## cr18269 ## Source details **Canonical URL:** [cr18269](https://www.imf.org/-/media/files/publications/cr/2018/cr18269.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18269.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18269.pdf.json) --- ### Executive summary - While external buffers are being rebuilt, the CEMAC’s recovery remains fragile. - Gabon: 2017 real growth revised to 0.5 percent. - 2017 current account deficit narrowed with oil and mining exports. - 2017 overall fiscal deficit (cash basis) declined by 3¼ percent of GDP. - Public investment dropped to 1½ percent of GDP in 2017—a reduction of over ⅔ compared to 2016. - 12-month average consumer price inflation was 2.7 percent in December; average inflation around 2.5 percent through end-April 2018. - Total stock of external arrears at end-2017: CFAF 123.7 billion, 1.2 percent of GDP. - Public debt around 63 percent of GDP in 2017. - Authorities adopted a supplementary 2018 budget targeting an improvement in the non-oil primary balance of about 2½ percent of non-oil GDP and implemented five other prior actions. ### Recent developments and program performance - Activity and sectors: - Oil production underperformed; Q1 2018 oil production fell by 10.7 percent (y/y). - Commercial and service sectors contracted due to fiscal consolidation and drop in public investment. - Mineral extraction expanded; new manganese operations and additional port capacity. - Fiscal outturns and composition: - Total revenues declined by 0.7 percent of GDP; non-oil revenues dropped by over 2 percent of GDP. - Non-oil primary deficit improved from 11 to 9.7 percent of non-oil GDP between 2016 and 2017 (shortfall of ½ percent of non-oil GDP relative to the program target). - Non-oil primary basic balance worsened to about 8½ percent of non-oil GDP (program forecast reduction from about 7 to 6 percent). - Cashflow pressures: authorities did not clear all external arrears by end-2017 and accumulated new arrears during first half of 2018. - Program performance: - Two end-December 2017 quantitative performance criteria were missed, including the continuous PC on external arrears accumulation; all three indicative targets were missed; other PCs were met. - Authorities request waivers of nonobservance for the continuous PC on external arrears accumulation and two end-June PCs (non-oil fiscal balance and net government claims on the central bank), and waivers of applicability where data are not yet available. - Completion of the second review would make available a purchase equivalent to SDR 71.43 million. ### Economic outlook and risks - Short-term: - Baseline growth forecast for 2018 revised down to 2 percent (reduction of ¾ of a percentage point). - Growth rebound in 2018 expected given prospects for FDI and higher oil prices; medium-term favorable if planned policies implemented. - Key near-term constraints: - Low non-oil revenue collections. - Tight short-term liquidity conditions at the Treasury. - Downside risks: - Further arrears accumulation, lower oil prices, social resistance to spending cuts, lack of controls on net spending of special accounts, and reform overload. - Upside risk: - Improved terms of trade and recent oil discoveries could increase investment above baseline. ### Fiscal policy and consolidation measures (2018) - 2018 program envisages reduction in overall fiscal deficit (cash basis) of 3.1 percent of GDP. - Non-oil primary deficit to decline by about 2½ percent of non-oil GDP. - Consolidation balanced: non-oil revenue mobilization measures (1.5 percent of GDP) and expenditure measures (1.4 percent of GDP). - Selected revenue measures (Total Revenue Measures: CFAF 140.4 (1.5 percent of GDP)): - Clearance of expired suspensive customs procedures: CFAF 16.0 (0.2) - Elimination of the "programme de lutte contre la vie chere": CFAF 21.0 (0.2) - Taxation of public entities PIT: CFAF 30.0 (0.3) - Revised rates of excise taxes: CFAF 16.4 (0.2) - Census of tax exemptions and elimination of unjustified exemptions: CFAF 20.5 (0.2) - Implementation of the withholding personal income tax (5 percent) to customs: CFAF 2.1 (0.0) - (Other specific items listed with exact CFAF values and percent-of-GDP contributions) - Selected expenditure measures (Total Expenditure Measures: CFAF 132.7 (1.4 percent of GDP)): - Reduction of the wage bill (including cuts, retirement plan, audit of payroll, elimination of ghostworkers): CFAF 75.4 (0.8) - Reduction of special accounts' deficits via expenditure controls and IT systems: CFAF 54.1 (0.6) - Reduction of non-social transfers: CFAF 3.2 (0.0) - Contingencies and automatic adjustments: - 1.5 percent of non-priority appropriations under 2018 Budget Law (equivalent to 0.3 percent of GDP) cancelled as prior action. - Supplementary budget includes contingencies up to 20 percent of appropriations by budget line. - Automatic adjustment mechanism: underperformance of non-oil revenue of 5 percent or more in a quarter triggers equivalent expenditure adjustment next quarter (staff stress to protect priority social spending). ### Arrears, debt, and financing strategy - External arrears: - Total stock at end-2017: CFAF 123.7 billion, 1.2 percent of GDP; about ¾ of legacy arrears cleared but new arrears of CFAF 77.5 billion accumulated in 2017 (most before program approval). - Authorities cleared all external arrears to official bilateral creditors and multilateral and guaranteed claims of commercial creditors in July ahead of second review; remaining non-guaranteed commercial arrears approximately CFAF 37.8 billion by end-June to be cleared by end-2018. - Domestic arrears and domestic debt: - Total domestic debt declined from 26.8 to 24.0 percent of GDP in 2017. - Remaining stock of domestic arrears at end-2017: about 5 percent of GDP. - Government operationalized the “Club de Libreville” payment plan; memo items reported as 3.5 (with subcomponents 0.4 and 0.02.6 in Text Table). - Public debt and DSA: - Public debt-to-GDP ratio: 63 percent (current level); baseline forecast to decline to about 43 percent by 2023. - Total public debt (end-2017): CFAF 5,552.8 billion (US$9.8 billion) including domestic arrears. - Gross external debt amounted to 40.6 percent of GDP (includes external arrears worth 1.4 percent of GDP). - Debt drivers: public investment, PSGE, spending for African Cup of Nations, borrowing after oil price shock. - Financing assurances and schedule: - Multilateral donors provided assurances for about US$560 million in budget support disbursements (timing concentrated in Q3–Q4). - IMF disbursements expected: US$98 million in July 2018 and US$98 million by end-December (as reported); Gabon quota: SDR 216.0 million. - Schedule of disbursements under the Extended Arrangement presented with exact entries; completion of second review would release SDR 71.43 million purchase. - Cashflow and liquidity management: - Treasury float at end-2017: 0.9 percent of GDP (target 0.6 percent). - Limits: accumulation of new Treasury float limited to 15 percent of total expenditure on goods and services, transfers, and domestically-financed investment. - VAT refund arrears to be repaid through 2020 (elsewhere note: VAT arrears repaid through 2021—text contains both repayment-through years; source text includes both statements). - Active measures: monthly cashflow updates, issuance of short-term T-bills (maturities of less than a year), TSA consolidation, Club de Libreville repayments (CFAF 285.7 billion repayable in 74 monthly installments of CFAF 5 billion, receivables bear net interest at 5.5 percent per annum). ### Financial sector vulnerabilities and banking sector measures - NPLs and banking metrics: - Loans in arrears increased from 9.7 percent of total loans at end-2016 to 14 percent at end-2017. - Bank deposits fell by about 9 percent. - Provisioning of non-performing loans declined by about 13½ percent. - Credit provision contracted nearly 11 percent in March 2018 (y/y); elsewhere credit provision worsened from -4.1 percent in December 2017 (y/y) to -9.0 percent in April 2018 (y/y) and later improved—source contains multiple exact values. - Public banks: - Three public banks in distress; two in liquidation and one under management. - Government to hire an international consultant to assess resolution/restructuring options; for two banks in liquidation, government agreed to abstain from decisions until plan finalized. - Government owns 75 percent of BICIG shares and plans to divest controlling stake. - SME financing and privatization: - Direct loans from Banque Gabonaise de Developpement (BGD) largely ineffective; authorities plan indirect channeling of funds to SMEs through commercial banks and consider a guarantee fund. - Privatize non-strategic 75 percent shareholding in BICIG by end-March 2019; hire a reputable firm by end-September 2018 to launch process. ### Structural fiscal and PFM reforms - Exemptions and revenue administration: - Exemptions account for 65 percent of customs receipts and 19 percent of total tax revenues collected. - Measures: eliminate unjustified exemptions; census and annex to Supplementary Budget Law listing exemptions with economic, budgetary, and social impact. - Implement VAT deferred payment mechanism (test with two oil companies and national mining company) and strengthen joint tax/customs audits. - PFM and expenditure controls: - Deploy expenditure-tracking software (E-BOP) across provinces; adapt local-level systems. - Action plan to upgrade financial information systems of public entities; create a unit to compile financial data from these entities. - Repatriate accounts at CDC into TSA; close commercial bank accounts per census and decree. - Publication commitments: quarterly fiscal reports and report on stock/composition of arrears as of end-December 2017. - Public investment and procurement: - Cost-benefit analyses for projects above CFAF 20 billion to be presented with 2019 draft budget law. - Reduce number of semi-autonomous agencies managing special accounts and reintegrate activities into central government operations. - Commit to publish quarterly reports on public procurement and PPPs and to use competitive procedures. ### Social spending and protection - 2017 pro-poor spending underperformed due to delays; authorities committed to improve 2018 outcomes through education facility program. - World Bank-supported performance-based financing to track social spending outcomes. - National household survey due in September 2018 to improve targeting of social protection