## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2018/cr18260.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18260.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18260.pdf.json) --- ### Context - Current ECF arrangement: access of 160 percent of quota or SDR 224.32 million; approved on June 30, 2017. - Crisis precipitating factors: oil price and security shocks beginning in 2014, and the heavy burden of external commercial debt. - Glencore debt restructuring: agreement in principle reached in February 2018; final restructuring agreement signed in June 2018 (prior action). - Regional role: stability is key given Chad’s regional peace-keeping efforts. ### Program (performance and design) - Performance under the program: - All but one performance criterion (PC) for end-December 2017 were met; all structural benchmarks (SBs) were met. - Most indicative targets (ITs) for end-March 2018 were met. - The continuous PC on the non-accumulation of external arrears was missed. - Authorities’ requests: - Waivers requested for the two missed PCs (customs revenue and external arrears accumulation). - Glencore restructuring: - Final agreement signed in June; considered in line with the program and expected to restore debt sustainability and generate sufficient financing for the program. - Union-level and regional support: - Program supported by union-level efforts to maintain an appropriate monetary policy stance, build up regional reserves, and promote financial sector stability. ### Staff views and financing implications - Staff support: - Completion of the second review under the ECF. - Waivers of non-observance of the two PCs. - Financial outcome: - Completion of the second review will result in the disbursement of SDR 35.05 million. - Role of Fund arrangement: - Instrumental to catalyze donor support to address Chad’s protracted balance of payment needs. - Downside risks to the program: - Large resort to nonconcessional financing. - Overshooting in the wage bill. - Further deterioration in the liquidity position of banks. - A significant drop in oil price. - Worsening of the security situation. ### Recent developments — economic and fiscal - GDP and sector: - Nominal GDP fell from $14 billion in 2014 to $9.9 billion in 2017. - GDP estimated to have declined by about 3 percent in 2017. - Non-oil GDP estimated to have declined by 0.5 percent in 2017. - Oil GDP collapsed by about 16 percent in 2017 following technical problems by one of the main operators. - Fiscal developments: - Non-oil revenues increased significantly in 2017 due to strong collection efforts. - Total domestically financed primary spending broadly within the budget envelope; overshooting in the wage bill offset by restraint in other spending. - Jan–Apr 2018 monthly wage bill declined to about CFAF 27 billion (about 10 percent lower than the 2017 average of CFAF 31 billion). - Domestic rollover: overall rollover of domestic debt about CFAF 150 billion (3 percent of non-oil GDP); rollover rate assumed 90 percent; composition shifting toward shorter maturities. - Arrears clearance: - About CFAF 45 billion or 0.9 percent of non-oil GDP of domestic arrears recorded at the Treasury were cleared in the second half of 2017. - Cotton public enterprise arrears cleared toward banks: CFAF 54 billion. - Paid arrears not recorded at the Treasury: about CFAF 6 billion. - External arrears outstanding reduced from $102 million at end-2017 to $55 million (end-April 2018). - Payments made to the Islamic Development Bank; agreement in principle reached with Libya to reschedule outstanding stock and maturities. - Glencore restructuring details and implications: - Modifications relative to February agreement: (i) a 1 percent floor on the LIBOR reference rate, (ii) outsourcing to an agent other than Glencore the financial accounting related to government oil exports, operating costs and debt service to Glencore, (iii) exclusion of military assets from applicable collateral. - Under current oil price and production assumptions, the Glencore debt would be fully repaid by early 2026. - Agreement becomes effective once standard procedural requirements are satisfied. - Banking sector: - Banks face liquidity pressures but remain solvent. - Credit to the private sector declined y-o-y by 1.3 percent in March 2018. - Deposits declined y-o-y by 0.7 percent in March 2018. - Overdue loans at end-March 2018: 30 percent of gross loans (28 percent in December). - BEAC interim emergency liquidity facility launched in September 2017; BEAC refinancing accounts for 16.8 percent of bank liquidity on average. - Capital adequacy ratio at end-March 2018: 19.1 percent. - External position: - Current account deficit for 2017 estimated at 5.7 percent of GDP compared to 9.2 percent in 2016. - Oil export volumes fell by almost 15 percent during 2017; oil export earnings increased by roughly 10.4 percent in 2017 due to price recovery. - Net foreign asset position at the regional central bank: about CFAF -257 billion at end-2017; improved to around CFAF -220 billion at end-April 2018; expected to reach CFAF -147 billion by end 2018. - Political developments: - New constitution promulgated on May 4, 2018; transitions to a full presidential system and extends presidential term to 6 years, renewable once. - President announced parliamentary elections will be held in November 2018, but precise timing remains uncertain and is likely to be in 2019 given preparation and financing gaps. ### Program performance (compliance and benchmarks) - End-December 2017 PCs and ITs: - Continuous PC on non-accumulation of external arrears missed by $0.74 million. - PC on customs revenues missed by CFAF 2 billion. - One out of two ITs at end-December 2017 met: DAO regularization increased from 49 percent at end-September to 65 percent at end-December (target 90 percent); poverty-reducing social spending reached CFAF 202 billion, meeting the adjusted target. - End-March 2018 ITs: - Most end-March 2018 ITs met: NOPB PC met with a large margin; customs revenue target met with a margin; domestic financing from the BEAC and from banks met. - ITs on regularization of DAO and on poverty-reducing social spending were both missed. - Structural benchmarks and prior actions through end-June 2018: - All structural benchmarks through end-June 2018 and the prior action have been met. - Actions completed include: publication of the quarterly oil sector note; finalization of terms of reference for external consultants for reorganization plan of two public banks; ratification of UNCAC in June; publication of list of tax exemptions before end-June; launch in June 2018 of the audit of unrecognized expenditure payment arrears. - Waiver requests: - Authorities request waivers for nonobservance of the PCs on customs revenues (missed by CFAF 2 billion) and external arrears accumulation (breached by $0.74 million; supplement later reports $7.740 million with most paid). ### Policy framework and medium-term outlook - Program anchor and objectives: - Reestablish debt sustainability through external commercial debt restructuring. - Achieve gradual fiscal adjustment via domestic revenue mobilization and create space for domestic arrears payment while maintaining a tight spending envelope. - Limit reliance on domestic financing to alleviate pressure on domestic banks. - Medium-term macroeconomic outlook: - Oil production: recovery in 2018 following technical problem resolution; gradual increase in 2019; jump in 2020 as new technologies and fields come online. - Higher oil prices increase gross oil revenues; partially offset by higher external debt service to Glencore per new contract. - Remaining windfall to be used to repay more domestic arrears and reduce domestic debt. - Non-oil activity recovery expected to begin in 2018 and pick up in the medium term, supported by gradual fiscal improvement. - Privatization of the cotton public enterprise expected to help the cotton sector contribute positively to non-oil growth. ### Current account outlook - Oil exports expected to pick up as production increases. - Imports expected to moderately rise over the medium term, reflecting higher domestic demand and planned increases in oil capital expenditures. - Expected increases in FDI and lower external debt amortization will help strengthen Chad’s net foreign assets position, contributing positively to the CEMAC regional reserves pool. ### Fiscal policy — remainder of 2018 and medium term - Fiscal policy will focus on maintaining spending discipline while strengthening non-oil revenue mobilization. - 2018 policies based on the 2018 budget; medium-term policies guided by agreed program objectives. - Controlling the wage bill is key: - Authorities committed to avoid increases in the wage bill to unsustainable levels. - For 2019, authorities aim to raise the share of non-wage spending in total spending and in non-oil GDP while maintaining overall spending discipline. - Demands for higher spending related to likely elections in 2019 and possible higher social and security spending should be accommodated through higher grant financing or through domestic financing consistent with avoiding an increase in domestic debt and adding undue pressure on banks. ### Revenue performance and tax policy - Strengthening non-oil revenue performance is the priority. - With continued strong collection efforts, non-oil tax revenues expected to increase to 7.9 percent of GDP in 2018. - Tax policy reforms (notably reform of the PIT) and measures to modernize excise duties collection, improve property tax collection, and start reducing exemptions are expected to help achieve this increase. - For 2019, authorities committed to build on these measures, including by further reducing tax exemptions. ### Domestic debt, arrears, and public debt trajectory - Remainder of 2018: - Domestic debt and recognized domestic arrears will be reduced. - Under baseline, domestic public debt projected to be broadly unchanged in percent of non-oil GDP despite increase related to clearance of cotton enterprise arrears. - Authorities commit to limit rollover to 90 percent for securitized debt. - Authorities plan to clear about 1.2 percent of non-oil GDP in recognized domestic arrears. - Medium term: - Non-oil tax revenues expected to increase to about 9 percent of non-oil GDP. - Wage bill would increase by about 1 percent every year in nominal terms, allowing reduction of its share in primary spending and non-oil GDP. - Public debt should continue to decline, consistent with plan to pay down debt to banks. - By end-2018, a plan for the clearance of all domestic arrears is expected to be in place. - About 0.9 and 0.2 percent of non-oil GDP in verified and yet to be audited arrears respectively are planned to be paid in 2019. ### Tax and customs reforms (key measures) - Reduce and better control tax exemptions to widen the tax base (proposed new SB). - Authorities will identify exemptions for removal or amendment based on the published list of tax exemptions and the 2017 audit of 47 tax conventions. - Improve VAT collection and compliance: - Quantitative analysis estimates VAT revenues could increase by about 3 percent of non-oil GDP. - Authorities committed to elaborate a plan with timebound measures to improve VAT collection (proposed new SB), including setting up a refund mechanism, reducing VAT exemptions, and improving collaboration between customs and tax administrations. - Create a dedicated unit within the Tax Directorate to increase property tax collection. ### Banking sector reforms and risks - Authorities committed to reforms to strengthen the banking sector. - Two large public banks solvent; terms of reference for external consultants for reorganization plan finalized; consultants to be hired and report by end-January 2019 (existing SB). - For BAC, shareholders decided to recapitalize and presented strategic plan to COBAC. - Monetary policy framework reform: - Removal of ceilings on government securities as collateral and introduction of competitive bidding for BEAC open market operations expected to improve access to BEAC refinancing. - Risks: shortage of eligible collateral due to a new haircut system or lifting of reserve requirement exemption scheduled for July. - Mitigants: extension of high quality credit, identification of eligible private collateral, better deposit mobilization, payments of domestic arrears. ### Public financial management and structural reforms - PFM reforms needed to improve spending control, transparency, and prevent accumulation of arrears. - Progress on cash flow projections, wage bill management, and emergency spending procedures is insufficient and fragile. - Strengthen public debt management (including use of updated SYGADE) and reporting and monitoring of spending. - Regularization of DAO and reduction in use of DAO are priorities. - Implementation of the National Development Plan (NDP) can help non-oil recovery; authorities to identify priority projects for concessional financing or grants. - Improving governance and reducing corruption are priorities; ratification of UNCAC is a promising step. ### Financing, program modalities, and risks - Program financing: - Program fully financed with firm assurances for the next 12 months and good prospects for the rest of the program. - Most budget support initially planned for 2017 disbursed in 2018 (African Development Bank, European Union); remaining amount to be disbursed in coming weeks (World Bank). - Final Glencore agreement expected to provide significant debt relief and ensure program is fully financed even under downside oil price scenarios. - Monitoring and SBs: - Staff and authorities agreed to maintain end-December 2018 PCs set at first review; new SBs agreed focused on widening tax base and improving VAT collection. - PCs for end-June 2019 to be set at third review. - Variation in external flows to be accommodated through adjustments to domestic financing, the non-oil primary balance, and payment of domestic arrears. - Main program risks and mitigants: - Risks: overruns in spending (notably wage bill or security), deterioration of social situation, resort to nonconcessional borrowing, worsening banks’ liquidity, drop in oil revenue. - Finalization of Glencore restructuring removes a major risk source; contingencies in contract and authorities’ commitment are key mitigants. - BEAC and COBAC policy commitments and assurances support CEMAC programs; revised foreign exchange regulations to be submitted for adoption by end-2018. ### Staff appraisal — key judgments - Macroeconomic stabilization signs strengthening, notably fiscal front; non-oil activity stabilized but not firmly picked up. - Fiscal performance encouraging: non-oil revenue improved since late 2017 and spending discipline, notably on the wage bill, maintained. - Program performance satisfactory; structural reform agenda on track; final Glencore debt agreement signed. - Debt vulnerabilities declined with Glencore agreement and arrears clearance but remain high. - Authorities should avoid adding to external debt burden, keep domestic debt declining, and improve debt management. - Continue normalizing payment of outstanding external arrears and prevent new ones. - Banking sector solvent but liquidity-pressured; timely implementation of agreed review and reorganization steps for large public banks and efforts to pay domestic arrears are important. - Program risks declined but remain high; authorities’ commitment and Glencore contingencies provide key