; -15.4; -1.7; 19.7; 29.4; 5.7; 4.6; 5.7; 4.0; 3.2; 8.8; 1.9; 0.6; 1.8. - Growth of imports of G&S (US$ terms, percent, selected): 9.9; -23.7; -15.3; 1.9; 14.2; 3.8; 3.8; 4.8; 5.0; 3.1; 1.2; 3.6; 2.6; 1.8; 2.7. - Grant element of new public sector borrowing (in percent, selected path): 37.3; 36.0; 36.7; 37.1; 36.5; 36.5; 36.7; 36.7; 36.9; 36.8 (where reported). ### Stress tests and sensitivity analyses (high-level) - Alternative scenarios and bound tests show vulnerability to shocks: - PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, and debt service-to-revenue ratios are reported across baseline, alternative scenarios (e.g., key variables at historical averages; new public sector loans on less favorable terms), and bound tests (e.g., lower real GDP growth, lower export value growth, one-time nominal depreciation). - Example stress outcomes (selected): PV of debt-to-GDP ratio baseline and scenarios for 2017–2037 include values such as 24; 21; 18; 14; 11; 8; 8; 8; 8 (presented in the sensitivity tables). - Sensitivity analysis highlights one-time 30 percent nominal depreciation and combinations of shocks as among the most extreme tests for certain indicators. ### Fiscal and program context (selected statements and recent developments) - The ECF-supported program’s implementation was adversely affected by the oil and security shocks, prompting dramatic spending cuts and severe adjustment measures. - The fiscal position was worsened by security-related expenditures and hosting more than 700,000 refugees, displaced persons and returnees. - Real oil GDP and real non-oil GDP contracted by 8.4 percent and 6 percent respectively in 2016 (reported in the broader Chapter context). *Source: IMF staff and country authorities as presented in the cited document.* ### 2016. After contracting for a second year in a row – real non-oil GDP was reduced by 2.9 ### cr17246 - 2016. After contracting for a second year in a row – real non-oil GDP was reduced by 2.9 ### Economic context and near-term outlook - Real non-oil GDP was reduced by 2.9 percent in 2015. - The slowdown led to massive layoffs in oil companies, accumulation of domestic arrears, and a virtual halt in construction. - Weak domestic demand and security-related trade disruptions contributed to about 1 percent deflation in 2016 on average. - Developments in Q1 2017 showed no major improvement. - Vicious cycle described: contraction in non-oil economic activity → lower non-oil revenue → reduced government spending → domestic and external payment arrears → adverse impact on banks and external position due to low oil receipts. - Program implementation performance: most quantitative performance criteria and structural benchmarks were met through June 2016; deepening crisis affected subsequent implementation. - Misreporting incident: accumulation of external payments arrears and weak coordination between cash and debt management services facilitated a case of misreporting during the combined third and fourth reviews; authorities acknowledged incorrect reporting and have since reported the correct amounts to creditors. ### Outlook under the new ECF arrangement - Recovery assumptions: - Non-oil activity expected to recover starting in late 2017, supported by planned arrears repayment, banking sector health improvement, diversification efforts, and an expected pickup in foreign-financed investment. - Real GDP projection: grow from 0.6 percent in 2017 to 2.4 percent next year and keep pace over the medium-term. - Inflation projection: pick up from negative territories and reach 0.2 percent in 2017 en route to the 3 percent CEMAC-wide target in 2020. - Authorities’ program building blocks: - Avoid unnecessary spending cuts while maintaining fiscal prudence and allocating resources for domestic arrears clearance. - Reestablish debt sustainability by restructuring external commercial debt. - Focus on non-oil revenue mobilization to support gradual medium-term adjustment. - Reduce reliance on domestic financing and liquidity pressure on banks. ### Policy measures, fiscal policy and public financial management reforms - Immediate and medium-term fiscal stance: - Revised 2017 budget targets widening of the non-oil primary fiscal deficit to 4.6 percent of non-oil GDP in 2017 before gradual medium-term improvement. - Adjustment efforts will hinge on revenue measures while keeping a tight spending envelope. - Revenue-enhancing measures and tax reforms: - Widen the tax base primarily by limiting exemptions, improving customs and tax administration, and simplifying taxes. - Early yields: new tax on oil and the 18 percent excise tax on communications expected to boost tax revenue by 0.3 percent of non-oil GDP in 2017. - Medium-term measures: broaden tax base, implement an effective VAT refund system, simplify personal income tax, and enhance property tax revenue collection. - Decree to impose a moratorium on new exemptions and identify exemptions to remove. - Modernize customs administration (including establishing a single customs window at Ngueli) and modernize the excise goods management system for tobacco, beer, alcoholic beverages and soft drinks. - Public financial management (PFM) reforms: - Strengthen fiscal controls, expenditure chain, and cash management to avoid accumulation of domestic arrears. - Enhance use of the computerized system to improve control, monitoring and transparency. - Significantly reduce spending executed through emergency procedures. - Audit of unverified expenditure payment arrears expected before year-end to inform a comprehensive repayment strategy that may include securitization; repayment to be prioritized by economic, social and financial impact. - Enhance oil sector transparency: remain in compliance with EITI and prepare and publish a quarterly oil sector note including financial flows affecting budget oil revenue projections. ### Debt management - Staff DSA assessment: Chad is currently in debt distress and debt is unsustainable without external commercial debt restructuring. - Authorities concur and are committed to deep restructuring of public debt to reduce service burden, especially over the next four years, and overall burden to achieve debt sustainability. - Actions planned: - Recruit debt advisors and expect to reach agreement on a restructuring by September 2017. - Improve institutional framework and debt management capacity through strengthened interagency coordination, cash flow management, and updated debt management databases. - Authorities’ view: restructuring paired with efforts to revive economic activity and restore financial viability will contribute to returning debt to a sustainable level. ### Monetary policy and financial sector reforms - National and regional monetary policy actions and regional financial sector reforms expected to support macroeconomic stability and external sustainability. - Authorities committed to gradually building up government deposits at the BEAC to improve the external position. - Priority: address liquidity pressures faced by some domestic banks. - Authorities working with the BEAC and regulators on a framework for liquidity assistance to Chadian banks. ### Other structural reforms and diversification agenda - Diversification is a main pillar of the 2017–21 National Development Plan (NDP). - Institutional reforms to improve business environment and strengthen private sector-led job creation, including measures to address corruption and creation of a special court to curb economic and financial crimes. - Financial sector deepening and inclusion: - Concur with staff recommendations to deepen the financial sector and enhance financial inclusion to support diversification. - Short-term expectation that fiscal actions, notably the clearance of arrears, will positively impact banks’ balance sheets and liquidity. - Measures to improve regulatory framework and promote mobile banking. - NDP implementation targets unlocking potential in agriculture and livestock, mining, and artisanal crafting. - Authorities expect a large participation in the donor conference they are organizing in September 2017 to raise official financing and private sector investment. ### Conclusion and request - Under the 2014-17 ECF-supported program, Chad achieved the HIPC completion point in April 2015 but later faced severe setbacks from oil price and security shocks, refugee crisis, and heavy debt burden. - Authorities responded with deep adjustments, corrective measures addressing the misreporting incident, and are pursuing a new reform and policy agenda to stabilize the economy and accelerate recovery over the medium-term. - Authorities request Board support for a three-year arrangement under the Extended Credit Facility and cancellation of the current arrangement. *IMF staff report content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17246.pdf_