program (GEF). - Authorities agreed to remove the salary component of social safety nets and expand priority spending floor to include primary/maternal care facilities and job training centers. - Text Table 5 (Priority Spending Floor Under the EFF Arrangement) lists exact program and actual allocations across Health, Education, and Safety nets and totals (e.g., Total: 151.6 (Prog.), 58.5 (Act.), 214.3 (Prog.)). ### External sector, exchange rate assessment, and reserves - Terms of trade and exports: - Oil and manganese prices increased by approximately 29 percent in 2017. - Oil export revenues projected CFAF 2,234 billion (US$ 3.8 billion) in 2017 (up from CFAF 1,941 billion (US$ 3.3 billion) in 2016). - External current account deficit declined from 10 percent of GDP in 2016 to approximately 5 percent in 2017; projected to narrow further in 2018 and turn positive by 2021. - Reserves and external sustainability: - Imputed international reserves decline moderated from loss of 9 percent of GDP in 2016 to less than 1 percent in 2017; decline continued through March 2018 with preliminary reversal in April and May. - BEAC reserves cover under 2.5 months of prospective imports. - Exchange rate valuation: - Staff judges REER overvaluation about 9 to 16 percent depending on method; Bems and Carvalho methodology and EBA-lite assessments presented with exact CA and REER gap metrics (e.g., Real Exchange Rate Gap: 16.6%10% / 15.6%10% and CA Actual: -4.9% / -4.9% in provided table). - Medium-term trade balance norm scenarios and overvaluation percentages provided (e.g., Overvaluation (Percent): -2.8 / 1.4 / 6.2 under three scenarios). ### Program monitoring, conditionality, and structural benchmarks - Program monitoring: prior actions, semi-annual reviews, quantitative performance criteria (QPCs), continuous PCs, indicative targets, and structural benchmarks outlined with exact reporting and adjuster rules (e.g., QPC adjuster for external program disbursements up to CFAF 80 billion; Brent baseline US$73.258 per barrel). - Reporting requirements: monthly data to IMF within six weeks of month end; external arrears reporting within three weeks. - Prior actions completed (selected, with dates): - Cancellation of 1.5 percent expenditure appropriations equivalent to 0.3 percent of GDP. Met (July 11, 2018). - Senate adoption of 2018 Supplementary Budget. Met (June 29, 2018). - Adapt E-BOP to new expenditure execution procedure and train staff. Met (July 10, 2018). - List central government entities whose funds are not on the TSA. Met (July 11, 2018). - Transmit letter to FGIS to put hold on acquisitions. Met (July 10, 2018). - Elimination of duty exemptions under the “programme de lutte contre la vie chère”. Met (July 10, 2018). - Structural benchmarks and timelines: numerous SBs with exact timeframes and statuses, including audits of 2015–2016 arrears (audit to be completed by end-September 2018), deployment of E-BOP, VAT deferred payment mechanism (end-October 2018), and creation of single unit for financial oversight (end-September 2018). ### Staff views, recommendations, and conditionality for future reviews - Staff assessment: program performance weak since December 2017 but authorities took decisive corrective action; staff supports completion of second review and waivers of nonobservance/applicability where appropriate. - Staff recommends granting a waiver for nonobservance of end-June 2018 quantitative and continuous performance criteria based on corrective measures, regional policy assurances, financing assurances review completion, and reasonable capacity to repay. - Completion of the third EFF review to be conditional on implementation of critical union-level policy measures established in June 2018 union-wide background paper. - Financing under the EFF: schedule of disbursements presented with exact SDR and monetary figures; total scheduled disbursements under the Extended Arrangement presented in the schedule entries. *IMF staff report: cr18269* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - While external buffers are being rebuilt, the CEMAC’s recovery remains fragile. - In Gabon, macroeconomic conditions are slowly improving: - 2017 real growth revised to 0.5 percent. - Oil and mining exports helped narrow the 2017 current account deficit. - Fiscal developments in 2017: - Overall fiscal deficit (cash basis) declined by 3¼ percent of GDP. - The adjustment relied on large cuts in public investment. - Weak program implementation contributed to underperformance of non-oil revenues and overruns on current spending. - Fiscal slippages aggravated cashflow pressures and contributed to the authorities’ failure to clear all external arrears at end-2017. - The authorities recently announced a strong package of fiscal consolidation measures. ### Recent developments and program performance - Activity and sectoral performance: - Economic activity appears to be stabilizing in 2017. - Oil production underperformed, partly due to work stoppages at some firms. - The commercial and service sectors fell into recession due to fiscal consolidation, especially the large drop in public investment. - Mineral extraction expanded (new manganese operations and additional port capacity); agri-industry and timber sectors performed robustly. - Inflation: - 12-month average consumer price inflation was 2.7 percent in December (a decline of 0.7 percentage points since June). - Average inflation remained around 2.5 percent through end-April 2018. - External sector: - Higher oil and manganese prices (both increasing by about 30 percent, y/y) improved terms of trade. - External current account deficit declined from 10 percent of GDP in 2016 to around 5 percent in 2017. - Imputed international reserves at the BEAC: reserves decline moderated from a loss of 9 percent of GDP in 2016 to less than 1 percent of GDP in 2017; the decline continued through March 2018, but preliminary data suggest reversal in April and May. - Fiscal composition and other fiscal indicators: - Public investment dropped to 1½ percent of GDP in 2017—a reduction of over ⅔ compared to 2016—largely due to a shortfall in external project financing associated with the failure to clear external arrears. - Total revenues declined by 0.7 percent of GDP, including a drop of over 2 percent of GDP in non-oil revenues. - Non-oil primary deficit improved from 11 to 9.7 percent of non-oil GDP between 2016 and 2017—a shortfall of ½ percent of non-oil GDP relative to the program target. - The non-oil primary basic balance worsened to about 8½ percent of non-oil GDP (program objectives forecast a reduction from about 7 to 6 percent). - Cashflow pressures: authorities did not clear all external arrears by end-2017 and accumulated new arrears during the first half of 2018. - External arrears: - Total stock of external arrears at end-2017 stood at CFAF 123.7 billion, 1.2 percent of GDP—largely arrears to commercial creditors, split equally between guaranteed and non-guaranteed claims. - About ¾ of the stock of arrears from previous years has been cleared, but new arrears accumulated in 2017 of CFAF 77.5 billion—most accumulated before program approval in June 2017. - During Q1 2018, some legacy arrears were paid and a debt reprofiling arrangement was negotiated with two commercial creditors; new arrears were also accumulated. - Reasons for arrears and repayment difficulties: - Liquidity conditions generated by fiscal slippages. - Delayed budget support disbursements, with most expected disbursements arriving only in December. - Technical debt servicing difficulties related to accumulated legacy arrears. - Arrears accumulation rate declined in 2017: 17 percent of expected 2017 debt service fell into arrears vs. 44 percent in 2016. - Public debt and financing: - Public debt around 63 percent of GDP in 2017—a reduction of about 1 percentage point of GDP compared with 2016. - Weak spending controls beyond the central government: net lending and net spending of special accounts grew substantially relative to 2016, suggesting PFM weaknesses in semi-autonomous entities not connected to expenditure-tracking software. ### Economic outlook and risks - Short-term outlook remains challenging. - Growth expectations: - A growth rebound in 2018 is expected given good prospects for FDI and higher oil prices. - Key near-term constraints: - Low non-oil revenue collections. - Tight short-term liquidity conditions at the Treasury. - Needed actions to support the outlook: - Decisive implementation of the recently announced fiscal consolidation plan. - Timely clearance of domestic arrears to strengthen banks’ balance sheets and increase credit to the private sector. - Clearance of external arrears to maintain Gabon’s creditworthiness and access to external financing. - Political and social risks: - Political risks increased after the Constitutional Court ordered dissolution of Parliament following failure to organize legislative elections by end-April. - Government resigned but President reappointed the same Prime Minister and named a new Minister of Economy. - New government established an economic task force to prepare a supplementary 2018 budget with new fiscal consolidation measures. - Social tensions could return with difficult adjustment measures, underscoring need for outreach and dialogue across political spectrum and civil society. ### Program status, policies, and fiscal measures - Performance against program targets: - Two end-December 2017 quantitative performance criteria were missed, including the continuous performance criterion on external arrears accumulation. - All three indicative targets were missed. - Other quantitative performance criteria were met. - Progress initially slow on key structural benchmarks, but many have now been met. - With delay in Executive Board consideration of the review, end-June 2018 performance criteria have become controlling. - Authorities’ requests to the IMF: - Requesting a waiver of nonobservance for the continuous performance criterion on external arrears accumulation and two end-June performance criteria (non-oil fiscal balance and net government claims on the central bank) which, based on available information, have not been observed. - Requesting a waiver of applicability for other end-June performance criteria for which data are not yet available (no indication they may have been missed). - Fiscal corrective measures: - Addressing tight liquidity and restoring programmed fiscal adjustment requires additional fiscal effort. - 