mitigation. ### Program recommendation and conditionality - Staff recommends completion of the second review under the ECF arrangement based on: - Chad’s performance under the program. - Restoration of debt sustainability through final Glencore restructuring. - Adequate implementation of regional policy assurances. - Staff supports waivers for nonobservance of PCs on customs revenue and external arrears accumulation on the basis of the minor size of the breaches. - Staff proposes completion of the financing assurances review. - Staff proposes that completion of the third review will be conditional on implementation of critical policy assurances at the union level, as established in the June 2018 union-wide paper. ### Key macroeconomic projections and indicators (selected) - Real economy (annual percentage change): - GDP at constant prices: 2015: 1.8; 2016: -6.4; 2017 Est.: -3.1; 2018 Proj.: -3.1; 2019 Proj.: 3.5; 2020 Proj.: 3.5; 2021 Proj.: 4.8. - Oil GDP: 2015: 32.1; 2016: -8.4; 2017 Est.: -16.2; 2018 Proj.: -16.2; 2019 Proj.: 15.7; 2020 Proj.: 15.2; 2021 Proj.: 8.4. - Non-oil GDP: 2015: -2.9; 2016: -6.0; 2017 Est.: -0.5; 2018 Proj.: -0.5; 2019 Proj.: 1.4; 2020 Proj.: 1.5; 2021 Proj.: 4.0. - Inflation and prices: - GDP deflator: 2015: -8.0; 2016: -1.2; 2017 Est.: -0.9; 2018 Proj.: -0.9; 2019 Proj.: 2.2; 2020 Proj.: 2.2; 2021 Proj.: 3.0. - CPI (annual average): 2015: 6.8; 2016: -1.1; 2017 Est.: -0.9; 2018 Proj.: -0.9; 2019 Proj.: 2.1; 2020 Proj.: 2.1; 2021 Proj.: 3.0. - Brent (US$/barrel): 2015: 52.4; 2016: 44.0; 2017 Est.: 54.4; 2018 Proj.: 54.4; 2019 Proj.: 64.7; 2020 Proj.: 73.3; 2021 Proj.: 56.6. - Chadian price (US$/barrel): 2015: 39.9; 2016: 36.2; 2017 Est.: 49.4; 2018 Proj.: 49.4; 2019 Proj.: 60.7; 2020 Proj.: 67.6; 2021 Proj.: 52.6. - Oil production for exportation (millions of barrels): 2015: 47.5; 2016: 44.4; 2017 Est.: 35.9; 2018 Proj.: 35.9; 2019 Proj.: 39.1; 2020 Proj.: 39.8; 2021 Proj.: 57.1. ### Monetary and external highlights (selected) - Net foreign assets (percent): 2015: -40.3; 2016: -38.2; 2017 Est.: 0.5; 2018 Proj.: 0.5; 2019 Proj.: 8.5; 2020 Proj.: 11.8; 2021 Proj.: 9.8. - Broad money (annual change): 2015: -4.7; 2016: -7.7; 2017 Est.: -0.9; 2018 Proj.: -4.3; 2019 Proj.: 7.6; 2020 Proj.: 7.2; 2021 Proj.: 7.0. - Current account balance, including official transfers (percent of GDP): 2015: -12.3; 2016: -9.2; 2017 Est.: -5.2; 2018 Proj.: -5.7; 2019 Proj.: -4.3; 2020 Proj.: -4.2; 2021 Proj.: -4.9. ### Fiscal outlook (selected) - Revenue and grants (percent of GDP): 2015: 17.1; 2016: 14.9; 2017 Est.: 16.1; 2018 Proj.: 17.1; 2019 Proj.: 18.5; 2020 Proj.: 19.4; 2021 Proj.: 18.3. - Oil revenue (percent of GDP): 2015: 4.9; 2016: 3.5; 2017 Est.: 4.1; 2018 Proj.: 4.1; 2019 Proj.: 5.4; 2020 Proj.: 6.3; 2021 Proj.: 5.7. - Non-oil revenue (percent of GDP): 2015: 8.3; 2016: 8.4; 2017 Est.: 8.1; 2018 Proj.: 8.7; 2019 Proj.: 8.2; 2020 Proj.: 8.3; 2021 Proj.: 9.6. - Expenditure (percent of GDP): 2015: 22.9; 2016: 18.0; 2017 Est.: 17.8; 2018 Proj.: 18.0; 2019 Proj.: 17.9; 2020 Proj.: 18.3; 2021 Proj.: 17.9. - Non-oil primary balance (commitment basis, excl. grants; percent of non-oil GDP): 2015: -9.7; 2016: -4.4; 2017 Est.: -4.2; 2018 Proj.: -3.8; 2019 Proj.: -4.5; 2020 Proj.: -4.4; 2021 Proj.: -3.0. - Total debt (percent of GDP): 2015: 43.3; 2016: 51.2; 2017 Est.: 52.5; 2018 Proj.: 52.5; 2019 Proj.: 48.1; 2020 Proj.: 49.2; 2021 Proj.: 38.6. - Domestic debt (percent of GDP): 2015: 18.3; 2016: 24.0; 2017 Est.: 25.4; 2018 Proj.: 25.1; 2019 Proj.: 22.1; 2020 Proj.: 23.0; 2021 Proj.: 17.9. ### Balance of payments and financing (selected) - Current account, excl. budget grants (billions of CFAF): 2016: -638; 2017: -357; 2018 Est.: -382; 2019 Proj.: -417; 2020 Proj.: -403; 2021 Proj.: -356. - Trade balance (billions of CFAF): 2016: 135; 2017: 176; 2018 Est.: 177; 2019 Proj.: 351; 2020 Proj.: 513; 2021 Proj.: 733. - Exports, f.o.b. (billions of CFAF): 2016: 1,318; 2017: 1,433; 2018 Est.: 1,433; 2019 Proj.: 1,658; 2020 Proj.: 1,886; 2021 Proj.: 2,442. - Of which oil (billions of CFAF): 2016: 955; 2017: 1,045; 2018 Est.: 1,045; 2019 Proj.: 1,253; 2020 Proj.: 1,477; 2021 Proj.: 1,959. - Financing gap (billions of CFAF): 2016: -126; 2017: -174; 2018 Est.: -173; 2019 Proj.: -261; 2020 Proj.: -260; 2021 Proj.: 2. - Financing gap (percent of GDP): 2016: -2.1; 2017: -3.0; 2018 Est.: -3.0; 2019 Proj.: -4.3; 2020 Proj.: -4.3; 2021 Proj.: 0.0. ### Selected program performance criteria and indicative targets (end-March 2018; billions of CFAF) - PC: Floor on non-oil primary budget balance: PC: -221; PC w/ adjustor: -183; Actual: met. - PC: Floor on customs revenue: PC: 110; PC w/ adjustor: 108; Actual: not met. - PC: Ceiling on net domestic government financing excluding BEAC: PC: -40; PC w/ adjustor: 11; Actual: -18; met. - PC: Ceiling on net government financing from the BEAC: PC: 29; PC w/ adjustor: -11; Actual: met. - PC: Ceiling on the stock of domestic payment arrears by the government: PC: 210; PC w/ adjustor: 195; Actual: met (185; 195; 192 reported). - PC (continuous): Ceiling on new external arrears: PC: 0; Actual: not met (delayed payments to multiple creditors). - Indicative Targets: - Floor on regularization of DAO (Percent of total DAO): IT: 90; IT w/ adjustor: 65; Actual: not met. - Floor for poverty-reducing social spending: IT: 205; IT w/ adjustor: 191; Actual: 202; met. ### Prior actions and structural benchmarks (status end-June 2018) - Prior action: - Sign final agreement with Glencore on the restructuring: Met. - Structural benchmarks (selected met): - Publication of a quarterly oil sector note: Met. - Finalization of terms of reference for external consultants for reorganization plan of two public banks: Met. - Publication of Tax and Customs exemptions: Met. - Ratification of UNCAC: Met. - Proposed/ongoing SBs and timelines include hiring external consultants (End-July 2018), adopting clearance strategy for domestic arrears (End-October 2018), and developing VAT collection action plan (End-December 2018). ### IMF disbursement schedule under the ECF (selected) - Disbursements (percent of quota — Million SDR): - 25.0 percent of quota — 35.05 Million SDR — Date of Board Approval. - 25.0 percent of quota — 35.05 Million SDR — August 15, 2017 — Condition: Observance of PCs for June 30, 2017 and completion of first review. - 25.0 percent of quota — 35.05 Million SDR — April 15, 2018 — Condition: Observance of PCs for December 31, 2017 and completion of second review. - 25.0 percent of quota — 35.05 Million SDR — October 15, 2018 — Condition: Observance of PCs for June 30, 2018 and completion of third review. - 20.0 percent of quota — 28.04 Million SDR — April 15, 2019 — Condition: Observance of PCs for December 31, 2018 and completion of fourth review. - 20.0 percent of quota — 28.04 Million SDR — October 15, 2019 — Condition: Observance of PCs for June 30, 2019 and completion of fifth review. - 20.0 percent of quota — 28.04 Million SDR — April 15, 2020 — Condition: Observance of PCs for December 31, 2019 and completion of sixth review. - Total: 160.0 percent of quota — 224.32 Million SDR. ### Arrears update and Supplement (July 25–27, 2018) - Supplement reports amount of new external arrears accumulated since the first review: $7.740 million (staff report earlier noted $0.74 million). - $7.615 million of that amount was paid already. - Remaining amount owed to Angola and expected to be paid shortly. - Given the relatively small amount, staff continued to support waiver request for nonobservance of the PC on non-accumulation of external arrears. - Supplementary Letter of Intent dated July 25, 2018 signed by Issa Mahamat Abdelmamout, Minister of Finance and Budget. ### Monitoring, reporting, and TMU highlights - TMU defines concepts, reporting procedures, QPCs, ITs, adjustors, and SBs. - Key reporting deadlines: - Monthly revenue data and Treasury tables: within 45 days of month-end. - Quarterly oil sector note: within 45 days of quarter-end. - DAO regularization information: quarterly within 60 days. - External debt table and arrears updates: monthly within 45 days. - QPC adjustors: - Adjustments permitted for lower-than-programmed receipts (e.g., lower oil revenue or budget support) and for higher-than-programmed receipts (e.g., windfalls), with specific formulas described in the TMU. ### Debt Sustainability Analysis — key findings - Post-Glencore restructuring and arrears clearance: - Debt vulnerabilities declined significantly; external risk rating upgraded to high. - All debt burden indicators (except debt-service-to-revenue ratio with minor temporary breaches) below thresholds in baseline from 2018 onwards. - PV of public debt-to-GDP on a downward trajectory. - Stress tests: - Extreme shocks breach indicators; combination shocks (growth and primary balance deteriorations) produce largest adverse impacts. - Conclusion: - Glencore restructuring and HIPC/MDRI relief restored debt sustainability prospects under baseline assumptions, but dynamics remain sensitive to oil revenues, fiscal policy adherence, arrears clearance, and potential additional borrowing. *Source: IMF staff report and associated documents (cr18260; July 16 and July 25, 2018).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - The current ECF arrangement: access of 160 percent of quota or SDR 224.32 million; approved on June 30, 2017. - Crisis precipitating factors: oil price and security shocks beginning in 2014, and the heavy burden of external commercial debt. - An agreement in principle to restructure the Glencore debt was reached in February 2018; the final restructuring agreement was signed in June 2018 (prior action). - Chad’s regional role: stability is key for the regional security situation given its regional peace-keeping efforts. ### Program - Performance under the program: - All but one performance criterion (PC) for end-December 2017 were met; all structural benchmarks (SBs) were met. - Most indicative targets (ITs) for end-March 2018 were met. - The continuous PC on the non-accumulation of external arrears was missed. - Authorities’ requests: waivers requested for the two missed PCs. - Glencore restructuring: - Final agreement signed in June; considered in line with the program. - Expected to restore debt sustainability and generate sufficient financing for the program. - Union-level and regional support: program supported by union-level efforts to maintain an appropriate monetary policy stance, build up regional reserves, and promote financial sector stability. ### Staff views and financing implications - Staff support: - Completion of the second review under the ECF. - Waivers of non-observance of the two PCs. - Financial outcome: completion of the second review will result in the disbursement of SDR 35.05 million. - Role of Fund arrangement: instrumental to catalyze donor support to address Chad’s protracted balance of payment needs. - Downside risks to the program: - Large resort to nonconcessional financing. - Overshooting in the wage bill. - Further deterioration in the liquidity position of banks. - A significant drop in oil price. - Worsening of the security situation. ### Recent developments (economic and fiscal) - GDP and sector developments: - Nominal GDP fell from $14 billion in 2014 to $9.9 billion in 2017. - GDP estimated to have declined by about 3 percent in 2017. - Non-oil GDP estimated to have declined by 0.5 percent in 2017. - Oil GDP collapsed by about 16 percent in 2017 following technical problems by one of the main operators. - Fiscal developments: - Non-oil revenues increased significantly in 2017 due to strong collection efforts. - Total domestically financed primary spending remained broadly within the budget envelope; overshooting in the wage bill offset by restraint in other spending. - In Jan–Apr 2018 the monthly wage bill declined to about CFAF 27 billion (about 10 percent lower than the 2017 average of CFAF 31 billion). - Domestic rollover: overall rollover of domestic debt about CFAF 150 billion (3 percent of non-oil GDP); rollover rate assumed 90 percent; composition shifting toward shorter maturities. - Arrears clearance: - About CFAF 45 billion or 0.9 percent of non-oil GDP of domestic arrears recorded at the Treasury were cleared in the second half of 2017. - Cotton public enterprise arrears cleared toward banks: CFAF 54 billion. - Paid arrears not recorded at the Treasury: about CFAF 6 billion. - External arrears outstanding reduced from $102 million at end-2017 to $55 million (end-April 2018). - Payments made to the Islamic Development Bank; agreement in principle reached with Libya to reschedule outstanding stock and maturities. - Progress reported on arrears to India and arrears in local currency to the Rep. of Congo and Equatorial Guinea. - Glencore debt restructuring details and implications: - Modifications relative to February agreement: (i) a 1 percent floor on the LIBOR reference rate, (ii) outsourcing to an agent other than Glencore the financial accounting related to government oil exports, operating costs and debt service to Glencore, (iii) exclusion of military assets from applicable collateral. - Under current oil price and oil production assumptions, the Glencore debt would be fully repaid by early 2026. - Agreement becomes effective once standard procedural requirements are satisfied. - Banking sector: - Banks face liquidity pressures but remain solvent. - Credit to the private sector declined year-on-year by 1.3 percent in March 2018. - Deposits declined year-on-year by 0.7 percent in March 2018. - Overdue loans at end-March 2018: 30 percent of gross loans (28 percent in December). - BEAC interim emergency liquidity facility launched in September 2017; BEAC refinancing accounts for 16.8 percent of bank liquidity on average. - Capital adequacy ratio at end-March 2018: 19.1 percent. - External position: - Current account deficit for 2017 estimated at 5.7 percent of GDP compared to 9.2 percent in 2016. - Oil export volumes fell by almost 15 percent during 2017; oil export earnings increased by roughly 10.4 percent in 2017 due to price recovery. - Net foreign asset position at the regional central bank: about CFAF -257 billion at end-2017; improved to around CFAF -220 billion at end-April 2018; expected to reach CFAF -147 billion by end 2018. - Political developments: - New constitution promulgated on May 4, 2018; transitions to a full presidential system and extends presidential term to 6 years, renewable once. - President announced parliamentary elections will be held in November 2018, but precise timing remains uncertain and is likely to be in 2019 given preparation and financing gaps. ### Program performance (compliance and benchmarks) - End-December 2017 PCs and ITs: - All but one PC for end-December 2017 met; continuous PC on non-accumulation of external arrears missed by $0.74 million. - PC on customs revenues missed by CFAF 2 billion. - One out of two ITs at end-December 2017 was met: regularization of spending through emergency procedures (DAO) increased from 49 percent at end-September to 65 percent at end-December (target 90 percent); poverty reducing social spending reached CFAF 202 billion, meeting the adjusted target. - End-March 2018 ITs: - Most end-March 2018 ITs met: NOPB PC met with a large margin; customs revenue target met with a margin; domestic financing from the BEAC and from banks met. - ITs on regularization of DAO and on poverty reducing social spending were both missed. - Structural benchmarks and prior actions through end-June 2018: - All structural benchmarks through end-June 2018 and the prior action have been met. - Actions completed include: publication of the quarterly oil sector note (the third since program start); finalization of terms of reference for external consultants for reorganization plan of two public banks; ratification of the United Nations Convention Against Corruption (UNCAC) in June; publication of list of tax exemptions before end-June; launch in June 2018 of the audit of unrecognized expenditure payment arrears. - Waiver requests: - Authorities request waivers for nonobservance of the PCs on customs revenues and external arrears accumulation, citing the minor nature of the breaches (customs revenues missed by CFAF 2 billion; external arrears ceiling breached by $0.74 million). ### Policy discussions - Program anchor and objectives: - Program anchored on a medium-term macroeconomic framework reflecting steady improvement in non-oil revenue, spending control, and gradual increase in oil production. - Main program elements: (i) reestablish debt sustainability through external commercial debt restructuring, (ii) achieve gradual fiscal adjustment via domestic revenue mobilization and create space for domestic arrears payment while maintaining a tight spending envelope, (iii) limit reliance on domestic financing to alleviate pressure on domestic banks. - Medium-term macroeconomic outlook (A): - Outlook broadly unchanged relative to the first review. - Oil production expectations: - Recovery in 2018 following resolution of technical problems. - Gradual increase in 2019. - Jump to higher levels in 2020 as new extraction technologies are implemented and new fields start producing. - Higher oil prices expected to lead to higher gross oil revenues; part offset by higher external debt service to Glencore per the new contract. - Remaining windfall to be used to repay more domestic arrears and reduce domestic debt. - Non-oil activity recovery expected to begin in 2018 and pick up in the medium term, supported by gradual fiscal improvement allowing increased discretionary spending and domestic arrears repayment. - Privatization of the cotton public enterprise expected to help the cotton sector contribute positively to non-oil growth (MEFP ¶14). *International Monetary Fund. CHAD: EXECUTIVE SUMMARY (July 16, 2018).* ### 17. The current account deficit is expected to improve gradually over the medium term. ### 17. The current account deficit is expected to improve gradually over the medium term. ### Current account outlook - Oil exports are expected to pick up as production increases in the coming years. - Imports are expected to moderately rise over the medium term, reflecting higher domestic demand and planned increases in oil capital expenditures. - Expected increases in foreign direct investment and lower external debt amortization will help strengthen Chad’s net foreign assets position, contributing positively to the CEMAC regional reserves pool. ### Fiscal policy for the remainder of 2018 and the medium term - Fiscal policy in 2018 and the medium term will focus on maintaining spending discipline while strengthening non-oil revenue mobilization. - Policies for the remainder of 2018 will be based on the 2018 budget; medium-term policies will be guided by already agreed broad program objectives. - Controlling the wage bill is key to allow space for higher spending on other categories to support economic recovery. - Authorities have shown commitment to avoid increases in the wage bill to unsustainable levels (MEFP ¶23). - For 2019, the authorities aim to raise the share of non-wage spending in total spending and in non-oil GDP while maintaining overall spending discipline. - Demands for higher spending related to likely elections in 2019 and possible higher social and security spending should be accommodated through higher grant financing or through domestic financing consistent with avoiding an increase in domestic debt and adding undue pressure on banks. ### Revenue performance and tax policy - Strengthening non-oil revenue performance is the priority. - Based on encouraging performance in late 2017 and early 2018, and with continued strong collection efforts, non-oil tax revenues are expected to increase to 7.9 percent of GDP in 2018. - Tax policy reforms (notably the reform of the PIT) and measures to improve tax administration (planned measures to modernize excise duties collection, improve property tax collection, and start reducing exemptions) are expected to help achieve this increase. - For 2019, authorities are committed to build on these measures, including by further reducing tax exemptions (MEFP ¶27). ### Domestic debt, arrears, and public debt trajectory - For the remainder of 2018, domestic debt and recognized domestic arrears will be reduced. - Under the baseline scenario, domestic public debt is projected to be broadly unchanged in percent of non-oil GDP despite the increase related to clearance of arrears of the cotton public enterprise. - Authorities commit to reduce securitized debt by limiting rollover to 90 percent for those securities. - Authorities plan to clear about 1.2 percent of non-oil GDP in recognized domestic arrears. - Additional resources are expected to be used to further reduce domestic debt, repay arrears, and improve the government’s position towards the banking sector. - Over the medium term: - Non-oil tax revenues are expected to increase to about 9 percent of non-oil GDP. - Oil revenue would pick up gradually due to higher production and lower operating costs. - The wage bill would increase by about 1 percent every year in nominal term, allowing for a reduction of its share in primary spending and non-oil GDP. - Domestically financed investment would gradually pick up in line with available resources. - Public debt should continue to decline, consistent with the authorities’ plan to pay down debt to banks. - By end-2018, a plan for the clearance of all domestic arrears is expected to be in place. - About 0.9 and 0.2 percent of non-oil GDP in verified and yet to be audited arrears respectively are planned to be paid in 2019. ### Tax and customs reforms - Reducing and better controlling tax exemptions will help widen the tax base (MEFP ¶30). - Building on the recently published list of tax exemptions and the 2017 audit of 47 tax conventions, authorities will identify exemptions for removal or amendment to generate meaningful revenue increases (proposed new SB). - Tax and customs administration reforms are needed (MEFP ¶29). - Collection of non-oil revenues through banks ("banquarisation des recettes") boosted revenues in 2018 and should support needed revenue increases. - Improving VAT collection and compliance is key; quantitative analysis estimates that revenues from VAT could increase by about 3 percent of non-oil GDP. - Authorities are committed to elaborate a plan with timebound measures to improve VAT collection (proposed new SB), including setting up a refund mechanism, reducing VAT exemptions, and improving collaboration between customs and tax administrations. - Creation of a dedicated unit within the Tax Directorate is expected to increase property tax collection. - Efforts are ongoing to improve control of transit operations and the value of imports in customs. ### Banking sector - Authorities have expressed strong commitment to agreed reforms to strengthen the banking sector (MEFP ¶38). - Two large public banks are solvent and authorities are preparing terms of reference and a reorganization plan in coordination with COBAC and with IMF staff support. - Authorities are working on hiring external consultants and assigned a Ministry of Finance team to coordinate selection, targeting completion of the review and reorganization plan report by end-January 2019 (existing SB). - For BAC, a small non-operational bank, Chadian and Sudanese shareholders decided to recapitalize the bank and presented its strategic plan to COBAC. - Monetary policy framework reform can deepen the interbank market but entails risks. - Removal of ceilings on government securities as collateral and introduction of competitive bidding for BEAC open market operations should improve Chadian banks' access to BEAC refinancing. - Some banks risk shortage of eligible collateral due to a new haircut system or the lifting of the reserve requirement exemption scheduled for July. - Mitigating actions include extension of high quality credit, identification of existing private collateral eligible for BEAC refinancing, and better deposit mobilization. - Efforts to pay domestic arrears and reduce domestic debt as planned should help ease liquidity pressures. ### Public financial management and structural reforms - Determined PFM reform efforts are needed to improve spending control, transparency, and prevent accumulation of arrears (MEFP ¶31, 32, and 35). - Some progress on cash flow projections, wage bill management, and emergency spending procedures, but these remain insufficient and fragile. - Authorities need to strengthen public debt management (including use of updated SYGADE) and reporting and monitoring of spending. - Regularization of spending through emergency procedures (DAO) in line with the program and reduction in the use of DAO are priorities. - Implementation of the new National Development Plan (NDP) will help strengthen non-oil sector recovery. - NDP launched in September 2017 to achieve sustainable inclusive growth; implementation may be complicated by weak governance and limited financing. - Authorities should identify priority projects for which concessional financing or grants can be secured, and ensure close and transparent monitoring of implementation. - Improving governance and reducing corruption are priorities to support activity in oil and non-oil sectors. - Ratification of the UNCAC is a promising step; focus should turn to measures and reforms to effectively implement the UNCAC (MEFP ¶40). ### Financing, program modalities, and risks - The program is fully financed, with firm assurances in place for the next 12 months and good prospects for the rest of the program (Text Table 2). - Most budget support initially planned for 2017 has been disbursed in 2018 (African Development Bank, European Union); remaining amount to be disbursed in the coming weeks (World Bank). - Final agreement with Glencore will provide significant debt relief and ensure the program is fully financed, even under downside oil price scenarios. - Program monitoring and structural benchmarks: - Staff and authorities proposed to maintain end-December 2018 PCs set at first review; reached agreement on new structural benchmarks. - PCs for end-June 2019 will be set at the time of the third review discussions in preparation of the 2019 budget. - Variation in external flows will be accommodated through adjustments to domestic financing, the non-oil primary balance, and payment of domestic arrears. - Two proposed new SBs aim at widening the tax base by reducing tax exemptions and improving VAT collection. - Risks and mitigants: - Program risks include overruns in spending (notably wage bill or security), deterioration of the social situation, resort to nonconcessional borrowing, worsening banks’ liquidity position, and a drop in oil revenue. - Finalization of the Glencore restructuring removes a major risk source; contingencies under the new Glencore debt contract and authorities’ commitment are key mitigating factors. - BEAC and COBAC policy commitments and assurances support CEMAC programs, including modernization of the monetary policy operation framework and submission of revised foreign exchange regulations for adoption by end-2018. - Regional NFA accumulation up to December 2017 was in line with projections; corrective actions are being implemented to restore desired upward path following underperformance in early 2018. ### Staff appraisal (key judgments) - Macroeconomic stabilization signs are strengthening, notably on the fiscal front; non-oil economic activity seems stabilized but not yet firmly picked up. - Fiscal performance has been encouraging: non-oil revenue improved since late 2017 and spending discipline, notably on the wage bill, maintained. - Performance under the Fund-supported program has been satisfactory and authorities’ commitment is strong. - All but one end-December PC have been met and most end-March ITs have been met, notably the non-oil primary balance (the fiscal anchor). - The continuous PC on external arrears accumulation was missed by a small amount. - Structural reform agenda is on track; all SBs have been met and the final Glencore debt agreement was signed. - Debt vulnerabilities declined with the Glencore agreement and clearance of arrears but remain high. - Authorities should fulfil outstanding procedural requirements in the Glencore agreement to make it effective. - To preserve debt sustainability, authorities should avoid adding to external debt burden, keep domestic debt on a declining trend, and improve debt management. - Continue normalizing payment of outstanding external arrears and prevent accumulation of new ones. - Banking sector is solvent but faces liquidity pressures; timely implementation of agreed review and reorganization steps for large public banks and efforts to pay domestic arrears and reduce domestic debt are important. - Program risks have declined but remain high; authorities’ strong commitment and Glencore contingencies provide key risk mitigation. *IMF staff report excerpt.