2018 supplementary budget (adopted by the Senate on June 29) targets an improvement in the non-oil primary balance of about 2½ percent of non-oil GDP. - In addition to the supplementary budget, authorities implemented five other prior actions that show increased commitment to the program; these actions entail decisive reforms to boost non-oil revenue collections and increase transparency and efficiency of public spending. - Monetary and financial support: - Program supported by union-level efforts to maintain appropriate monetary policy stance, build up regional reserves and promote financial stability. ### Staff views and IMF considerations - Staff assessment: - Program performance since December 2017 had been weak, but authorities have taken decisive corrective action with approval of a supplementary budget to place public finances on a sustainable path. - Several delayed structural reforms have now been implemented. - Given the strength of corrective actions, staff supports completion of the second review and the authorities’ request for waivers of nonobservance and waivers of applicability of the relevant end-June 2018 performance criteria. - Financing conditionality: - Completion of the second review would make available a purchase equivalent to SDR 71.43 million. *IMF staff report: EXECUTIVE SUMMARY (cr18269)* ### 9. The stock of government domestic debt (including arrears) was reduced in 2017. Total ### 9. The stock of government domestic debt (including arrears) was reduced in 2017. Total ### Domestic debt and arrears: key findings - Total domestic debt declined from 26.8 to 24.0 percent of GDP (Text Table 2). - The decline was largely due to a repayment of about 2.4 percent of GDP of domestic arrears (mostly on the exceptional budgetary float), as well as of moratorium debt. - This decline was about 1½ percent of GDP less than the program target, given lower settlement of VAT arrears and an upward adjustment in the stock of moratorium debt. - Remaining stock of domestic arrears at end-2017: about 5 percent of GDP; government decided in April 2018 to operationalize a new payment plan known as the “Club de Libreville” arrangement. - Memo items for the Club de Libreville: 3.5 (with subcomponents listed as 0.4 and 0.02.6 in the Text Table). ### Financial sector vulnerabilities - Loans in arrears increased from 9.7 percent of total loans at end-2016 to 14 percent at end-2017 (Text Figure 5). - Bank deposits fell by about 9 percent. - Provisioning of non-performing loans declined by about 13½ percent (Table 6). - Credit provision contracted nearly 11 percent in March 2018 (y/y). - Capital adequacy ratios complied with prudential norms mainly due to a decline in the risk-weighted assets of banks. - The government program for domestic arrears has not been published; dialogue with the private sector is ongoing. - Incomplete information circulated by the authorities concerning the structural benchmark on assessment of options for resolution/restructuring of the three distressed public banks. ### Program performance (end-2017 and through end-June 2018) - Three end-2017 performance criteria (PCs) were met at end-December 2017, including those concerning domestic and external financing. - The target for the non-oil primary balance and the continuous PC on external arrears were missed. - With the postponement of the Executive Board consideration of the review, the end-June 2018 performance criteria have become controlling. - Staff project the floor on the non-oil primary fiscal balance and the ceiling on net government claims on the central bank will not be observed because of tight liquidity from lower revenue collections. - The three indicative targets on non-oil revenues, social spending, and domestic arrears were missed at end-December 2017 by relatively large margins. - Progress on structural benchmarks through end-March 2018 was weak: measures to avoid accumulation of new arrears were not implemented on schedule, including adaptation of the expenditure control system to cover local administrations. - Initial steps taken: produce quarterly fiscal reports and monitoring of arrears; launch audit/validation of 2015 and 2016 extrabudgetary spending — but end-March deadlines were missed. - Delayed measures: improve cash management, prepare cost-benefit analysis for new large investment projects, produce annex to the 2018 budget law on tax exemptions. - Tax and customs IT systems were adapted to eliminate illegal exemptions, but some steps remain pending to make reforms fully operational. ### Outlook and risks - Baseline growth forecast for 2018 revised down to 2 percent—a reduction of ¾ of a percentage point. - Two key factors for the markdown: - Growth in oil production revised down to zero; Q1 production drop of 10.7 percent (y/y). New fields expected by end Q3 to moderate losses; higher international oil prices may stabilize production in 2018. - Non-oil sectors show a two-speed economy: traditional sectors (construction, commerce and other services) weak; agribusiness, forestry, non-oil commodities, and the special economic zone (SEZ) showing rapid growth. - Medium-term outlook: relatively favorable if planned policies are implemented. Large FDI flows into new sectors could reduce dependence on oil and public spending. - Public debt projection: improvement in stock of public debt (including domestic arrears) could fall below 55 percent of GDP by the end of the program period, assuming continued investment to optimize existing oil production (consistent with overall output declines of 1.3 to 2 percent per annum over the medium term). - Downside risks (short term and other): - Urgent measures required to address tight liquidity, avoid further arrears, and redress fiscal slippages. - Without policy adjustments, deficits likely to be accommodated through accumulation of new arrears and minimal arrears clearance, compromising financial stability and growth. - Lower oil prices would increase short-term liquidity constraints and delay repayment of domestic arrears. - Other risks: social resistance to spending cuts, protracted fiscal adjustment impact on growth, lack of adequate controls on net spending of special accounts, risk of reform overload. - Upside risk: improved terms of trade and recent oil discoveries could increase investment above baseline. ### Economic policies for 2018 — Fiscal policy: preserving fiscal sustainability - Program aims to ensure debt sustainability, rebuild fiscal buffers, and avoid accumulation of arrears. - In 2018, the program envisages a reduction in the overall fiscal deficit (cash basis) of 3.1 percent of GDP—a reduction similar to the one observed in 2017 and about 1 percent of GDP higher than the fiscal effort planned at the time of the original program request. - The non-oil primary deficit will decline by about 2½ percent of non-oil GDP. - Fiscal consolidation balanced between non-oil revenue mobilization measures (1.5 percent of GDP) and expenditure rationalization measures (1.4 percent of GDP), with emphasis on reducing the wage bill and spending on special accounts. - Specific fiscal measures and estimated yields/savings (Text Table 4; as presented): - Total Revenue Measures: CFAF 140.4 (1.5 percent of GDP) - Clearance of expired suspensive customs procedures: CFAF 16.0 (0.2) - Elimination of the "programme de lutte contre la vie chere": CFAF 21.0 (0.2) - Clearance of customs warehousing arrangements: CFAF 6.0 (0.1) - Revision of taxation modalities of manganese and wood exports (actual cost): CFAF 5.9 (0.1) - Taxation of public entities PIT: CFAF 30.0 (0.3) - Strengthening of quality and frequency of CIT controls: CFAF 10.0 (0.1) - Taxation of luxury vehicles: CFAF 1.3 (0.0) - Taxation of fund transfers: CFAF 3.0 (0.0) - Revised rates of property transfers taxes: CFAF 4.0 (0.0) - Revised rates of excise taxes: CFAF 16.4 (0.2) - Census of tax exemptions and elimination of unjustified exemptions (incl. removal of tax exemptions applied to public procurement): CFAF 20.5 (0.2) - Implementation of the withholding personal income tax (5 percent) to customs: CFAF 2.1 (0.0) - Broadening the tax basis of the single combined tax for activities with a turnover of less CFAF 35,000 (CIT): CFAF 4.2 (0.0) - Total Expenditure Measures: CFAF 132.7 (1.4 percent of GDP) - Reduction of the wage bill (reduction of bonuses, immediate cuts in salaries, reduction of housing allowances, implementation of a voluntary retirement plan, audit of the payroll, elimination of ghostworkers): CFAF 75.4 (0.8) - Reduction of non-social transfers by strengthening financial oversight on units and agencies benefiting from these transfers: CFAF 3.2 (0.0) - Reduction of special accounts' deficits by strengthening expenditure controls through the implementation of adequate IT systems in agencies or administrative units managing these accounts, and...: CFAF 54.1 (0.6) - Additional details: - The program will launch an audit of the payroll and introduce controls over employee attendance to eliminate ghost workers, including physical presence tests to collect payroll payments. - Staff highlighted importance of protecting salaries in social sectors and ensuring no deterioration in service delivery. - Structural reforms to tighten controls on special accounts spending include elimination of a large number of semi-autonomous agencies managing these accounts and reintegration of these activities into central government operations. - Public investment will increase from 1.5 percent of GDP in 2017 with a reprioritization toward specific growth corridors, particularly road construction. *Sources: Gabonese authorities; and IMF staff estimates.