* ### 41. Based on Chad’s performance under the program, the restoration of debt ### 41. Based on Chad’s performance under the program, the restoration of debt sustainability through the final restructuring of the Glencore debt, and the adequate implementation of the regional policy assurances, staff recommends the completion of the second review under the ECF arrangement. ### Program recommendation and conditionality - Staff recommends completion of the second review under the ECF arrangement based on: - Chad’s performance under the program. - Restoration of debt sustainability through the final restructuring of the Glencore debt. - Adequate implementation of the regional policy assurances. - Staff supports authorities’ request for waivers of nonobservance of the PCs on: - customs revenue, and - external arrears accumulation, - on the basis of the minor size of the breaches. - Staff proposes completion of the financing assurances review. - Staff proposes that completion of the third review will be conditional on: - the implementation of critical policy assurances at the union level, as established in the June 2018 union-wide paper. ### Key macroeconomic projections and indicators (selected from Table 1) - Real economy (annual percentage change unless otherwise indicated) - GDP at constant prices: 2015: 1.8; 2016: -6.4; 2017 Est.: -3.1; 2018 Proj.: -3.1; 2019 Proj.: 3.5; 2020 Proj.: 3.5; 2021 Proj.: 4.8. - Oil GDP: 2015: 32.1; 2016: -8.4; 2017 Est.: -16.2; 2018 Proj.: -16.2; 2019 Proj.: 15.7; 2020 Proj.: 15.2; 2021 Proj.: 8.4. - Non-oil GDP: 2015: -2.9; 2016: -6.0; 2017 Est.: -0.5; 2018 Proj.: -0.5; 2019 Proj.: 1.4; 2020 Proj.: 1.5; 2021 Proj.: 4.0. - Inflation and prices - GDP deflator: 2015: -8.0; 2016: -1.2; 2017 Est.: -0.9; 2018 Proj.: -0.9; 2019 Proj.: 2.2; 2020 Proj.: 2.2; 2021 Proj.: 3.0. - Consumer price index (annual average): 2015: 6.8; 2016: -1.1; 2017 Est.: -0.9; 2018 Proj.: -0.9; 2019 Proj.: 2.1; 2020 Proj.: 2.1; 2021 Proj.: 3.0. - Brent (US$/barrel): 2015: 52.4; 2016: 44.0; 2017 Est.: 54.4; 2018 Proj.: 54.4; 2019 Proj.: 64.7; 2020 Proj.: 73.3; 2021 Proj.: 56.6. - Chadian price (US$/barrel): 2015: 39.9; 2016: 36.2; 2017 Est.: 49.4; 2018 Proj.: 49.4; 2019 Proj.: 60.7; 2020 Proj.: 67.6; 2021 Proj.: 52.6. - Oil production for exportation (millions of barrels): 2015: 47.5; 2016: 44.4; 2017 Est.: 35.9; 2018 Proj.: 35.9; 2019 Proj.: 39.1; 2020 Proj.: 39.8; 2021 Proj.: 57.1. ### Monetary and external positions (selected) - Money and credit (percent, levels reported in Table 1) - Net foreign assets: 2015: -40.3; 2016: -38.2; 2017 Est.: 0.5; 2018 Proj.: 0.5; 2019 Proj.: 8.5; 2020 Proj.: 11.8; 2021 Proj.: 9.8. - Broad money (annual change): 2015: -4.7; 2016: -7.7; 2017 Est.: -0.9; 2018 Proj.: -4.3; 2019 Proj.: 7.6; 2020 Proj.: 7.2; 2021 Proj.: 7.0. - Velocity (non-oil GDP/broad money): 2015: 5.0; 2016: 5.1; 2017 Est.: 5.1; 2018 Proj.: 5.3; 2019 Proj.: 5.0; 2020 Proj.: 5.1; 2021 Proj.: 4.8. - External sector (valued in US dollar) - Exports of goods and services, f.o.b. (annual change): 2015: -34.0; 2016: -15.4; 2017 Est.: 10.5; 2018 Proj.: 10.4; 2019 Proj.: 26.5; 2020 Proj.: 37.8; 2021 Proj.: 6.5. - Imports of goods and services, f.o.b. (annual change): 2015: -23.7; 2016: -15.3; 2017 Est.: 2.9; 2018 Proj.: 2.9; 2019 Proj.: 20.7; 2020 Proj.: 20.3; 2021 Proj.: 4.9. - Overall balance of payments (percent of GDP): 2015: -6.4; 2016: -8.6; 2017 Est.: -0.8; 2018 Proj.: -1.1; 2019 Proj.: 1.5; 2020 Proj.: 1.3; 2021 Proj.: 1.1. - Current account balance, including official transfers (percent of GDP): 2015: -12.3; 2016: -9.2; 2017 Est.: -5.2; 2018 Proj.: -5.7; 2019 Proj.: -4.3; 2020 Proj.: -4.2; 2021 Proj.: -4.9. ### Fiscal outlook (selected from Table 1) - Revenue and grants (percent of GDP): 2015: 17.1; 2016: 14.9; 2017 Est.: 16.1; 2018 Proj.: 17.1; 2019 Proj.: 18.5; 2020 Proj.: 19.4; 2021 Proj.: 18.3. - Of which: oil revenue (percent of GDP): 2015: 4.9; 2016: 3.5; 2017 Est.: 4.1; 2018 Proj.: 4.1; 2019 Proj.: 5.4; 2020 Proj.: 6.3; 2021 Proj.: 5.7. - Of which: non-oil revenue (percent of GDP): 2015: 8.3; 2016: 8.4; 2017 Est.: 8.1; 2018 Proj.: 8.7; 2019 Proj.: 8.2; 2020 Proj.: 8.3; 2021 Proj.: 9.6. - Expenditure (percent of GDP): 2015: 22.9; 2016: 18.0; 2017 Est.: 17.8; 2018 Proj.: 18.0; 2019 Proj.: 17.9; 2020 Proj.: 18.3; 2021 Proj.: 17.9. - Current expenditure (percent of GDP): 2015: 15.6; 2016: 14.2; 2017 Est.: 13.3; 2018 Proj.: 13.7; 2019 Proj.: 12.4; 2020 Proj.: 12.9; 2021 Proj.: 11.7. - Capital expenditure (percent of GDP): 2015: 7.3; 2016: 3.7; 2017 Est.: 4.5; 2018 Proj.: 4.4; 2019 Proj.: 5.5; 2020 Proj.: 5.5; 2021 Proj.: 6.2. - Non-oil primary balance (commitment basis, excl. grants; percent of non-oil GDP): 2015: -9.7; 2016: -4.4; 2017 Est.: -4.2; 2018 Proj.: -3.8; 2019 Proj.: -4.5; 2020 Proj.: -4.4; 2021 Proj.: -3.0. - Overall fiscal balance (incl. grants, commitments basis; percent of GDP): 2015: -5.9; 2016: -3.0; 2017 Est.: -1.7; 2018 Proj.: -1.0; 2019 Proj.: 0.6; 2020 Proj.: 1.0; 2021 Proj.: 0.3. - Total debt (percent of GDP): 2015: 43.3; 2016: 51.2; 2017 Est.: 52.5; 2018 Proj.: 52.5; 2019 Proj.: 48.1; 2020 Proj.: 49.2; 2021 Proj.: 38.6. - Of which: domestic debt (percent of GDP): 2015: 18.3; 2016: 24.0; 2017 Est.: 25.4; 2018 Proj.: 25.1; 2019 Proj.: 22.1; 2020 Proj.: 23.0; 2021 Proj.: 17.9. ### Balance of payments and financing (selected from Table 4) - Current account, excl. budget grants (billions of CFAF): 2016: -638; 2017: -357; 2018 Est.: -382; 2019 Proj.: -417; 2020 Proj.: -403; 2021 Proj.: -356. - Trade balance (billions of CFAF): 2016: 135; 2017: 176; 2018 Est.: 177; 2019 Proj.: 351; 2020 Proj.: 513; 2021 Proj.: 733. - Exports, f.o.b. (billions of CFAF): 2016: 1,318; 2017: 1,433; 2018 Est.: 1,433; 2019 Proj.: 1,658; 2020 Proj.: 1,886; 2021 Proj.: 2,442. - Of which oil (billions of CFAF): 2016: 955; 2017: 1,045; 2018 Est.: 1,045; 2019 Proj.: 1,253; 2020 Proj.: 1,477; 2021 Proj.: 1,959. - Overall balance (billions of CFAF): 2016: -604; 2017: -190; 2018 Est.: -211; 2019 Proj.: -91; 2020 Proj.: -95; 2021 Proj.: 68. - Financing gap (billions of CFAF): 2016: -126; 2017: -174; 2018 Est.: -173; 2019 Proj.: -261; 2020 Proj.: -260; 2021 Proj.: 2. - Financing gap (percent of GDP): 2016: -2.1; 2017: -3.0; 2018 Est.: -3.0; 2019 Proj.: -4.3; 2020 Proj.: -4.3; 2021 Proj.: 0.0. - IMF ECF financing noted in financing table: IMF ECF entries linked to residual gap/IMF financing (billions of CFAF) show values such as 37, 27, 27, 81, 83, 43, 44, 19, 20 across periods corresponding to disbursement sequence. ### Program performance criteria and indicative targets (selected from Table 7) - Performance Criteria (end-March 2018; in billions of CFAF; cumulative from beginning of year) - Floor on non-oil primary budget balance: PC: -221; PC w/ adjustor: -183; Actual: met. - Floor on customs revenue: PC: 110; PC w/ adjustor: 108; Actual: not met. - Ceiling on net domestic government financing excluding BEAC: PC: -40; PC w/ adjustor: 11; Actual: -18; met. - Ceiling on net government financing from the BEAC: PC: 29; PC w/ adjustor: -11; Actual: met. - Ceiling on the stock of domestic payment arrears by the government: PC: 210; PC w/ adjustor: 195; Actual: met (185; 195; 192 reported). - Ceiling on new external arrears of the government and non-financial public enterprises (to be respected continuously): PC: 0; Actual: not met (noted delayed payments to multiple creditors). - Indicative Targets - Floor on the regularization of emergency spending procedures-DAO (Percent of total DAO): IT: 90; IT w/ adjustor: 65; Actual: not met. - Floor for poverty-reducing social spending: IT: 205; IT w/ adjustor: 191; Actual: 202; met. ### Prior actions and structural benchmarks (status as of end-June 2018; Table 8) - Prior action - 1. Sign final agreement with Glencore on the restructuring: Met. - Structural benchmarks (selected) - 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 — Met. - Finalization of the terms of reference for external consultants to review and prepare a reorganization plan for two public banks: End-May 2018 — Met. - Publication of Tax and Customs exemptions: End-June 2018 — Met. - Ratification of the United Nations Convention Against Corruption (UNCAC): End-June 2018 — Met. - Hire external consultants to review and prepare a reorganization plan for two public banks: End-July 2018 — status: ... - Adopt a clearance strategy of domestic arrears based on the audit results: End-October 2018 — status: ... - Develop an action plan with timebound measure to improve VAT collection: End-December 2018 — Proposed. - Deliver report of external consultants on the review and reorganization plan for two public banks: End-January, 2019 — status: ... - Based on the audit of 47 tax conventions, remove exemptions not in line with legal texts and ensure that others are adequately implemented: End-February 2019 — Proposed. ### IMF disbursement schedule under the ECF arrangement (selected from Tables 10 and 11) - Schedule of disbursements under the ECF arrangement (Amount in percent of quota and Million SDR) - 25.0 percent of quota — 35.05 Million SDR — Date of Board Approval — Condition: Executive Board approval of the three year ECF arrangement. - 25.0 percent of quota — 35.05 Million SDR — August 15, 2017 — Condition: Observance of the performance criteria for June 30, 2017 and completion of the first review under the arrangement. - 25.0 percent of quota — 35.05 Million SDR — April 15, 2018 — Condition: Observance of the performance criteria for December 31, 2017 and completion of the second review under the arrangement. - 25.0 percent of quota — 35.05 Million SDR — October 15, 2018 — Condition: Observance of the performance criteria for June 30, 2018 and completion of the third review under the arrangement. - 20.0 percent of quota — 28.04 Million SDR — April 15, 2019 — Condition: Observance of the performance criteria for December 31, 2018 and completion of the fourth review under the arrangement. - 20.0 percent of quota — 28.04 Million SDR — October 15, 2019 — Condition: Observance of the performance criteria for June 30, 2019 and completion of the fifth review under the arrangement. - 20.0 percent of quota — 28.04 Million SDR — April 15, 2020 — Condition: Observance of the performance criteria for December 31, 2019 and completion of the sixth review under the arrangement. - Total: 160.0 percent of quota — 224.32 Million SDR. - Indicators of capacity to repay the IMF (selected highlights from Table 11) - Fund obligations based on existing credit — Principal (SDR millions): 2018: 0.0; 2019: 0.0; 2020: 2.0; 2021: 8.1; 2022: 17.0; 2023: 29.7; 2024: 33.7. - Charges and interest (SDR millions): annual 0.3 or 0.5 across 2018–2032 as listed. - Outstanding IMF credit based on existing and prospective drawings (SDR millions): 2018: 230.1; 2019: 286.1; 2020: 312.2; 2021: 304.1; 2022: 287.0; 2023: 253.9; 2024: 203.4; 2025: 146.3; 2026: 92.5; 2027: 47.7; 2028: 16.8; 2029: 2.8; 2030–2032: 0.0. - Net use of IMF credit (SDR millions): 2018: 105.2; 2019: 56.1; 2020: 26.0; 2021: -8.1; 2022: -17.0; 2023: -29.7; 2024: -50.5; 2025: -57.1; 2026: -53.8; 2027: -44.9; 2028: -34.4; 2029: -14.0; 2030–2032: 0.0. - Memorandum items (selected): Exports of goods and services (CFAF billions): 2018: 2,510; 2019: 2,623; 2020: 2,852; 2021: 2,956; 2022: 3,108; 2023: 3,271; 2024: 3,443. *Source: IMF staff report and associated tables.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Program context and recent actions - IMF ECF arrangement approved on June 30, 2017 covering June 30, 2017 until June 29, 2020 to support Chad’s stabilization and recovery strategy. - First review completed on April 13, 2018 with immediate disbursement of SDR 35.05 million, bringing total disbursements under the arrangement to SDR 70.1 million. - Government requests completion of the second review under the ECF-supported program and waivers for missing the PCs on customs revenue and external arrears accumulation. ### Economic performance and outlook - Non-oil GDP contracted for a third consecutive year in 2017; overall economic activity estimated to have contracted by about 3 percent in 2017. - Signs of stabilization appeared at end-2017 and early 2018; economic activity (oil and non-oil) expected to recover in 2018 due to a pick-up in oil production and in aggregate demand. - Oil revenues in 2017 increased by around 17 percent relative to 2016 despite lower production due to higher oil prices and a rebound of oil tax revenues. - Deflationary pressures abated in late 2017 and the first two months of 2018, though demand remained relatively weak and cross-border trade was disrupted by security concerns. ### Fiscal performance and liquidity - Fiscal stabilization driven by reforms to raise non-oil revenue and maintain spending discipline, supported by development partners, the debt rescheduling agreement with Glencore, and successful rollover of domestic public debt. - Non-oil revenue: last month of 2017 non-oil revenues about CFAF 55 billion compared to the monthly average in 2017 of about CFAF 35 billion (some of which is expected to be temporary). - Regularization of old tax arrears in late 2017 amounted to about CFAF 20 billion. - Wage bill: average monthly wage bill reduced from about CFAF 32 billion in H1 2017 to about CFAF 30 billion in H2 2017 after cuts to bonuses and benefits. - Domestic arrears: increased to about CFAF 270 billion in Q1 2017 and declined to about CFAF 195 billion at end-December 2017; government repaid about CFAF 13 billion in arrears not recorded within “Reste-à-Payer” at Treasury. - Clearance of cotton enterprise (CotonTchad) arrears increased government domestic debt by about CFAF 54 billion (about 0.9 percent of GDP) to be repaid over the next 5 years; 60 percent of the enterprise privatized to OLAM for about CFAF 9.8 billion (35 percent state, 5 percent farmers). ### External arrears and debt restructuring - External arrears declined from $102 million at end-2017 to $55 million at end-March 2018 following agreements and repayments. - Agreement in principle with the Libyan Foreign Bank to clear arrears including repayment of outstanding principal of $17.3 million in 3 instalments in 2018, and interest of $4.2 million over four instalments (one in 2018 and three in 2019), and rescheduling upcoming maturities with 18 months grace period. - Government cleared all outstanding arrears to the Islamic Development Bank and engaged Republic of Congo, Equatorial Guinea, and India on payment plans. - Finalization of the Glencore debt restructuring agreement signed on June 28 intended to generate sufficient financing for the program, reduce debt vulnerabilities, include contingencies to limit effects of lower oil revenues, and increase the economy’s benefit from oil revenue. ### Banking sector and financial stability - Banking sector liquidity under stress but banks remain solvent. - Credit to the private sector and deposits declined by 1.3 percent and 0.7 percent respectively in March 2018 (y-o-y), and by 0.9 percent and 2.5 percent relative to December 2017. - Overdue loans accounted for 30 percent of gross loans at end-March 2018 (28 percent in December 2017). - BEAC refinancing accounts for 16.8 percent of bank liquidity on average at end-March 2018. - Capital adequacy ratio of banks was 19.1 percent at end-March 2018. - Interim BEAC emergency liquidity facility helped prevent further deterioration for banks that rolled over government domestic securities. - Domestic treasury bills and bonds rollover rate during the first 5 months of 2018 broadly in line with program objective (around 90 percent), although with shorter maturities. ### Program implementation: performance criteria, targets, and structural benchmarks - All but one performance criterion for end-December 2017 were met; customs revenue target missed by a small margin; DAO regularization indicative target missed at end-December 2017. - End-March 2018 indicative targets on DAO regularization and social spending were missed, primarily due to coordination issues and civil servant strikes. - The performance criterion on accumulation of external arrears was missed as payment of maturities due in Q2 2018 were not paid; some arrears were subsequently paid, a portion remains outstanding and will be paid as soon as possible. - Specific end-December 2017 outcomes: - Non-oil primary balance (NOPB) deficit: CFAF 183 billion vs quantitative PC of CFAF 221 billion (PC met with large margin). - Customs revenue: CFAF 108 billion vs target CFAF 110 billion (missed by small margin). - Net domestic government financing from BEAC: criterion met with large margin. - Net domestic government financing excluding BEAC: met (below program ceiling adjusted for lower receipts). - Domestic arrears stock: CFAF 195 billion at end-December 2017 (criterion met). - Zero ceiling on contracting or guaranteeing new non-concessional external debt: met. - Indicative target on poverty-reducing social spending: met, taking into account the program adjustor. - Indicative target on regularization of DAO: missed despite increase from 49 percent at end-September to 64 percent at end-December (target was 90 percent). - Structural benchmark implementation: all four structural benchmarks completed, including: - Finalization of terms of reference for external consultants to review and prepare a reorganization plan for two public banks. - Publication of list of tax and customs exemptions. - Ratification of the United Nations Convention against Corruption (UNCAC). - Near-term structural commitments: - Hire external consultants by end-July to review and prepare a reorganization plan for two public banks. - Adopt by