* ### 18. The authorities have also introduced a stronger system to manage contingencies and ### 18. The authorities have also introduced a stronger system to manage contingencies and ### Managing contingencies and fiscal risks - First, 1.5 percent of non-priority appropriations under the 2018 Budget Law equivalent to 0.3 percent of GDP will be immediately cancelled (prior action). This short-term measure will contribute to a reduction in expenditure pressures before the new spending ceilings associated with the 2018 Supplementary Budget are in place. - Second, the supplementary budget includes large contingencies of up to 20 percent of the appropriations depending on the budget line, which will limit the capacity of sectoral ministries to fully execute their budgets in cases of unexpected revenue shortfalls. - In addition, the budget includes an automatic adjustment mechanism whereby an underperformance of non-oil revenue collection of 5 percent or more in a given quarter (relative to the program baseline) would require an equivalent expenditure adjustment in the succeeding quarter. Staff highlighted the importance of avoiding automatic adjustment cuts in priority social spending programs and limit the impact on public investment. ### Tight financing constraints and implementation risks - Need to avoid slippages in expenditure rationalization plans to prevent the severe cash constraints observed in 2017; all fiscal adjustment effort for 2018 will fall on the second semester. - Risks identified: - Wage and employment measures may take longer to achieve envisaged reductions. - Spending on special accounts could be higher than projected given coordination challenges. - Encouraging steps: requiring physical presence tests to retrieve salary payments (to control ghost workers) and announcing elimination and reintegration of a large number of government agencies into regular ministries (specific operational plans not yet available). - Coordination and financing actions required: - Enforce budgetary contingencies and automatic spending rules, requiring stronger coordination between the Ministry of Economy and the Budget Ministry. - Treasury to mobilize resources in the domestic debt market according to a well-established calendar of issuances, consistent with within-year cash flow needs and annual fiscal financing needs. - Ensure privatization plans (a key part of financing assumptions for 2018) are executed without further delay; authorities agreed to prepare a privatization plan based on time-bound actions by end-September (MEFP ¶17). - Tax Authority to proceed expeditiously with recovery of tax arrears: 40 percent of the current stock of recoverable tax arrears will be collected by September 2018 (new structural benchmark). - Authorities committed to requesting a hold on planned acquisitions by the sovereign wealth fund (FGIS) (MEFP ¶14). ### Managing Domestic and External Arrears - Despite efforts to reduce arrears at end-2017, substantial problems reemerged in 2018. A firm and timely arrears clearance strategy plus strong fiscal measures and contingency planning are required to prevent further accumulation. - External arrears actions: - Authorities cleared all external arrears to official bilateral creditors as well as multilateral and guaranteed claims of commercial creditors in July ahead of the completion of the second review. - Arrears owed to remaining commercial creditors, whose claims are not guaranteed (approximately CFAF 37.8 billion by end-June), will be cleared by end-2018; authorities are making good-faith efforts to inform these creditors about their arrears clearance plan. - Cash-flow planning and liquidity management: - Authorities started regular meetings to update monthly cash flow plan of revenues, expenditures, loan disbursements, debt repayment schedules, and the remaining arrears clearance plan; Directors of the Treasury and the Debt Unit hold monthly meetings and senior staff meet weekly. - Over time, build a reasonable buffer into the cash-flow plan and proactively mobilize funds (for example issuing short-term T-bills with maturity of less than a year) to reduce excessive reliance on cash balances. - Domestic arrears strategy: - Stock of Treasury float will be cleared by end 2018. - Accumulation of new float will be limited to 15 percent of total expenditure on goods and services, transfers, and domestically-financed investment. - Stock of VAT refund arrears will be gradually repaid through 2020. ### Accelerating structural fiscal reforms - Progress to date limited; need to accelerate reforms to reduce and streamline tax exemptions and address fraud. Fragmentation of cash management across multiple bank accounts undermines control and transparency. - Specific actions and commitments: - Budget formulation: prepared updated debt strategy and analysis of tax exemptions with economic, budgetary, and social impact. - Tax audits: audits ongoing to regularize tax situation of importers not subject to VAT (those with transactions that exceed the VAT liability threshold); resulting tax adjustments will be completed by end-December (MEFP ¶26). - Customs administration: sensitization campaigns on upfront payment for clearing customs taxes completed; list and selection criteria for importers eligible for other forms of payment being validated (MEFP ¶25). - Expenditure-tracking and transparency: expenditure-tracking software at local level will be adapted to the new expenditure procedure and fully deployed across all provinces before the completion of the review (MEFP ¶20); census of central government entities with funds not deposited on the Treasury Single Account (TSA) to be finalized. - Arrears monitoring: independent audit of 2015 and 2016 domestic arrears launched; report to be issued by end-September 2018. Report on stock and composition of arrears as of end-December 2017 will be published with the fiscal report on budget execution (MEFP ¶21). - Public investment management: cost-benefit analyses for major investment projects will be presented with the 2019 draft budget law for any projects exceeding CFAF 20 billion (MEFP ¶33). ### New structural reforms to consolidate fiscal consolidation - Enhanced expenditure controls: - Action plan to upgrade financial information systems of public entities and departmental agencies, including those managing special accounts. - Create a unit to compile financial data from these entities and publish a new decree establishing harmonized statutes for public administrative institutions (MEFP ¶30). - Cash management: - Intensify efforts to streamline cash management, close and repatriate accounts opened at Caisse des Dépôts to the TSA. - Include in the 2019 budget law a deferred VAT payment mechanism to be tested with the two oil companies and the national mining company (MEFP ¶22). ### Medium-term structural reforms - Revenue administration: - Implement customs multi-modal portal and finalize text establishing the Gabonese Revenue Authority (MEFP ¶27–28). - Rationalization of exemptions: - Accelerate elimination of unjustified tax exemptions and strengthen joint audits by tax and customs staff (MEFP ¶23–24). Increase frequency of audits and strengthen taxpayer identification and monitoring (MEFP ¶26). - PFM reforms: - Continue progress toward full implementation of program budgeting reform in compliance with CEMAC directives on PFM (MEFP ¶32) to improve budget preparation, controls on execution, fiscal reporting, and access to budget information. ### Safeguarding social spending - Pro-poor spending underperformed in 2017 largely due to delays in the education investment program; authorities committed to improved outcomes in 2018 through a new program to improve education facilities. - Social protection targeting and monitoring: - With World Bank support, social spending outcomes are being tracked through performance based financing to strengthen cash allocation, service delivery, and facilitate quarterly reporting of outcomes. - Authorities will use the national household survey (due in September 2018) to improve targeting of the social protection program (Gabonais Economiquements Faibles, or GEF) (MEFP ¶34). - Authorities agreed with the World Bank to remove the salary component of social safety nets and expand the priority spending floor under the program to include investment in primary/maternal care facilities and job training centers. - Reporting commitments: - Authorities agreed to produce quarterly fiscal reports including a focus on social expenditure on a regular basis (MEFP ¶31-32). - Staff highlighted importance of respecting legal provisions that limit modifications of the budget composition during execution to ensure allocations to social expenditure comply with the budget law. ### Addressing banking sector weaknesses - Resolution of three public banks in financial distress should be expedited to minimize fiscal costs; two banks already in liquidation and one under management. - Authorities to hire an international consultant to assess options and prepare resolution plans; for the two banks in liquidation, government agreed to abstain from decisions (including paying indemnities) until the plan is finalized (MEFP ¶36-37). - Concerns about government acquisition of additional shares in BICIG: government now owns 75 percent of its shares, posing risks of undue political influence on lending decisions; authorities view this as transitory and plan to divest controlling stake. - Non-performing loans trend is a key vulnerability: - Capital adequacy ratios meet minimum standards, but progress on legal and supervisory framework for NPLs has been limited. - Authorities agreed to expedite reforms: training of specialized judges, establishment of commercial courts, modernization of the real estate credit registry; a new timetable and draft plan with objectives, responsible parties, and monthly monitoring established (MEFP ¶38). - Implementation of domestic arrears repayment plan expected to buttress financial sector stability; establish court and out-of-court mechanisms for NPLs. ### Financing and SME development - Improving SME financing to support economic diversification and financial inclusion: - Direct loans from Banque Gabonaise de Developpement (BGD) largely failed to catalyze private sector growth; authorities to explore indirect channeling of funds to SMEs through commercial banks (MEFP ¶39). - Considering setting up a guarantee fund for SMEs to (i) consolidate all Gabonese Funds and initiatives in favor of SMEs; and (ii) support SMEs in preparing funding and business plans to facilitate access to credit. ### Reforms to foster private sector development - External position in 2018 assessed as weaker than implied by fundamentals; Special Economic Zones and PPPs used to attract private investment in agri-business, forestry, and mining. - Structural reform priorities: - Strengthen enabling business environment, judicial system, and operationalize arbitration chamber for business disputes (expected by September 2018). - Improve training of special judges, establish commercial courts, modernize the credit registry. - Operationalize the EITI interest group; progress toward EITI membership has stalled (MEFP ¶41–42). ### Key figures and thresholds cited - 1.5 percent (cancellation of non-priority appropriations under 2018 Budget Law) - 0.3 percent of GDP (equivalent of the 1.5 percent cancellation) - up to 20 percent (contingencies in the supplementary budget) - 5 percent (threshold for automatic adjustment mechanism on non-oil revenue underperformance) - 40 percent (share of current stock of recoverable tax arrears to be collected by September 2018) - approximately CFAF 37.8 billion (external arrears to remaining commercial creditors by end-June) - 15 percent (limit on accumulation of new Treasury float as share of specified expenditures) - CFAF 20 billion (threshold for cost-benefit analyses for major investment projects to be presented with 2019 draft budget law) - 75 percent (government ownership of BICIG shares) - Maturities of less than a year (short-term T-bills cited as liquidity management instrument) - VAT refund arrears to be repaid through 2020 - National household survey due in September 2018 ### Text Table 5 — Priority Spending Floor Under the EFF Arrangement (Billions of CFA francs) - Health Total: 26.6 (Prog.), 14.3 (Act.), 41.9 (Prog.) - Goods and services: 14.6 (Prog.), 11.2 (Act.), 11.3 (Prog.) - Transfers: 12 (Prog.), 3.1 (Act.), 6.5 (Prog.) - Investment: ... (Prog.), ... (Act.), 24.2 (Prog.) - Education Total: 76.4 (Prog.), 7.8 (Act.), 91.2 (Prog.) - Goods and services: 10.9 (Prog.), 7.3 (Act.), 15.3 (Prog.) - Transfers: ... (Prog.), ... (Act.), 55.6 (Prog.) - Investment: 65.5 (Prog.), 0.5 (Act.), 20.3 (Prog.) - Safety nets and employment initiatives Total: 48.6 (Prog.), 36.4 (Act.), 81.2 (Prog.) - Salaries (CNAMGS): 25.3 (Prog.), 25.3 (Act.), ... - Goods and services: 0.4 (Prog.), 0.4 (Act.), 1.9 (Prog.) - Transfers: 22.9 (Prog.), 10.7 (Act.), 32.3 (Prog.) - Investment: ... (Prog.), ... (Act.), 46.9 (Prog.) - Total: 151.6 (Prog.), 58.5 (Act.), 214.3 (Prog.) *Source: IMF staff summary of the authorities’ measures and commitments as presented in the document.* ### 31. The BEAC and COBAC have pursued the implementation of their policy commitments ### 31. The BEAC and COBAC have pursued the implementation of their policy commitments ### Implementation of previous commitments and new policy assurances - Implementation actions completed included: - tighter monetary policy; - elimination of statutory advances; - maintaining firm control over the extension of credit to banks. - Regional NFA accumulation up to December 2017 was in line with projections; corrective actions are being implemented to restore NFA accumulation following underperformance in early 2018. - New BEAC policy assurances aimed at enhancing monetary policy transmission and reinforcing centralization of foreign exchange reserves at BEAC: - completion by end-2018 of the modernization of the monetary policy operations framework; - submission (for adoption) to the UMAC ministerial committee by end-2018 of revised foreign exchange regulations. - The policy assurance on achieving projected regional NFA accumulation is based on: - BEAC’s commitment to implement an adequately tight monetary policy; - member states’ commitment to implement adjustment policies in the context of IMF-supported programs. - These assurances are described as critical to rebuilding sufficient external reserves cover for regional external sustainability and for Gabon. ### Financing and arrears - Program financing status: - The program remains fully financed. - Financing needs for the next 12 months will be met by a combination of external borrowing, budget support and Fund financing. - Prospects to achieve projected financing in 2019 and beyond are described as good, conditional on implementation of the fiscal consolidation program and remaining access under the EFF arrangement contributing to closing external financing gaps. - Commercial arrears: - Gabon has outstanding arrears with commercial creditors. - Authorities indicated intention to resolve approximately CFAF 37.8 billion in commercial (non-guaranteed) arrears by the end of the year. - Staff found Gabon is making a good faith effort consistent with the Fund’s Lending-into-Arrears Policy; the Fund may provide financing notwithstanding external arrears given prompt Fund financial support is considered essential and Gabon is pursuing appropriate policies. ### Capacity to repay the Fund and safeguards - Capacity to repay: - In the case of full drawing of the amount under the EFF, repayments to the Fund at the end of the projection period (2023) would remain manageable at 0.4 percent of GDP, or 2.5 percent of gross reserves. - Public debt is expected to remain high during the program period but strong program implementation would place it on a firm downward path. - Gabon has a strong record of repayment to the Fund. - Safeguards Assessment: - A full safeguards assessment for the regional central bank was completed in August 2017. - Assessment noted positive steps by the BEAC to strengthen governance in its charter provisions and plans to strengthen financial reporting transparency through full transition to IFRS. - BEAC continues to implement outstanding recommendations from the 2017 assessment. ### Program modalities, performance criteria, and waivers - The report proposes: - new program performance criteria for end-2018; - new structural benchmarks for 2018-19. - Waiver requests: - Authorities request a waiver of nonobservance for the continuous performance criterion on external arrears accumulation and two end-June performance criteria (non-oil primary fiscal balance and net central bank claims on the government), which, based on available information, have not been observed. - Request for waiver of applicability for end-June performance criteria on net claims of the banking system on the government, and on contracting or guaranteeing of external debt, for which data are not yet available. - Staff assesses that waiver of nonobservance can be recommended given corrective actions taken by the authorities. - A new QPC is proposed, elevating the indicative target on non-oil revenue starting with the end-December 2018 target. ### Prior actions completed (selected measures and documentation) - Cancellation of 1.5 percent expenditure appropriations under the 2018 Budget Law equivalent to 0.3 percent of GDP. - Met (July 11, 2018) - Senate Adoption of 2018 Supplementary Budget. - Met (June 29, 2018) - Adapt the E-BOP information system to the new expenditure execution procedure to allow systematic issuance of purchase orders, and train local staff. - Met (July 10, 2018) - List all central government entities whose funds are not deposited on the Treasury single account. - Met (July 11, 2018) - Transmit a letter to the Fonds Gabonais d’Investissements Strategiques (FGIS) requesting to put on hold planned acquisition of assets in 2018. - Met (July 10, 2018) - Elimination of duty exemptions under the “program to combat high cost of living” (programme de lutte contre la vie chère). - Met (July 10, 2018) ### Risks to program implementation - Elevated risks due to recent slippages in program implementation and potential social protests if reform rationale is not effectively communicated across the political spectrum and civil society. - Mitigating factors: - Adoption of a supplementary budget by the Senate (prior action). - Authorities’ signaling effects through measures that increase transparency and fiscal rigor. - Improved program coordination via regular meetings between the Budget and Economy Ministers and the President’s office to prioritize reforms at the highest political level. ### Staff appraisal: macroeconomic context and outlook - Regional context: - The coordinated CEMAC effort since December 2016 has stabilized the region, but the recovery remains fragile. - BEAC reserves are stabilizing, supported by adjustment in Gabon and other CEMAC countries and external financing from development partners, though adjustment has been uneven and fiscal consolidation has fallen short in some countries. - Regional reserves’ accumulation underperformed during early 2018. - Gabon outlook and diversification: - Gabon avoided a recession due to robust activity in new sectors despite weakness in traditional sectors (oil, commerce and services). - Authorities’ efforts to attract investment in non-oil commodities (manganese, forestry), the special economic zone (SEZ) and agribusiness are contributing to diversification and resilience. - Broader business-environment reforms could help achieve growth rates of 4-5 percent over the medium-term. ### Fiscal consolidation, implementation challenges, and social considerations - Supplementary budget projections: - Overall fiscal deficit (cash basis) is expected to improve from 3.4 to 0.2 percent of GDP. - Non-oil primary balance (in percent of non-oil GDP) is projected to improve from 9.7 to 7.1 percent. - Implementation risks and political economy: - Revenue-side challenges: - Elimination of extensive and largely ineffective custom duty exemptions and removal of favorable tax treatment could face resistance from beneficiaries. - Expenditure-side challenges: - Ambitious wage bill reforms (salary reductions and elimination of some bonuses) could trigger social protests; authorities should step up consultation and communication. - Announced cuts in spending by the Presidency and ministries, including reduction of perks by senior officials, could have positive signaling effects if implemented. - Social protection: - Stronger commitment to critical social spending programs is needed to increase social acceptance and offset impacts of fiscal consolidation. - Debt servicing: - Timely servicing of all external and domestic debt obligations is critical to avoid further arrears accumulation. ### Institutional coordination, fiscal risk management, and structural reforms - Urgent priorities: - Improve coordination between tax collection and economic planning (Ministry of Economy) and budget execution (Budget Ministry) to prevent fiscal slippages and delays in structural reforms. - Implement automatic spending adjustments when non-oil revenue underperforms to ensure fiscal discipline and avoid recurrent arrears. - Preserve budget contingency/reserve if privatization or domestic debt market access underperforms. - Structural reform needs: - Decisive tax reforms to limit excessive use of ad hoc and opaque tax exemptions. - Better expenditure tracking, especially for semi-autonomous government units (special accounts). - Completion of an audit of possible extrabudgetary operations. - Cost-benefit analysis of public investment projects. - Continued capacity building, including Fund technical assistance, to support sequencing and implementation