end-October 2018 a clearance strategy of domestic arrears based on audit results that started in June. - Launch the audit of transfers and subsidies (due at end-March 2018) before the end of the year. ### Policy priorities and commitments - Maintain tight spending envelope consistent with available resources and the approved 2018 budget; 2019 budget to be designed consistently with program parameters. - Ensure higher spending associated with the cost of the elections is fully consistent with the ECF-supported program. - Create fiscal space through domestic revenue mobilization, increase investment and social spending, and improve public financial management, notably by strictly limiting the use of DAOs. - Continue reforms to diversify the economy, strengthen private sector competitiveness, improve governance and fight corruption, including effective implementation of UNCAC; these goals align with the National Development Plan 2017-21. - Government will consult with the IMF before making changes to the policies set out in the MEFP and will provide timely information as agreed under the TMU. - Government agrees to publication of the staff report, this letter of intent, the MEFP, and the TMU on the IMF’s website. *Appendix I. Letter of Intent (cr18260)* ### 16. The continuous zero ceiling on new external arrears of the government and non- ### cr18260 - 16. The continuous zero ceiling on new external arrears of the government and non- ### Arrears and performance against program targets - The continuous zero ceiling on new external arrears of the government and non-financial public enterprises was missed: payments due to an official creditor in the second quarter were not made. - During the second quarter of 2018, arrears accumulated to an official creditor for US$0.74 million, some of which was subsequently paid. - The emergence of these arrears is primarily due to coordination problems within the administration. - Most indicative targets at end-March 2018 were met: - Non-oil primary deficit remained significantly below the program ceiling as non-oil revenues continued to outperform while all categories of domestically financed spending were low. - The IT on customs revenue was met with a margin due to sustained government efforts to improve customs administration and limit fraud. - The IT on net domestic financing from the BEAC was met as government deposits at the BEAC increased. - The IT on net domestic financing from banks was met as the rollover of public securities was broadly in line with the program. - Repayment of domestic arrears was less than projected but met the adjusted target. - Missed indicative targets: - The IT on the regularization of DAO was missed by a large margin, primarily because of temporary coordination issues among relevant agencies. - The IT on poverty-reducing social spending was missed because of liquidity constraints and civil servants strikes. ### Progress on structural reforms - Final Glencore debt restructuring agreement was signed in June (prior action). - All 4 structural benchmarks were implemented on time. - Additional measures implemented or advanced: - Terms of reference for external consultants to review and prepare a reorganization plan for two public banks were finalized. - The United Nations Convention Against Corruption was ratified. - The list of tax and customs exemptions was published on the Ministry of Finance website. - Government continues to publish quarterly notes on the oil sector, in line with the IMF-agreed template. - The audit of domestic arrears (due by end-October 2017) was launched in June. - The audit of transfers and subsidies (due end-March 2018) is expected to be launched before the end of the year. ### C. Glencore Debt Restructuring — terms and implications - The government signed the final agreement to restructure the Glencore debt to restore debt sustainability and generate financing for the program. - Key features of the final agreement (in line with the agreement in principle reached in February): - Significant extension of maturity. - Large reduction in restructuring fees. - Lower interest rate. - Specific contingencies to protect Chad in case of lower oil receipts. - Debt service payment to be made on a quarterly basis, including additional debt service (amortization and interest) through a cash sweep mechanism if average year-to-date oil prices are higher than the baseline set in the new contract. - A floor on the applicable LIBOR of 1 percent for the whole contract period. - Adjustment in waiver on the applicable collateral to exclude military assets. - Agreement to outsource (to a company other than Glencore) the financial accounting related to government oil exports, operating cost, and debt service to Glencore. ### Economic and financial policies for the remainder of the program — overview - Government strategy: stabilize the economy, support a resumption in non-oil growth, preserve adjustment in current spending, redirect resources to social sectors and public investment, and reduce domestic debt to banks and arrears to suppliers. - Controlling the wage bill is considered necessary for medium-term sustainability. - Efforts to raise non-oil revenue must be sustained to ensure a steady and reliable income source. ### A. Fiscal policy in 2018 and the medium-term — objectives and measures - 2018 considered critical to durably lift the economy out of crisis; with adequate policies, reforms, and improved oil prices, non-oil GDP is expected to recover and benefit from oil revenue accruing to the treasury after the Glencore restructuring. - Fiscal policy priorities for remainder of 2018: - Maintain spending discipline. - Improve non-oil revenue mobilization. - Reduce reliance on domestic bank financing. - Build on measures introduced early in 2018 to strengthen non-oil revenue collection. - Ensure the wage bill is sustainable. - Wage bill management measures and consequences: - Measures to reduce bonuses and benefits earlier in the year led to a significant reduction in the wage bill in the first four months of 2018, but intensified social tension and led to resumptions of strikes by civil servants. - Government commitments and intended actions: - (i) Further eliminate ghost workers, civil servants that reached retirement age, and those that are under age. - (ii) Update the payroll file following the audit of the payroll and further improve workers’ information with comprehensive data for public employees to ensure benefits and bonuses are only paid to rightful employees. - (iii) Improve the budgeting and monitoring of the wage bill. - (iv) Implement the recommendations of the planned audit of diplomas of the civil service. - Spending envelope and budgeting: - Spending in 2018 guided by the approved budget; 2019 budget to be consistent with program parameters. - Parliamentary elections likely in 2019; any higher spending related to elections will be fully consistent with the program. - If necessary, increases in social and security spending will occur only if adequate resources are available and consistent with the program. - Efforts to increase non-oil tax revenues (in percent of non-oil GDP) will be sustained; efforts to control the wage bill and increase the share of other spending in non-oil GDP (particularly investment spending) will continue. - Domestic financing strategy: - Limit recourse to domestic banks to rolling over maturing treasury bills and bonds in close collaboration with the BEAC and banks. - Pay maturities related to non-securitized debt (Emprunt Obligataire, the new debt associated with clearance of CotonTchad arrears, and Convention de prêt 60 villas). - Aim to repay at least 10 percent of maturing treasuries depending on resource availability. - Use additional budgetary revenues to further reduce domestic debt in 2018 and 2019 consistent with program targets and objectives. - Relief from restructuring of BEAC debt (finalized in September 2017: 4-year grace period, maturity of 14 years and interest of 2 percent) will be used to build buffers and reduce debt to domestic banks in 2019 and beyond. - Domestic arrears: - Payment of domestic arrears is a priority; aim to reduce stock of recognized arrears by at least the amount set under the program. - Government aims to pay more domestic arrears than programmed if additional resources are available. - Payments of yet-to-be-validated arrears will await audit results and follow the clearance strategy described in section C. ### B. Tax and customs reforms and policies - Non-oil tax revenues: - Measure implemented in January 2018 requiring taxes to be paid through the banking system (“bancarisation des recettes”) is expected to reduce leakages and boost non-oil tax revenues. - Government considering better taxation of financial services and information and communication technologies. - IMF TA requested to ensure efficiency of the recent reform at the tax administration. - Customs revenues: - Government will follow up on IMF TA recommendations and continue to: - (i) Improve control of transit operations. - (ii) Enhance control of the value of imports. - (iii) Strengthen control of customs exemptions. - (iv) Reinforce ex-post control of the use of goods that benefited from exemptions. - Pursue computerization of customs offices and enhance collaboration between tax and customs administrations. - Concrete reforms to pursue: - Tackling prevalence of tax and customs exemptions: - EU study (sample of 39 out of 150–250 “conventions d’établissement”) estimates the cost of exemptions for the Tax Directorate at about CFAF 45 billion in 2015. - Government started implementing recommendations of audit of 47 tax conventions to reduce discretionary extension of exemptions and eliminate inefficient exemptions. - Government will identify exemptions for removal or amendment if expired or not implemented correctly (proposed new structural benchmark). - Requests for new and renewal of tax exemptions will be assessed by the ministry of finance considering effect on tax revenues. - Widening the tax base and prioritizing VAT and property tax reforms: - VAT revenue stands at about 1 percent of non-oil GDP, the lowest in Africa. - Government developing a plan with timebound measures to improve VAT collection (proposed new structural benchmark), including: - (i) Set-up a VAT refund mechanism. - (ii) Reduce VAT exemptions. - Ensure companies that collect VAT transfer revenues to tax administration; improve collaboration between customs and tax administrations through integration of DGI database and ASYCUDA. - Strengthen property tax collection via better land and property registration and tax collection procedures: - Fewer than 5,000 land titles registered in Chad. - Revenue from tax on land ownership represents less than 1 percent of total tax revenue. - Plan to create a dedicated Direction in charge mainly of land and property tax (“Direction Générale des Domaines”) within the General Tax Directorate and launch a census to update and improve the land registry. ### C. Structural reforms on public financial management (PFM) - Government emphasizes sound and transparent PFM as essential to program objectives; progress noted in budget execution, monitoring, reporting, and integration of CEMAC directives in Chadian legislation. - Government will continue collaboration with development partners, TA missions, and long-term resident experts in the Budget and Treasury Directorate. - Improvement of the expenditure chain: - Use of emergency spending procedures (“dépenses avant ordonnancement”, DAO) has been extensive in the past two years. - Government committed to both reduce use of DAO and regularize them as soon as possible: - Regularize within 45 days, 70, 75, and 80 percent of DAO after the second, third, and fourth quarter of 2018 respectively; monitored through an indicative target. - Should regularization be insufficient, government will consider introducing a nominal limit on the use of DAO. - Four phases of the expenditure chain (commitment, validation, authorization of payment order, and cash payment) are implemented and monitored through the computerized system (CID). - Comprehensive strategy to clear potential existing arrears: - Validated arrears: CFAF 195 billion by end-December 2017 (reported in “Reste à Payer” table). - FAD TA mission (September 15-28, 2016) estimates potential additional claims at CFAF 300 billion (estimate subject to wide variation). Potential claims include: - (i) Claims related to capital expenditures under public procurement contracts not going through the standard spending chain (e.g., “décomptes”). - (ii) Claims related to goods and services expenditures not going through standard spending chain. - (iii) Claims related to public procurement contracts for capital expenditures that have not generated any “décomptes”. - (iv) Debt not approved by the Debt Directorate (under litigation), including some liabilities of public enterprises. - Government committed to adopt a clearance strategy of domestic arrears by end-October 2018 (existing structural benchmark) based on audit results. - Clearance pace will be consistent with resource availability and the medium-term fiscal framework. - Prioritization of payments will be based on economic and social impact and effect on the banking sector. - Modalities for repayment after the audit could include cash payment, securitization of arrears, and potential discounts. - Government will endeavor to publicly communicate its repayment strategy. *cr18260 - 16. The continuous zero ceiling on new external arrears of the government and non-* ### 34. The government continues to work towards a more efficient cash management ### 34. The government continues to work towards a more efficient cash management ### Cash management committee and cash plan - The Cash Plan Committee is now fully operational. - Committee responsibilities: - cash flow forecasts and management, - monitoring the current Treasury account at the BEAC, - centralizing public accounting operations, cash flow and public debt. - A cash management plan has been developed, including monthly forecast of revenue and main expenditure (notably the wage bill, and domestic and external debt service). - Moving forward: efforts will focus on refining the monthly cash flow plan and strengthening the responsiveness of the Committee to update revenue and expenditure forecasts. ### Strengthening public debt recording, monitoring, and reporting - The government recognizes weak public debt management, monitoring and reporting, which led to recent misreporting of information on debt service to the IMF. - Planned actions: - Draw on the ongoing AFRITAC Center’s technical assistance missions to develop a medium-term debt strategy and strengthen debt monitoring. - Seek follow-up TA support to improve debt management. - Continue to publish the annual public debt management report and incorporate a section elaborating on the short to medium term debt management strategy and a risk analysis. - Ensure that all relevant officials meet on a monthly basis (with the participation of the IMF resident representative) to take stock of previous payments and plan for forthcoming ones to ensure external debt service is paid on time and adequately reported to the Fund. ### Public procurement management - Government intends to improve the efficiency and transparency of public procurement management. - Planned actions: - Strengthen the capacity of the Public Procurement Regulatory Authority. - Current practice: - The General Directorate