given capacity constraints. ### Financial sector risks and domestic arrears - Close monitoring and decisive actions needed to address: - Repayment of domestic arrears, which heavily affect small and medium enterprises and influence economic confidence. - Certification challenges for receipt of goods and services from government suppliers given delays in independent audit. - Three public banks in distress: - These banks are relatively small and not considered systemic, but the government should expedite plans to assess resolution options and limit fiscal costs. *Source: cr18269 - 31. The BEAC and COBAC have pursued the implementation of their policy commitments* ### 45. Staff recommends granting a waiver for the nonobservance of the end-June 2018 ### cr18269 - 45. Staff recommends granting a waiver for the nonobservance of the end-June 2018 ### Recommendation and basis - Staff recommends granting a waiver for the nonobservance of the end-June 2018 quantitative and continuous performance criteria. - The waiver recommendation is based on: - corrective measures taken by the authorities; - adequate implementation of the regional policy assurances; - completion of the financing assurances review; and - approval of the authorities’ request for completion of the second review of the Extended Arrangement. - The capacity to repay the Fund is described as adequate, and risks to program implementation are manageable given the government’s commitment to program objectives. ### Program implementation, corrective measures, and ownership - Program performance since the first review fell below expectations. - Authorities have taken decisive steps to keep the program on track, demonstrated by: - adoption of six prior actions; - implementation of several structural reforms that had experienced delays (including civil service reform); - strengthened program monitoring; - development of a communication strategy to explain policy choices; and - inclusion of some new compensatory social measures. - Many reforms were designed by an intergovernmental task force endorsed by the President, which is expected to increase program ownership. - The attached Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) set out appropriate policies to pursue the program objectives. ### Conditionality for future reviews - Staff proposes that completion of the third EFF review be conditional on the implementation of critical policy measures at the union level, as established in the June 2018 union-wide background paper. - Note: Performance under the second review is assessed on the basis of performance criteria and targets for the most recent test date, which is end-June 2018. ### Economic outlook and selected indicators (high-level summary from figures and tables) - Oil sector developments and non-oil dynamics: - The oil price shock caused a slowdown, but new export commodities are expected to bolster non-oil growth. - Recovery of oil prices suggests the oil sector will be less of a drag on growth. - Monetary and inflation dynamics: - Inflation slowed in late 2017 as the effect of 2016 fuel price hikes left the index. - Monetary liquidity is improving, but credit growth remains weak, suggesting continued uncertainty. - Fiscal and external outlook (high-level observations from fiscal and BOP figures): - Spending adjustment has largely been borne by capital spending. - Oil price shock and lower activity impacted oil and non-oil revenue, contributing to an elevated level of public debt. - The overall balance has improved, but the non-oil primary balance has adjusted less than envisaged. ### Financing, disbursements, and Fund schedule (as reported) - Schedule of disbursements and timing under the Extended Arrangement, 2017–20 (as presented): - June 19, 2017 — Approval of the extended arrangement under the EFF. 71.43096.64933.069 - December 1, 2017 — Observance of PCs for end-June 2017, continuous PCs and completion of the first review. 71.43098.91533.069 - June 1, 2018 — Observance of PCs for end-December 2017, continuous PCs and completion of second review. 2/ 71.430100.61833.069 - December 1, 2018 — Observance of PCs for end-June 2018, continuous PCs and completion of third review. 71.430100.61833.069 - June 1, 2019 — Observance of PCs for end-December 2018, continuous PCs and completion of fourth review. 71.430100.79233.069 - December 1, 2019 — Observance of PCs for end-June 2019, continuous PCs and completion of fifth review. 71.430100.79233.069 - April 30, 2020 — Observance of PCs for end-December 2019, continuous PCs and completion of sixth review. 35.82050.56916.583 - Total 464.400648.954215.000 - Gabon's quota is SDR 216.0 million (memorandum note in schedule). ### Key program-relevant facts and figures (selected exact values as presented) - Number of prior actions adopted: six prior actions. - Assessment date triggering second review performance criteria: end-June 2018. - Total of scheduled disbursements under the Extended Arrangement: 464.400648.954215.000 - Gabon quota (memo): SDR 216.0 million. - Statement on capacity: "The capacity to repay the Fund is adequate, and risks to program implementation are manageable given the government’s commitment to program objectives." - Conditionality for third review: implementation of critical policy measures at the union level as established in the June 2018 union-wide background paper. *Source: cr18269 - 45. Staff recommends granting a waiver for the nonobservance of the end-June 2018* ### Annex I. Debt Sustainability Analysis (DSA) ### Annex I. Debt Sustainability Analysis (DSA) ### A. Public Debt Sustainability - Current assessment - Public debt-to-GDP ratio: 63 percent (current level); forecast to decline to about 43 percent by 2023 under the baseline scenario. - Main risks: large share of debt held by non-residents (70 percent) and foreign currency debt (62 percent); risk of lower-than-expected growth; risk of insufficient fiscal consolidation. - Policy measures that would strengthen outcomes: implementation of a decisive fiscal adjustment program, envisaged agri-industry investments, and appreciation of the CFA Franc against the U.S. dollar — under which debt would decline over the life of the program to 55 percent of GDP. - Clearance of external arrears is crucial for continued market access. - Drivers of past debt accumulation - Public debt rose from 19 percent of GDP in 2008 to 63 percent in 2017 driven mostly by large investment expenditure related to: - Government strategic plan for economic diversification (PSGE). - Capital spending in the run-up to the African Cup of Nations in 2012 and 2016. - Government borrowing after the recent oil price shock, which triggered a large decline in oil revenue and turned the GDP deflator negative. - Public debt level and composition (as at end-2017) - Total public debt: CFAF 5,552.8 billion (US$9.8 billion) including incorporation of domestic arrears. - Table 1 (CFAF billion) — selected entries: - External Debt: 2015: 2,884.4; 2016: 3,107.0; 2017: 3,355.8 - Bilateral: 2015: 695.9; 2016: 742.8; 2017: 678.9 - Multilateral: 2015: 383.3; 2016: 376.8; 2017: 913.5 - Commercial: 2015: 496.6; 2016: 641.4; 2017: 566.5 - Financial Markets: 2015: 1,308.6; 2016: 1,346.0; 2017: 1,196.9 - Domestic Debt: 2015: 916.8; 2016: 2,228.3; 2017: 2,081.9 - Banking: 2015: 452.4; 2016: 810.7; 2017: 826.4 - Non-Banking System: 2015: 464.4; 2016: 1,417.6; 2017: 1,255.5 - Total: 2015: 3,801.2; 2016: 5,335.3; 2017: 5,437.6 - Debt characteristics: mostly external and medium to long term. - Policy/fiscal rule context: CEMAC regional public debt ceiling set at 70 percent of GDP; Gabon’s national ceiling set at 35 percent of GDP, which was exceeded in 2015. - Comparison with previous DSA (2017 Gabon Program Request) - Gross public debt is about 7.8 percentage points of GDP lower in 2018 compared with the original program, and 4 percentage points lower by end-2022. - Factors explaining the revised debt path: - Lower overall fiscal deficits in the initial years: actual overall fiscal deficit in 2017 was 1.2 percentage points of GDP lower than in the original program. Pace of fiscal consolidation about 1 percent of GDP higher than originally planned. - Appreciation of the exchange rate vis-à-vis the U.S. dollar: current DSA assumes about 7.8 percent appreciation over the medium term, reducing local-currency value of foreign currency debt (foreign currency debt > 60 percent of total external debt). - Conversely, lower growth projections partially offset decline in the debt-to-GDP ratio. - Baseline projections and realism - Debt levels: gross debt projected to decline from 63 percent of GDP in 2018 to about 43 percent of GDP by 2023. - Gross financing needs: projected at 4.3 percent of GDP in 2019; average 3.3 percent of GDP over 2018–23. - Growth: current output growth projection at 2.0 for 2018 (authorities project 2.1 percent). Debt dynamics not highly sensitive to GDP growth surprises; median forecast error for real GDP growth is moderate. - Fiscal adjustment: non-oil primary basic balance (adjusted for foreign-financed capital investment) improves throughout 2018–23. Consolidation driven by higher non-oil revenues from tax policy and administration reforms that more than compensate for fall in oil revenues. Spending projections assume compliance with original program objectives. Projected 3-year adjustment judged feasible given DSA template distribution and pre-2009 Gabon evidence. - Shocks and stress tests (impact on debt-to-GDP and financing needs) - Primary balance shock: deterioration of 2.4 percentage points of GDP in the primary balance in 2019 increases public debt to 47 percent of GDP by end-2023. Gross financing needs increase slightly; effective interest rates do not deviate from baseline. - Growth shock: real output growth lowered by one standard deviation for 2 consecutive years starting in 2019. Debt-to-GDP increases to about 57 percent during the shock, and to 49 percent by end-2023. Gross financing needs decline to 1.2 percent of GDP in 2021, then increase to about 4.6 percent of GDP in 2022. - Interest rate shock: real interest rates increase by 200 basis points starting in 2018. Implicit average interest rate reaches almost 14 percent by 2023 (almost 10 percentage points higher than baseline). Debt-to-GDP and gross financing needs reach 54 percent and 7.7 percent of GDP respectively by 2023. - Real exchange rate shock: permanent real exchange rate depreciation of 18 percent increases debt by about 5 percentage points of GDP by 2023. Gross financing needs increase by about 1.0 percentage points of GDP by 2023 compared with baseline. - Combined shock: incorporates largest effects of individual shocks on relevant variables; debt would increase to around 79 percent of GDP. Gross financing needs increase to about 13 percent of GDP in 2023. ### B. External Debt Sustainability Analysis - External debt stock and profile (end-2017) - Gross external debt amounted to 40.6 percent of GDP, which includes external arrears worth 1.4 percent of GDP. - Composition of external debt (shares of total external debt): - Financial markets: 36 percent - Bilateral: 20 percent - Commercial creditors: 17 percent - Multilateral institutions: 27 percent - Commercial claims split: 81 percent of total commercial are guaranteed by other sovereigns; 19 percent are not guaranteed. - Developments in 2017: increased exposure to multilaterals with budget/program support from AfDB, WB, and the IMF; rolled over the US$193 million Eurobond amortization due at year end with a mid-year issuance of the same; authorities cleared approximately 77 percent of legacy arrears but accumulated further arrears in 2017. - Baseline external scenario - Assumption: all international bonds falling due until 2023 are rolled over. - Projection: external debt-to-GDP ratio should exceed 42 percent in 2019, then gradually decline to 38 percent by 2023. - External stress scenarios and impacts - Historical scenario (variables as in past ten years): financial needs much lower than baseline and external debt reduces. - Shocks (0.5 standard deviation applied to real interest rate, growth rate, current account balance): - Shock to non-interest rate current account leads to increase in external debt to 67 percent in 2023. - One-time 30 percent real exchange rate depreciation leads to external debt spike to 60 percent in 2020. *Source: Annex I. Debt Sustainability Analysis (DSA), cr18269.* ### 9. High financing needs and intra-year cash flow management will be challenging. The ### 9. High financing needs and intra-year cash flow management will be challenging. ### Financing and cash-flow risks - Failure to clear all external arrears, as per commitment, and fiscal slippages in 2017 pose a challenge in 2018 in terms of financing. - Authorities continue to face liquidity pressure, with the ratio of debt service to reserves and exports well above the rule-of-thumb benchmark of sufficient liquidity. - A credible cash flow strategy is crucial to prevent further arrears accumulation over the next years. - Multilateral donors (AFD, AfDB and World Bank) have provided assurances for budget support disbursements totaling about US$560 million, but substantial amounts of disbursements will only be made available in the third and fourth quarter of the year. - The government may face difficulties to stay current on its debt service and repay all legacy external arrears. - In anticipation of this difficulty, the authorities have engaged in good-faith efforts with creditors with the intention to reprofile and amortize a portion of their legacy arrears. - Creditor’s willingness to agree to further extensions in their repayment schedules remains to be verified. ### Public debt and financing indicators (selected figures from DSA) - Nominal gross public debt: 28.8 64.2 62.7 56.0 54.4 50.3 47.5 45.6 42.5 (as presented in the table). - Public gross financing needs: 1.1 10.1 5.5 5.5 4.4 2.3 1.1 3.8 2.8 (as presented in the table). - Real GDP growth (in percent): 4.2 2.1 0.5 2.0 3.4 4.2 4.5 4.5 4.5 (as presented in the table). - Inflation (GDP deflator, in percent): 1.7 -4.3 3.9 7.1 0.0 0.2 0.2 -1.0 0.5 (as presented in the table). - Effective interest rate (in percent): 4.7 4.6 2.9 4.3 4.3 4.1 4.1 4.1 4.3 (as presented in the table). - Change in gross public sector debt (cumulative projection): 1.1 19.5 -1.5 -6.7 -1.6 -4.1 -2.8 -2.0 -3.0 -20.2 (as presented in the table). - Identified debt-creating flows (cumulative): -4.7 6.9 -4.3 -7.4 -2.0 -3.8 -2.5 -1.8 -2.9 -20.5 (as presented in the table). ### DSA scenarios and stress tests (high-level outcomes) - Baseline, Historical, and Constant Primary Balance scenarios provided with underlying assumptions for Real GDP growth, Inflation, Primary Balance, and Effective interest rate across 2018–2023 (see DSA tables and figures for full year-by-year values). - Stress tests include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and Combined Shock. These tests indicate substantially higher gross nominal public debt and public gross financing needs under adverse shocks (see DSA figures for graphical trajectories and quantitative outcomes). ### External sector assessment — key findings - Gabon’s external position for 2018 is assessed to be weaker than implied by medium-term fundamentals and desirable policies, though improved relative to 2017. - Improvement compared to 2017 is due to an uptick of commodity prices (mainly oil and manganese), leading to a narrowing of the current account deficit from 10 to 5 percent of GDP in 2017. - The fall in Gabon’s gross imputed reserves at the BEAC has slowed but remains under 2.5 months of prospective imports. - Given Gabon’s membership in the CEMAC monetary union, competitiveness will continue to depend more on structural improvements led by reform-oriented fiscal policies and diversification strategies, than on the level of the exchange rate per se. - Commodity and external revenue specifics: - Oil and manganese prices increased by approximately 29 percent in 2017. - In 2017, the real and effective exchange rate appreciated by 4 percent. - Oil export revenues are projected to have been CFAF 2,234 billion (US$ 3.8 billion) in 2017, increasing from CFAF 1,941 billion (US$ 3.3 billion) in 2016. - Current account trajectory: - The current account deficit widened to 9 percent of GDP in 2016, but is now estimated to have narrowed to approximately 5 percent of GDP in 2017. - The deficit is projected to narrow further in 2018, and gradually decline over time and turn positive by 2021, helped by a rise in non-oil exports. - External valuation assessment: - External sustainability assessments point to an overvaluation of the real exchange rate between 12 and 15 percent. - The EBA-lite methodologies indicate a range between 10-16 percent overvaluation under specified assumptions. *Source: IMF staff (cr18269).* ### 4. Applying exchange rate assessments tailored to resource rich countries indicates a ### 4. Applying exchange rate assessments tailored to resource rich countries indicates a more moderate degree of overvaluation. ### Exchange rate assessment methodology for resource-rich countries - The methodology developed by Bems and Carvalho (2009) allows an additional assessment of the exchange rate valuation, based on domestic and external fundamentals and tailored to the conditions of a resource-rich country. - Bems and Carvalho methodology assesses the REER in the medium term. ### EBA-Lite / CA Norm and IREER summary findings (selected metrics preserved exactly) - CA Actual: -4.9% / -4.9% - CA Actual, Cyclically Adjusted: -4.0% / -4.0% - CA Norm, Cyclically Adjusted \1: 0.6% / 0.3% - CA Gap: -4.6% / -4.3% - Elasticity: -0.28 / -0.28 - ln(REER) - Actual: 4.63 / 4.63 - ln(REER) - Norm: 4.53 / 4.53 - Real Exchange Rate Gap: 16.6%10% / 15.6%10% - Assumptions: - Years to adjust: 35 - Current reserve level in $ bn.: 0.92 / 0.92 - Reserves target in $ bn: 2.62 5-months imports / 2.62 5-months imports - Needed Reserves accum. in Bn $: 1.70 / 1.70 - Needed yearly adjustment in $ bn: 0.57 / 0.34 - Needed Adjustment (P*), change in reserves/GDP (per year): 0.03 / 0.02 - Medium term Overall Fiscal balance (P*), overall balance/GDP: 0.01 / 0.01 - Note: \1 The cyclically adjusted CA norm makes an ad-hoc adjustment related to the contribution of large agri-industry projects to the CA (approx. 1.7 percent of GDP on average in the medium term), since their activities (originating from the SEZ) are tax-exempt and do not contribute to improving the fiscal path. The cyclically adjusted CA norm therefore reflects the medium term CA excluding these projects. ### External sector assessment results and staff judgment - Depending on the choice of allocation rule from nonrenewable resources, an overvaluation between -2 and 10 percent is estimated. - When balancing quantitative assessments with an analysis of macroeconomic fundamentals and desirable policies, staff judges the exchange rate to be overvalued by about 9 to 16 percent. - Table 2. Gabon: External Sector Assessment (Resource Rich Countries) — Source: IMF staff estimates. ### Medium-term trade balance norm and overvaluation (Bems and Carvalho application) - MT trade balance norm (Percent of GDP): 1.8 / 4.2 / 7.0 (presented as three scenarios: Constant real annuity; Constant real per capita annuity; Constant annuity over output) - Underlying trade balance (Percent of GDP): 3.4 / 3.4 / 3.4 - Trade balance elasticity2: 0.6 / 0.6 / 0.6 - Overvaluation (Percent): -2.8 / 1.4 / 6.2 - Note 2: Trade elasticity is estimated assuming exports volume and imports volume elasticities equal to zero. ### Constraints and policy channels given Gabon’s monetary union membership - Since Gabon belongs to a monetary union, available paths to regain competitiveness are more limited than in countries with a flexible exchange rate. - Structural transformation and economic diversification are decisive for boosting competitiveness and ensuring external stability. ### Near- and medium-term export development strategies - Near-term: - Export competitiveness boosted by a rise in mining sector activity due to an increase in manganese and iron-ore prices. - New general cargo and bulk ports, both completed in 2017, will allow on and offloading of vessels in less than half the cost and time, improving efficiency of export-led sectors. - Medium-term: - Export expansion supported by FDI-related investments in agri-business projects, raising export potential in new commodity classes such as palm-oil and timber. - As a result of this investment activity, the current account is expected to improve by about 1-2 percent of GDP, compared to a framework without the agri-industry projects. ### Strategies to enhance public sector efficiency - The Fund-supported program underpins prudent fiscal policies, especially PFM measures to improve spending efficiency, notably on infrastructure and public investment, complementing FDI-led activities in exporting sectors. - Other fiscal measures aim to relieve structural bottlenecks, improve the business