of control of public procurement continues to publish a quarterly bulletin. - The last report shows that in 2016, only 7 of the 146 markets (for a total of CFAF 250 billion) were attributed without public tendering. ### Banking sector reforms - Regional monetary policy framework reform presents opportunities and risks: - Removal of existing ceilings on the use of government securities and introduction of competitive bidding for the BEAC’s open market operations is expected to improve access of Chadian banks to BEAC refinancing. - Risks: some banks may face further shortage of eligible collateral due to introduction of a new haircut system or the lifting of reserve requirement exemption, scheduled for July, potentially exacerbating liquidity stress. - Offsetting factors: expected improvement in economic conditions, government effort to pay domestic arrears and reduce domestic debt, likely improvement in banks’ liquidity as deposits recover and they extend credit eligible for refinance at the BEAC. - Public banks reform strategy: - Reforms aim to ensure public banks perform financial intermediation roles: deposit collection, proper allocation of resources to economic sectors, and monitoring of credit, liquidity and solvency risks. - Terms of reference for the review of public banks’ strategy and adoption of a reorganization plan were finalized in coordination with the COBAC and with support from IMF staff. - External consultant is expected to be hired by end-July 2018 (existing structural benchmark) to complete and share the report on the review and the reorganization plan by end-January 2019 to the IMF staff and the COBAC (existing structural benchmark). - For the newly established state-owned “Banque de L’habitat”, the government will set safeguards for better risk assessment and management to limit potential contingent liabilities for the state. - Concerning the BAC (a small non-operational bank), the Chadian and Sudanese authorities decided to recapitalize the bank and presented its strategic plan to the COBAC. The government aims to ensure the bank has proper resources and a viable business plan and to expand BAC’s activity to conventional intermediation in addition to Islamic finance. ### Other structural reforms - National Development Plan (NDP) 2017-21: - Government keen to implement the 2017-21 NDP to improve the economy’s competitiveness. - Government set up a single committee in charge of NDP monitoring to improve transparency of the monitoring framework and facilitate implementation. - Improving governance and anti-corruption: - Government committed to implement the United Nations Convention against Corruption (UNCAC), recently ratified by the National Assembly. - Commitments include identifying areas to improve effectiveness of legislation in criminalizing acts of corruption in line with the UNCAC and considering adoption of implementing legislation for asset declaration obligations set forth in the Constitution. - Government will evaluate options for reinforcing domestic capacity of institutions in charge of detection, investigation, prosecution, and adjudication of cases of corruption. ### Monitoring program implementation and reviews - Monitoring institutional arrangements: - The government will rely on the Negotiation Committee based in the Ministry of Finance and Budget, in constant communication with IMF staff in Washington and its Resident Representative in Chad. - Program monitoring mechanisms: - Bi–annual reviews by the IMF Executive Board on the basis of performance criteria, indicative targets, and structural benchmarks (Tables 1 and 2 attached). - Indicators are outlined in the attached Technical Memorandum of Understanding (TMU). - The third review will be based on end-June 2018 test dates, and the fourth review on end-December 2018. - The government undertakes to adopt, in consultation with IMF staff, any new financial or structural measures necessary for program success. ### Quantitative Performance Criteria (QPC) and Indicative Targets (selected figures; in billions of CFAF, unless otherwise indicated) - Table headings: End-June 2018 | End-Sept 2018 | End-Dec 2018 | End-Mar 2019 | End-June 2019 (columns include QPC, IT, QPC, IT, Proj.) - Selected QPC and IT figures: 1. Floor on non-oil primary budget balance (NOPB): -125 | -175 | -218 | -80 | -125 2. Floor on customs revenue: 45 | 85 | 118 | 25 | 50 3. Ceiling on net domestic government financing excluding BEAC: -5 | -15 | -55 | -5 | -10 4. Ceiling on net government financing from the BEAC: 70 | 35 | 35 | 110 | 120 5. Ceiling on the stock of domestic payment arrears by the government: 170 | 155 | 150 | 145 | 130 6. Ceiling on new external arrears of the government and non-financial public enterprises: 0 | 0 | 0 | 0 | 0 7. Ceiling on contracting or guaranteeing new non-concessional external debt by the government and non-financial public enterprises: 0 | 0 | 0 | 0 | 0 8. Floor on the regularization of emergency spending procedures-DAO (Percent of total DAO): 70 | 75 | 80 | 50 | 70 9. Floor for poverty-reducing social spending: 107 | 160 | 214 | 58 | 116 - Memo items: 10. Ceiling on new domestic payment arrears by the government: 0 | 0 | 0 | 0 | 0 11. External concessional borrowing (US$ million): 52 | 103 | 155 | ... | ... 12. Oil Revenue: 161 | 239 | 318 | 78 | 156 13. Grants: 45 | 114 | 150 | 0 | 28 - Notes and definitions provided in the TMU clarifying NOPB, DAO, customs revenue source, inclusion of Treasury bills/bonds and domestic banks direct loans in financing, stock of verified arrears, and the baseline end-December 2017 stock of domestic arrears of CFAF 195 billion. ### Structural benchmarks for 2018-2019 (from Table 2) - 1. 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. Due: Quarterly, starting end-June 2018. - 2. Hire external consultants to review and prepare a reorganization plan for two public banks. Due: End-July 2018. - 3. Adopt a clearance strategy of domestic arrears based on the audit results. Due: End-October 2018. - 4. Develop an action plan with timebound measure to improve VAT collection. Due: End-December 2018. - 5. Deliver report of external consultants on the review and reorganization plan for two public banks. Due: End-January, 2019. - 6. Based on the audit of 47 tax conventions, remove exemptions not in line with legal texts and ensure that others are adequately implemented. Due: End-February 2019. ### Technical Memorandum of Understanding (TMU) — key reporting definitions and procedures - TMU purpose: - Spells out concepts, definitions, and data reporting procedures mentioned in the Letter of Intent (LOI) and Memorandum on Economic and Financial Policies (MEFP) of July 13, 2018. - Describes information requirements to monitor performance under the ECF arrangement, including reporting procedures; definitions and computation methods; quantitative performance criteria; indicative targets; adjusters; and structural benchmarks. - Reporting procedures: - Data on all variables subject to QPCs and ITs and progress on structural benchmarks will be transmitted regularly to the IMF per Attachment 1. - For continuous QPCs, authorities will report any non-observance promptly. - Revisions to data will be forwarded to the IMF within 14 days after being made. - Definitions (selected): - Government: central government of the Republic of Chad as per GFSM 2014, paragraphs 2.85 – 2.89. - Public nonfinancial enterprises: government-controlled corporations listed (STE, SNE, SOTEL, STPE, SHT, COTEX, SONACIM Tchad, CimenTchad, SIMATRAC, STH, FER). - Oil revenue: sum of (i) gross sales revenue of government’s crude oils obtained through government’s equity participation minus cash-call and transportation costs, (ii) royalties, (iii) statistical fees, (iv) profit tax, (v) dividends, (vi) bonuses, (vii) revenues from exploration duties, (viii) surface tax, (ix) access rights to the pipe and (x) any other flows of revenue paid by oil companies (settled in-kind and in-cash), except indirect duty and taxes. Exceptional receipts are excluded. - Customs revenue: revenue from all levies and duties payable on goods and services as defined in GFSM 2014, paragraph 5.84; recorded on a cash basis and for program monitoring taken from the “Situation des régies financières” of the Treasury. - Exceptional receipts: payments from resolution of protracted disputes between foreign companies and the Government; payments from sale/placement/privatization of government assets, granting or renewal of licenses. - Total government revenue: sum of tax revenue and non-tax revenue, including oil revenue, customs revenue, and exceptional receipts. - Total government expenditure: 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 DAO. - DAO (Dépenses avant ordonnancement): all expenditures not going through the standard spending procedure; two categories described (relative to a credit line in the budget; and those made regardless of existence of a credit line). - Wages and salaries: compensation of all government employees; data computed from the document “Masse salariale”. - Subsidies and Transfers: defined and for monitoring refer to reporting in specified tables (“Tableau de 4 Phases”). - Debt definitions: follows Guidelines on Public Debt Conditionality; includes loans, suppliers’ credits, lease agreements; domestic debt denominated in CFAF; external debt denominated in foreign currency. - Concessional vs. non-concessional debt: debt is concessional if it includes a grant element of at least 35 percent. The discount rate used to calculate present value at contracting is 5 percent per annum. *Source: Chadian authorities; and IMF Staff (excerpts from the IMF program documents and Technical Memorandum of Understanding).* ### 15. Domestic payment arrears is defined as the sum of (i) recognized expenditure payment ### cr18260 - 15. Domestic payment arrears is defined as the sum of (i) recognized expenditure payment ### Definitions: arrears, balances, and financing - Domestic payment arrears = sum of (i) recognized expenditure payment arrears and (ii) domestic debt payment arrears. - Recognized expenditure payment arrears: - The outstanding amount in a payment order, to a private or public company, for an expenditure incurred, validated and certified by the financial controller and then created by the “Direction of Ordonnancement”, is defined as a float after the payment authorization is issued by the Treasury. - The outstanding amount of a float is classified as a recognized expenditure payment arrear 90 days after the issuance of the payment authorization. - The recognized expenditures payment arrears so defined do not include domestic debt payment arrear and arrears on wage and salaries. - Unrecognized expenditure payment arrears are any potential expenditures payment arrears which have not gone through that standard spending procedure; their nature and amount will be determined by an audit of domestic arrears (see paragraph 23). - Domestic debt payment arrears = difference between the amount required to be paid under the contract or legal document and the amount actually paid after the payment deadline specified in the pertinent contract. - External debt payment arrears = external debt obligations of the government and public, non-financial enterprises that have not been paid when due in accordance with the relevant contractual terms (taking into account any contractual grace periods). Excludes: - arrears on external financial obligations for which the creditor has accepted in writing to negotiate alternative payment schedules before the relevant payment due, and - technical arrears that are less than two weeks. - The non–oil primary balance (NOPB) is defined on a commitment basis as the 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. - Domestic currency government financing: - Issuance of any instrument in CFAF to creditors; loans from BEAC (including support from the IMF), 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 the net government position towards the domestic commercial banks and includes prepaid interest. - 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 the end of the previous year. - “Program reference rate” = staff’s “average projected rate” for the six-month USD LIBOR over the following 10 years identified as 3.22 percent for the duration of the program. - Present value of loans with flexible interest rate calculated using program reference rate plus the fixed spread (in basis points) specified in the loan contract. - If variable rate linked to a benchmark other than six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 basis points) will be added. ### Quantitative Performance Criteria (QPC) — scope and specific criteria - QPCs are cumulative from the beginning of the calendar year to applicable test-dates (Table 1 of the MEFP). Continuous QPCs must never be non-observed; authorities would inform the IMF promptly if non-observance occurs. - Specified QPCs include: - A floor for the non–oil primary balance (defined in paragraph 17). - A floor on custom revenue (defined in paragraph 6). - A ceiling on the net domestic government financing (excluding BEAC) = sum of net bank financing and net securitized financing (para 19). This ceiling does not apply to: - new agreements on internal debt restructuring and arrears securitization, and - credit from the banking sector used to pay the arrears of the cotton public enterprise. - A ceiling on net government financing from BEAC (as defined in para 19). The ceiling includes support from the IMF. - A ceiling on the stock of domestic recognized expenditure payment arrears (defined in paragraph 15). - As of end-December 2017, the stock of recognized expenditure payment arrears was at CFAF 195 billion based on information in the Table “Reste à Payer” (prepared by the Treasury). - The ceiling set for end-March 2019 onwards would be adjusted to reflect the end-December 2018 actual stock of arrears when final data is available. - 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 must be reported promptly with date, amount of missed payment and creditor involved. - A zero ceiling on new non-concessional external debt contracted or guaranteed by the government and non–financial public enterprises with maturity of more than one year (applies continuously; does not include IMF financing). Debt is non-concessional if it includes a grant element of less than 35 percent (Paragraph 14). Exclusions: - normal short–term credits for imports; and - debt contracted before the ECF arrangement and rescheduled during this arrangement to the extent the rescheduling is assessed to improve the overall public debt profile. ### Indicative targets (Table 1 of MEFP) - Indicative targets are cumulative from beginning of calendar year to test-dates. Specified indicative targets include: - A floor on regularization of spending executed through emergency spending procedures (DAO). - Regularization of DAO will be done within 45 days after the end of the quarter and as follows: 70 percent after the second quarter, 75 percent after the third quarter, and 80 percent after the fourth quarter. - A floor on poverty–reducing social spending (defined in paragraph 18). ### Adjustors to performance criteria and indicative targets (paragraph 23) - To account for factors beyond government control, QPCs during the assessment period will be adjusted as follows: - If total budgetary receipts and loans are lower than programmed because of lower oil revenue or budget support, then: - 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 excluding BEAC or net government financing from BEAC) could be envisaged up to 25 percent of the shortfall not compensated for through reduction in arrears payment. - If total budgetary receipts and loans are larger than programmed because of higher oil revenue, additional budget support, or exceptional receipt, then: - the floor for the non-oil primary balance can be adjusted downward by 25 percent of the excess amount. - the non-oil primary balance can be adjusted downward by the same amount of budget grants provided to finance the parliamentary elections. - For the TMU, baseline oil revenue, budget support and exceptional receipts are shown in Text Table 1 (Cumulative on annual basis). Extracted values (2018 and 2019, in CFAF Billion) as presented: - 2018 / End-Jun.: Net Oil Revenue 161; Budget Grants 45; Budget Loans 0; Exception Receipt 0; Total 205 - 2018 / End-Sep.: Net Oil Revenue 239; Budget Grants 114; Budget Loans 26; Exception Receipt 0; Total 380 - 2018 / End-Dec.: Net Oil Revenue 318; Budget Grants 150; Budget Loans 26; Exception Receipt 0; Total 494 - 2019 / End-Mar.: Net Oil Revenue 78; Budget Grants 0; Budget Loans 0; Exception Receipt 0; Total 78 - 2019 / End-Jun.: Net Oil Revenue 156; Budget Grants 28; Budget Loans 0; Exception Receipt 0; Total 184 - Should expenditure compression be needed, poverty-reducing social spending would be adjusted so that it is reduced proportionally less than other domestically financed primary spending such that its ratio does not decline compared to the previous year. ### Structural benchmarks (Table 2 of MEFP) and timelines - Structural benchmarks include (selected): - Publication of a quarterly note on the oil sector, in line with the template agreed with IMF staff, including detailed information on debt service to Glencore, quarterly, starting end-June 2018 (Table 2). - The note will comment on recent developments in the oil sector (production, export, new exploration) over the previous quarter and expectations/forecasts for the next 6 months. - The note will provide detailed account of the flow of oil revenue by categories and types of payments (in-cash and in-kind), sale of government-owned crude oils (gross sales revenue, volume sold, transaction prices), operating costs (“Cash-call”), 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. - Hire external consultant to review the financial position and strategy of BCC and CBT and develop a reorganization plan by end-July 2018. - Adopt a clearance strategy of domestic arrears based on the audit results by end-October 2018. - Develop an action plan with timebound measures to improve VAT collection by end-December 2018, including timebound steps to set-up a VAT refund mechanism and a plan to reduce VAT exemptions. - Deliver the report of external consultant on BCC and CBT to the IMF staff and regional supervisory authorities (COBAC) by end-January 2019. - Based on the audit of 47 tax conventions, remove exemptions not in line with legal texts and ensure others are adequately implemented by end-February 2019. ### Data reporting requirements (Table 1. Summary of Data to be Reported) - Key reporting items, providers, and periodicity/target dates (selected highlights): - 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 — General Budget Directorate (DGB): Monthly, within 45 days after month–end. - Information on DAO regularization — Ministry of Finance and Budget: Quarterly, within 60 days after the end of the Quarter. - 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 (updated list of stock of arrears by creditor; repayments; rescheduling agreements at beginning of program) — Ministry of Finance and Budget: Monthly, within 45 days of month-end. - In case of missed external debt service payment, required within 14 days of occurrence: date of missed payment; amount of missed payment; creditor involved — Ministry of Finance and Budget. - Details on servicing of 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. - Monetary survey — BEAC: Monthly, within 45 days of month–end. - Provisional monetary data from the BEAC (exchange rates, foreign reserves, assets and liabilities of 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. - 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. - GDP and GNP — Macroeconomic Framework Committee (SG MFB): Annually, within 180 days of year end. - Balance of payments — BEAC: Annually, within 180 days of year end (preliminary data). - Gross external debt — Ministry of Finance and Budget (DGT): Annually, within 90 days of year end. ### Debt Sustainability Analysis (DSA) findings (summary) - Following restructuring of the debt to Glencore and progress in clearing external arrears: - Debt vulnerabilities declined significantly and the external risk rating has been upgraded to high. - The DSA shows that all debt burden indicators, except the debt-service-to-revenue ratio which has minor and temporary breaches, are below their respective thresholds in the baseline from 2018 onwards. - The debt-service-to-revenue ratio falls below the threshold in 2019 and remains so throughout the projection period, except for minor breaches in 2020 and 2021. - Overall, total public debt vulnerabilities are elevated although the present value (PV) of the public debt-to-GDP ratio remains on a downward trajectory. - The fixed primary balance scenario (keeping the primary deficit-to-GDP ratio unchanged from 2017) shows the debt ratio declining at a slower pace throughout the forecast period, underscoring the need to adhere to the prudent fiscal policy framework underpinning the IMF-supported program. - Adoption and implementation of an appropriate debt management strategy, while making progress in economic diversification, would further reduce vulnerabilities. - Institutional note: - Chad’s three-year average CPIA score for 2015–17 is estimated at 2.60, corresponding to a weak policy performance under the DSA framework. *Prepared by the staffs of the International Monetary Fund and the International Development Association; July 16, 2018.* ### 1. Chad’s external public debt burden increased considerably from 2008, mainly on ### 1. Chad’s external public debt burden increased considerably from 2008, mainly on ### Overview and headline figures - At March 2018, outstanding public and publicly guaranteed (PPG) external debt stood at nearly US$2.86 billion (26 percent of GDP) compared to US$1.6 billion (18 percent of GDP) at end-2008. - Commercial borrowings (oil sale advances) from Glencore in 2013 and 2014 were the main contributors to the rise in external public debt. - Falling oil prices over 2014-16 reduced revenues available to repay oil sales advances, increasing the debt service burden. ### External debt stock and composition (selected figures from Text Table 1) - Total external debt (end-March 2018): 2.9 (Millions of US$ column heading implies billions of CFA francs also shown). - Total (Billions of CFA francs) 2014–2018 (end-March): 2014: 1617; 2015: 1622; 2016: 1572; 2017: 1540; 2018 (end-March): (figure shown as continuation of table context). - Total (Percent of GDP) 2014–2018 (end-March): 2014: 29; 2015: 25; 2016: 27; 2017: 27; 2018 (end-March): 26. - Multilateral creditors (2014–end-March 2018, Millions of US$): 2014: 735; 2015: 375; 2016: 390; 2017: 385; 2018 (end-March): 405. - IMF: 11; 38; 77; 96; 122 (2014–2018 end-March). - World Bank/IDA: 397; 113; 110; 101; 99. - African Development Fund/Bank: 181; 69; 56; 56; 55. - Bilateral (2014–end-March 2018, Millions of US$): 334; 366; 370; 419; 396. - Paris Club official debt: 11; 2; ...; 25; 24. - Non-Paris Club official debt: 323; 364; 370; 394; 372. - China, People's Republic: 129; 144; 156; 132; 132. - Libya: 140; 158; 164; 150; 127. - India: 21; 27; 30; 27; 27. - Commercial debt (2014–end-March 2018, Millions of US$): 941; 875; 862; 768; 740. - Glencore loan accounts for about 98 percent of commercial debt stock in 2017. ### Debt relief, reprofiling, and restructurings - Chad benefited from US$756 million in debt relief after achieving the HIPC completion point in April 2015. This amount includes MDRI relief from the International Development Association and the African Development Bank, and forgiveness from the Paris Club; non-Paris Club members agreed to reschedule remaining amounts on IDA comparable terms. - In late 2015, the authorities signed a rescheduling agreement with Glencore to consolidate oil sale advances and extend maturities; however, that rescheduling increased the present value of the debt and proved insufficient. - In February 2018, authorities reached an agreement in principle with Glencore for a deeper restructuring which helped to reestablish debt sustainability. - The authorities rescheduled arrears (accrued in 2016) and upcoming maturities with China in April 2017. - Final debt restructuring agreement with Glencore was signed in June 2018 and will enter into effect as soon as all remaining standard procedural requirements are satisfied. The agreement includes a significantly longer maturity, lower interest rate and fees, and contingency mechanisms to adjust debt service depending on oil revenues. ### External payment arrears - External arrears accumulated in 2016 and 2017 due to liquidity challenges. - At end-2017 about US$102 million (1 percent of GDP) remained outstanding, mainly to bilateral creditors (Text Table 2). - The authorities reduced this stock to US$55 million by paying the amount owed to the Islamic Development Bank and through a rescheduling agreement with Libya. - Text Table 2: Estimated External Arrears (Millions of US dollars) - 2017 / 2018 (end-April) - Multilateral total: 6.7 / 0.2 - Islamic Development Bank: 6.5 / 0.0 - European Investment Bank: 0.2 / 0.2 - International Fund for Agriculture Development: (not separately quantified in table excerpt) - Bilateral total: 92.0 / 51.7 - Libya: 40.3 / 0.0 - India: 10.2 / 10.2 - Congo (in CFAF): 37.9 / 37.9 - Equatorial Guinea: 3.5 / 3.5 - Commercial total: 3.2 / 3.2 - Mega International Commercial Bank (Commercial bank from Taiwan Province of China): 3.2 / 3.2 - Total: 101.9 / 55.1 ### Domestic public debt developments (Text Table 3) - Total domestic debt (Billions of CFA francs): 2014: 708.9; 2015: 1185.0; 2016: 1482.2; 2017p: 1445.6. - Total domestic debt (Percent of GDP): 2014: 10.3; 2015: 18.3; 2016: 24.8; 2017p: 25.2. - Central Bank financing (share of total, percent): 31.4; 38.4; 33.3; 33.2 (2014–2017p). - In September 2017, all debt to the BEAC (for an amount of CFAF 479 billion) was consolidated and rescheduled into long-term securities with grace period of 4 years and maturity of 14 years. - In April 2018, domestic public debt rose by about 1 percent of GDP (CFAF 55 billion) as the government cleared the arrears of the cotton public enterprise to commercial banks; offsetting effects expected from efforts to reduce existing debt to banks. - Domestic arrears (share and amounts reported): 4 / 7.3 / 16.9 / 12.8 / 13.5 (table context indicates rows and shares across years). ### DSA baseline assumptions and outlook (UNDERLYING ASSUMPTIONS) - Baseline reflects policies and financing assumptions underlying the ECF arrangement and the Glencore debt restructuring. - Key assumptions: - Upwardly revised WEO oil price projection (April 2018). - Gradual recovery in oil production: production was significantly lower in 2017 than projected; production expected to begin to recover in 2018, remain below program request DSA projections up to 2020, then gradually increase as new extraction technologies and new fields come online. - Conservative interest rate (LIBOR) projections. - Policies to stabilize the fiscal position and support sustainable recovery in non-oil activity. - Clearance of external arrears in 2018 assumed. - Fiscal policy assumption: authorities remain committed to strengthen the fiscal position, maintain tight spending control, and improve non-oil revenue mobilization. - Arrears assumption: baseline includes gradual reduction in verified domestic arrears and start of modest payment of yet-to-be-audited arrears; efforts underway to clear arrears to official bilateral creditors and to the bank from Taiwan province of China. - Current account: current account deficit is smaller in the medium-term than under the first review DSA, mainly reflecting higher oil prices. - Selected macro projection comparisons (Table excerpt, percent of GDP or percentage change as labeled): - Real Growth: Program request: 0.6; 2.4; 3.1; 3.9; 3.6; 3.7. First Review: -3.1; 3.5; 2.8; 6.8; 4.8; 4.6. Current DSA: -3.1; 3.5; 3.6; 6.9; 4.8; 4.7. - GDP deflator in US dollar terms: Program request: -4.1; 1.5; 2.3; 3.2; 2.7; 2.3. First Review: 1.0; 12.4; 3.6; 4.1; 3.7; 3.6. Current DSA: 1.0; 8.7; 2.1; 4.1; 3.4; 3.6. - Budget Balance (Percent of GDP): Program request: 3.3; 2.7; 2.1; 2.3; 2.1; 2.4. First Review: 0.6; 2.1; 0.9; 1.7; 1.5; 2.3. Current DSA: 1.5; 2.8; 1.8; 2.9; 2.6; 3.3. - Net FDI (Percent of GDP): Program request: 3.2; 3.4; 3.7; 4.0; 4.0; 3.6. First Review: 3.7; 4.0; 4.4; 4.6; 4.7; 3.5. Current DSA: 3.7; 4.0; 4.3; 4.5; 4.6; 3.5. - Non-Interest Current Account Balance (Percent of GDP): Program request: -0.8; -1.9; -2.5; -2.7; -3.3; -2.7. First Review: -4.2; -3.6; -4.8; -4.2; -4.3; -4.0. Current DSA: -4.6; -0.3; -1.9; -2.2; -3.4; -3.8. ### Impact of Glencore restructuring on debt dynamics - The Glencore debt restructuring significantly improves debt dynamics, particularly the debt service-to-revenue ratio. - Under the restructuring, the debt service-to-revenue ratio: - Drops considerably over the next four years compared to pre-restructuring levels. - Is above the threshold in 2018 due to a delayed cargo shipment intended to service the debt (delayed from December 2017 to 2018 during negotiations). - Falls below the threshold in 2019 to 16.5 percent (around half of the pre-restructuring ratio), then increases slightly over the medium term, marginally breaching the threshold before falling significantly as the Glencore agreement's adjustment mechanism requires faster paydown when oil prices exceed the contract baseline price. - Under the new oil prices scenario, the cash sweep mechanism is triggered throughout the projection period and until 2026, leading to additional amortization and additional interest payments and faster repayment of the debt, which accelerates the decline in the PV of debt relative to the previous projection. ### Debt sustainability metrics and stress tests - Baseline external DSA outcomes: - The PV of public and publicly guaranteed external debt as a share of GDP declines gradually from 25.1 percent at end-2017 to under 10 percent by 2025. - The PV of debt-to-revenue ratio is 8.7 percentage points below the 200 percent threshold mark in 2018 and declines over the medium-term. - PV of debt to exports and debt service to exports measures remain comfortably below thresholds over the forecast horizon. - Stress test outcomes: - All debt indicators breach relevant thresholds under extreme shocks. - A shock to exports would push the PV of debt-to-exports and the debt service-to-exports ratios well above their thresholds. - The largest impact on PV of debt-to-GDP, PV of debt-to-revenue, and debt service-to-revenue comes from a combination shock where both growth and the primary balance fall below their historical average by half a standard deviation; all three indicators would rise sharply above their respective thresholds in 2018 and remain elevated well into the medium-term. - These results underscore sensitivity to fiscal and growth assumptions and confirm the need to adhere to the fiscal adjustment path under the IMF-supported program. ### Public DSA (total public debt) and vulnerabilities - PV of total public debt as a share of GDP at end-2017: 50.3 percent. - This is about 12.1 percentage points above the benchmark level associated with heightened public debt vulnerabilities for weak policy performance. - The PV of total public debt declines continuously over the medium-term, falling below the threshold by 2020 and eventually stabilizing at about 17 percent into the long-term. - A fixed primary balance scenario follows a similar trajectory but remains above the baseline, highlighting the need to maintain prudent fiscal policies. ### Risks to the outlook - Main downside risks include: - Potential for additional domestic debt and arrears not yet identified. - A rise in non-concessional borrowing. - Overruns in the wage bill. - Further deterioration in bank liquidity that could undermine rollover of domestic public debt. - Oil market developments pose both upside and downside risks; contingencies in the Glencore restructuring dampen the fiscal impact of oil price and production fluctuations. ### Conclusion (implications) - The Glencore restructuring and HIPC/MDRI-related relief restored debt sustainability prospects under baseline assumptions, but debt dynamics remain sensitive to oil revenues, fiscal policy adherence, arrears clearance, and potential additional borrowing. - Maintaining tight spending control, improving non-oil revenue mobilization, clearing arrears, and limiting non-concessional borrowing are critical to preserve the improvements in debt sustainability. *Source: Chadian authorities, selected creditors, and World Bank and IMF staff estimates.* ### 13. Chad’s external debt is assessed to be at high risk of distress and there are heightened ### 13. Chad’s external debt is assessed to be at high risk of distress and there are heightened ### Assessment of debt distress and vulnerabilities - Chad’s external debt is assessed to be at high risk of debt distress. - Total public debt vulnerabilities remain elevated, reinforcing the need to maintain prudent fiscal policy including on external and domestic borrowing. - The authorities broadly agreed with staff’s assessment and expressed commitment to further reduce debt vulnerabilities. ### Drivers of near- and medium-term debt dynamics - Rescheduling of the Glencore debt, projected recovery in the oil sector, and prudent fiscal policy result in debt burden indicators declining significantly over the near and medium terms. - The external debt trajectory remains sensitive to shocks on exports and to fiscal slippages. - Temporary external arrears continued to arise in the first half of 2018, indicating ongoing difficulties in managing external debt. ### Required institutional and policy actions - Much more attention is needed to clear all remaining external and domestic arrears. - Effective inter-agency coordination to strengthen the capacity to record and monitor public debt is very important to better manage public debt. - The need to maintain prudent fiscal policy, including on external and domestic borrowing, is emphasized. ### Key baseline indicators and projections (selected figures preserved exactly as in source) - External debt (nominal): 27.3 (2017); 26.2 (2018); 24.9 (2019); 22.2 (2020); 19.7 (2021); 17.2 (2022); 9.2 (2027 average); 9.2 (2037 average). - Change in external debt: 0.2 (2017); -1.2 (2018); -1.3 (2019); -2.7 (2020); -2.5 (2021); -2.5 (2022); -0.5 (2027 average); -0.1 (2037 average). - Identified net debt-creating flows: 2.9 (2017); -1.1 (2018); -0.4 (2019); -1.7 (2020); -1.0 (2021); -0.2 (2022); -0.2 (2027 average); 3.5 (2037 average). - Non-interest current account deficit: 5.3 (2017); 6.3 (2018); 4.6 (2019); 3.1 (2020); 4.6 (2021); 3.6 (2022); 4.0 (2027 average); 3.5 (2037 average). - Exports: 27.5 (2017); 33.7 (2018); 34.1 (2019); 35.3 (2020); 34.2 (2021); 34.5 (2022); 31.7 (2027 average); 17.9 (2037 average). - Imports: 41.4 (2017); 44.3 (2018); 44.5 (2019); 44.1 (2020); 43.0 (2021); 42.5 (2022); 36.4 (2027 average); 26.6 (2037 average). - Net FDI (negative = inflow): -4.3 (2017); 1.9 (2018); -3.7 (2019); -4.3 (2020); -5.0 (2021); -4.5 (2022); -4.6 (2027 average); -3.5 (2037 average). - Endogenous debt dynamics: 2.0 (2017); 0.2 (2018); 0.0 (2019); -0.7 (2020); -0.3 (2021); -0.3 (2022); -0.2 (2027 average); -0.1 (2037 average). - PV of external debt: 26.9 (2017); 26.2 (2018); 24.3 (2019); 22.8 (2020); 20.0 (2021); 17.6 (2022); 15.1 (2027); 7.3 (2037); 6.9 (2037 average in table). - PV of debt in percent of exports: 110.4 (2017); 95.3 (2018); 72.0 (2019); 66.8 (2020); 56.6 (2021); 51.3 (2022); 43.8 (2027); 22.9 (2037); 38.3 (2037 average in table). - PV of debt in percent of government revenues: 279.5 (2017); 242.6 (2018); 201.3 (2019); 188.9 (2020); 153.9 (2021); 134.6 (2022); 112.0 (2027); 52.4 (2037); 46.5 (2037 average in table). - Debt service-to-exports ratio (in percent): 8.9 (2017 baseline row shows multiple years; selected values) and projected values include 3.2 and 3.5. - PPG debt service-to-revenue ratio (in percent): 22.6 (2017); 19.3 (2018); 16.5 (2019); 18.3 (2020); 18.3 (2021); 18.5 (2022); 7.3 (2027); 4.3 (2037). - Total gross financing need (Billions of U.S. dollars): 0.3 (2017); 0.1 (2018); 0.2 (2019); 0.2 (2020); 0.2 (2021); 0.4 (2022); 0.2 (2027); 1.5 (2037). - Non-interest current account deficit that stabilizes debt ratio: 4.4 (2017); 4.2 (2018); 5.9 (2019); 6.3 (2020); 6.5 (2021); 6.0 (2022); 2.5 (2027); 4.8 (2037). ### Key macroeconomic assumptions (selected) - Real GDP growth (in percent): 4.1 (2017); 5.3 (2018); -3.1 (2019); 3.5 (2020); 3.6 (2021); 6.9 (2022); 4.8 (2027 average); 4.6 (2037 average). - GDP deflator in US dollar terms (change in percent): -0.1 (2017); 12.5 (2018); 1.0 (2019); 8.7 (2020); 2.1 (2021); 4.1 (2022); 3.4 (2027 average); 3.6 (2037 average). - Effective interest rate (percent): 2.7 (2017); 2.1 (2018); 4.1 (2019); 4.3 (2020); 3.5 (2021); 3.7 (2022); 3.3 (2027); 3.2 (2037). - Growth of exports of G&S (US dollar terms, in percent): -1.7 (2017); 19.6 (2018); 10.4 (2019); 37.8 (2020); 7.0 (2021); 15.4 (2022); 5.0 (2027); 9.5 (2037). - Growth of imports of G&S (US dollar terms, in percent): 1.9 (2017); 14.1 (2018); 2.9 (2019); 20.3 (2020); 6.3 (2021); 10.2 (2022); 5.7 (2027); 7.1 (2037). - Grant element of new public sector borrowing (in percent): 37.1, 37.4, 37.3, 37.6, 37.0, 37.1, 37.3, 37.4, 37.6 (values shown in projection rows). ### Selected public sector debt indicators (from public sector DSA tables) - Public sector debt (percent of GDP): 52.5 (2017); 49.2 (2018); 45.4 (2019); 40.8 (2020); 36.9 (2021); 33.1 (2022); 21.4 (2027 average); 19.9 (2037 average). - Foreign-currency denominated public sector debt: 27.3 (2017); 26.2 (2018); 24.9 (2019); 22.2 (2020); 19.7 (2021); 17.2 (2022); 9.2 (2027 average); 9.2 (2037 average). - PV of public sector debt: 51.5 (2017 historical/memo); projection series include 51.4, 47.3, 43.3, 38.6, 34.8, 31.0, 19.4, 17.6 (selected projection values in table). - Gross financing need: 5.8 (2017); 5.9 (2018); 5.2 (2019); 5.3 (2020); 4.0 (2021); 3.1 (2022); 2.0 (2027); 4.5 (2037). - PV of public sector debt-to-revenue and grants ratio (in percent): values include 410.2, 344.4, 288.3, 279.0, 238.3, 221.8, 192.0, 120.4, 105.0 across historical and projection columns. ### Stress tests and sensitivity analysis (high-level summary) - Stress tests show the most extreme stress scenarios for various indicators are driven by combination shocks, exports shocks, and one-time 30 percent nominal depreciations depending on the indicator. - Table 2 and Table 4 present alternative scenarios and bound tests for PV of debt-to-exports, PV of debt-to-revenue, PV of debt-to-GDP, debt service-to-exports ratio, and debt service-to-revenue ratio for 2017–37. - Examples of outcomes in sensitivity tables (selected entries preserved exactly as in source): - PV of debt-to-exports ratio baseline: 25 (2017); 23 (2018); 22 (2019); 19 (2020); 17 (2021); 14 (2022); 7 (2027); 7 (2037). - PV of debt-to-revenue ratio baseline: 91 (2017); 68 (2018); 64 (2019); 54 (2020); 44 (2021); 48 (2022); 41 (2027); 23 (2037). - PV of debt-to-GDP ratio baseline: 23 (2017); 21 (2018); 19 (2019); 11 (2020); 8 (2021); 14 (2022); 7 (2027); 7 (2037). - Debt service-to-exports ratio baseline: 9 (2017); 7 (2018); 6 (2019); 7 (2020); 7 (2021); 7 (2022); 3 (2027); 4 (2037). - Debt service-to-revenue ratio baseline: 23 (2017); 19 (2018); 16 (2019); 18 (2020); 18 (2021); 19 (2022); 7 (2027); 4 (2037). - Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline): 36 repeated across projection years. *Source: IMF staff estimates and projections as presented in the chapter.* ### 1. This supplement provides an update on Chad’s external arrears since the ### This supplement provides an update on Chad’s external arrears since the issuance of the staff report for the second review under the ECF arrangement. ### Update on external arrears and waiver request - Amount of new external arrears accumulated since the Board concluded the first review under the ECF arrangement: $7.740 million (an amount of $0.74 million was reported in the staff report). - These arrears accumulated in the past ten days for a very short duration and the vast majority ($7.615 million) was paid already. - The remaining amount is owed to Angola and the authorities expect to pay it shortly. - Given the relatively small amount of the arrears, staff continues to support the authorities’ request for a waiver of nonobservance of the performance criterion (PC) on the non-accumulation of external arrears. ### Supplementary Letter of Intent (N’Djamena, July 25, 2018) - The authorities communicated that the amount of new external arrears is $7.740 million, not $0.74 million as reported previously. - Letter signed by Issa Mahamat Abdelmamout, Minister of Finance and Budget. - Document dates: July 25, 2018. ### Statement by the Executive Director for Chad and Advisors (July 27, 2018) - Expression of gratitude for Fund support to the ECF-supported program. - Noted difficult environment: low oil revenues, difficult socio-economic situation, security challenges. - Progress highlighted: fiscal consolidation, addressing domestic and external arrears, mitigating banking system liquidity pressures, and debt restructuring agreement in principle with Glencore on June 28, 2018. ### I. Performance under the ECF arrangement - General assessment: - All but one performance criterion at end-December 2017 were met; only one indicative target was not met. - Continuous zero ceiling on new external arrears of the government and non-financial public enterprises has been missed. - Most indicative targets at end-March 2018 have been met; targets related to regularization of emergency expenditures procedures (DAO) and poverty reducing social spending were missed due to coordination problems, liquidity constraints, and civil servants strikes. - Fiscal front: - Performance in 2017 better than expected due to government efforts to control spending and increase non-oil revenues. - Collection of non-oil revenues improved in the first quarter of 2018. - Total expenditures in the first quarter of 2018 were in line with program targets. - Government repaid domestic arrears in the second half of 2017, significantly reducing the stock of domestic arrears. - External arrears: - Outstanding external arrears were reduced almost by half in the first four months of 2018. - A small amount of external arrears accumulated in the first half of 2018 due to fragility factors including coordination challenges and weaknesses in debt management and reporting exacerbated by staff turnover; these arrears have since been cleared. - Authorities determined to avoid recurrence and will strengthen debt management with Fund assistance. - Banking sector: - Government began implementing strategy to strengthen public banks, including terms of reference for review and preparation of a reorganization plan finalized in coordination with the Banking Commission, COBAC, and IMF staff. - Report on the reorganization plan expected to be finalized by end-January 2019. - Structural reforms and transparency: - UNCAC ratified. - List of tax and customs exemptions published on the Ministry of Finance website. - Government continued to publish quarterly notes on the oil sector in line with the template agreed with IMF staff. - Audit of domestic arrears launched in June (audit was due by end-October 2017). - Audit of transfers and subsidies expected to be launched before the end of the year. ### II. Policies for the remainder of 2018 and the medium-term - Macroeconomic outlook and risks: - Expected increase in oil production over the medium-term, higher FDI notably in the oil sector, and lower external debt service following the Glencore agreement reduce program risks and should improve Chad’s international reserves. - Economic activity expected to start to recover in 2018 reflecting projected favorable developments in the oil sector, increased investment spending, and progress in clearance of domestic arrears. - Fiscal policy stance: - Fiscal policy will remain the cornerstone of the program. - Authorities will strengthen non-oil revenue collection and contain current spending. - Oil revenue is expected to increase in 2018 owing notably to projected increase in production. - Government will aim to limit recourse to domestic financing and further reduce stock of recognized arrears in line with program objectives. - Over the medium term, efforts to increase non-oil tax revenues will be sustained, control the wage bill, and increase the share of other expenditure in non-oil GDP, particularly social and investment spending. - Authorities will pursue dialogue with social partners to preserve social cohesion and secure support for reform implementation. - Revenue and public financial management measures: - Create a unit dedicated to property tax collection in the tax administration. - Customs administration will aim to better control transit operations and import valuation. - Streamline tax exemptions to broaden the tax base. - Improve tax collection procedures and strengthen collaboration between tax and customs administrations. - Continue efforts to improve the expenditure chain and meet the target for regularization of DAO. - Monitor and report public spending on a regular basis. - Financial sector measures: - Address vulnerabilities in the banking sector in collaboration with BEAC and COBAC, including resolving payment arrears to commercial banks to alleviate liquidity pressures. - Review institutional and operational frameworks and the financial position and strategy of some of the largest public banks. - Improve monetary transmission mechanism and develop a vibrant interbank market; ongoing reform of the monetary policy framework conducted by BEAC is anticipated. ### III. Conclusion - Authorities remain committed to the ECF-supported program despite fragility-related hurdles. - Performance under the program has remained broadly on track. - Authorities renew commitment to program objectives and plan to continue reform efforts in coordination with regional authorities, notably BEAC and COBAC. - Authorities look forward to Fund policy advice, technical assistance, and support from development partners. *Prepared by the African Department in consultation with SPR and LEG; Approved by Dominique Desruelle and Yan Sun; July 25, 2018.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18260.pdf_