climate, and attract further FDI, aiding external sector recovery. - These strategies are expected to enable the external sector position to gradually strengthen over the medium term and facilitate accumulation of reserves to an adequate level. ### Macroeconomic outlook and recent developments (from MEFP and attachments) - Growth and sectoral performance: - Overall economic growth declined from 2.1 percent in 2016 to 0.5 percent in 2017. - Oil production decreased by 8.5 percent in 2017 (compared with an earlier projection of a decline of 5.9 percent). - Non-oil growth slowed to 1.7 percent in 2017. - Mineral extraction and agriculture and timber sectors showed robust performance; manganese operations commissioned. - External sector and reserves: - Trade balance improved by 46 percent in 2017. - Exports value increased by 22 percent in 2017; oil sales in value terms increased by 15 percent in 2017. - External current account deficit declined from 10 percent of GDP in 2016 to approximately 5 percent in 2017. - Modest accumulation of imputed international reserves at the BEAC in 2017. - Monetary and inflation conditions: - Monetary base contraction slowed from -13 percent (year-over-year) through end-June 2017 to -3.9 percent at end-December 2017. - Money supply (M2) increased by 4.5 percent (year-over-year) through April 2018. - Bank lending to the private sector: credit provision worsened from -4.1 percent in December 2017 (year-over-year) to 9.0 percent in April 2018. - Average 12-month consumer price inflation was 2.6 percent at end December and around 2.5 percent at end-April 2018. - Financing and investment: - FDI inflow expected to be slightly lower than initially forecast in 2018 due to delays in OLAM fertilizer and cash-crop projects. - OLAM intensified efforts on new international airport and mineral ports worth approximately CFAF 250 billion by June 2020. - T-bills issuance on regional markets of CFAF 150 billion will provide immediate liquidity. - Additional financing: CFAF 50 billion of income tax in the mining sector collected in April 2018; AFD disbursed € 37.5 million in July and expected another € 37.5 million in second half of year; IMF expected to disburse US$98 million in July 2018 and US$98 million by end-December; World Bank and AfDB to disburse US$200 million and € 200 million, respectively, during the last quarter. - External and domestic debt developments: - Stock of arrears declined significantly following payments to complete the first review of the Fund-supported program, but delays prevented complete clearance of external arrears by end 2017. - Rate of external arrears accumulation declined: 17 percent of expected 2017 debt service fell in arrears versus 44 percent in 2016. - Total domestic debt declined from 26.8 percent of GDP in 2016 to 24 percent at end-2017. - Remaining stock of domestic arrears about 5 percent of GDP at end-2017; government decided in April 2018 to implement a payment plan under the “Club of Libreville”. - Growth forecast revisions and risks: - Baseline forecast for 2018 revised to 2 percent, or 0.7 percentage points less than the previous forecast. - Factors for the markdown: - Weak performance of the oil sector during 2017 and early 2018; Q1 2018 oil production fell by 10.7 percent (year-over-year). - Sectors dependent on government expenditure (construction, commerce, services) expected to stagnate amid further fiscal consolidation. - Offsetting factors: recent rise in international oil prices, start of production at new fields expected in Q4 2018, rapid growth from maturing agricultural, forestry, and mining projects, and expansion of the Special Economic Zone. - Economy exhibiting a “two-speed economy” with growth engines slowly shifting to new sectors. *Source: IMF staff estimates and Memorandum of Economic and Financial Policies (July 24, 2018).* ### 8. Medium-term prospects remain relatively promising if adequate policies are ### 8. Medium-term prospects remain relatively promising if adequate policies are implemented as planned. ### Medium-term outlook and structural drivers - Large and continuing FDI flows toward agri-business and other nontraditional sectors can help the Gabonese economy to reduce its dependence on oil and governmental activities. - The oil industry will remain important; the recovery of oil prices during 2017, recent discoveries of new reserves, and ongoing work for a new fiscal regime for oil should encourage new investments and contribute to economic activity in the service sector. - Largely rural and labor-intensive agricultural and forestry projects could generate positive spillovers, conditional on reforms to address the weak business climate and greater efforts to improve it. ### B. Fiscal Policy — 2017 outturn and 2018 developments - Overall fiscal deficit on a cash basis declined in 2017 to 3.4 percent of the GDP. - Total revenues fell by 0.7 percentage points of GDP compared to 2016. - Despite a drop in petroleum production, oil revenues rose by 1.5 percentage points of GDP compared to 2016 (due to higher prices and exceptional revenues). - Non-oil revenues declined by 2.3 percentage points of GDP. - VAT receipts decreased by -0.6 percentage points of GDP. - Customs revenues decreased by -0.5 percentage points of GDP. - Factors affecting revenue: growth slowdown, work stoppages in tax administration in 2017, and new measures introduced in Q4 2017 aimed at boosting non-oil revenue mobilization. - Overall spending fell by 3.2 percentage points of GDP relative to 2016. - Capital expenditure reductions: externally-financed investment spending decreased by 2.1 percentage points of GDP; domestically-financed investment spending decreased by 1.2 percentage points of GDP. - Goods and services spending was reduced by 1.1 percentage points of GDP through rationalization measures. - Wage bill strategy produced savings of 0.4 percentage points of GDP (efforts to update payrolls and rationalize staff expenditure), despite unplanned payment of new and deferred bonuses to tax officials amounting to CFAF 20.9 billion. - Transfers declined by 0.2 percentage points of GDP. - Two expenditure items exceeded program targets: net lending by 0.6 percentage points of GDP and special accounts by 1.1 percentage points of GDP versus 2016. - Cashflow pressures and financing - Fiscal slippages and delayed external disbursements caused substantial cashflow pressures. - Large part of expected external financing disbursed only in December 2017. - Treasury float at end-2017 was 0.9 percent of the GDP versus a target of 0.6 percent of the GDP. - The commitment to save 5 percent of oil revenues in the Funds for Future Generations (FGF) or in the Stabilization Fund was not met. - Despite pressures, reduction in overall fiscal balance on a cash basis allowed containment of external and domestic borrowing and ensured a reduction in total public debt. - Budget execution through April 2018 - Total revenues as at end-April dropped by CFAF 33 billion compared to the same period in 2017 (both oil and non-oil revenues declined). - Monthly customs revenues improved steadily since the beginning of the year. - Total expenditure increased by CFAF 47 billion compared with April 2017, due to weaker fiscal controls and new asset acquisitions by Gabon’s sovereign wealth fund, the FGIS. ### Fiscal targets and consolidation strategy (medium term and 2018) - Fiscal position targets - Overall fiscal balance on a cash basis should become positive by 2019 and reach 1.7 percent of the GDP by the end of the Fund-supported program. - Non-oil primary balance should decline gradually to 3.3 percent of non-oil GDP in 2020. - Non-oil basic primary deficit should reach 0.1 percent of non-oil GDP. - Progressive improvement aims to reduce total public debt to below 50 percent of GDP by the end of the Fund-supported program. - 2018 consolidation objective: reduce the overall fiscal deficit on a cash basis to 0.2 percent of GDP. - Revenue measures (in addition to measures adopted under original 2018 budget law) - Clearance of half of the expired suspensive customs procedures (new structural benchmark, end-December 2018). - Suppression of unjustified VAT exemptions, particularly those granted for public contracts. - Application of the highest excise duty rates provided by the CEMAC directives. - Creation of a tax on luxury vehicles. - Revision of the tax rate applied to transfers of funds. - Increase of property transfer fees. - Taxation of the activities of the public corporations. - Revision of tax applicable to wood and manganese exports based on current prices. - Expenditure measures - Aim to reduce the wage bill by 1.5 percentage points of GDP compared with 2017 through: reduction of performance bonuses, cuts in salaries and in household allowances, and implementation of a voluntary retirement plan. - An audit of the number of civil servants and control over staff attendance to lead to payroll revisions and savings. - Acceleration of structural reforms to strengthen controls on special accounts expenditures and reduction of the number of departmental agencies and entities managing these accounts to reduce deficits. ### Financing and liquidity measures (2018) - Contain budgetary float to a maximum of 15 percent of the expenditure directly controlled by the Government. - Strengthen recovery of tax arrears: recover 40 percent of the recoverable tax arrears identified (new structural benchmark, end-September 2018). - Increase planned asset divestitures by CFAF 39 billion and planned drawings from international financial markets under the budget law by CFAF 150 billion. - Supplementary budget law - Will be adopted by the Senate prior to the second review of the Fund-supported program; the Senate adopted the budget law on June 29th (prior action). - Includes automatic adjustment provision: if non-oil revenues collected in a quarter fall short of the baseline forecast by 5 percent or more, an equivalent adjustment of expenditure will take place. - Contingency reserve increases: 20 percent for goods and services expenditure, 15 percent for transfers, 12 percent for capital expenditures, and 10 percent for other expenditure; appropriations placed in reserve are unavailable until released. - Immediate prior actions (before the second review) - Elimination of the government’s program to address high living costs that resulted in an estimated loss of revenue of CFAF 10.4 billion during Q1 2018 (prior action); exemptions to be limited to basic goods (meat, poultry, fish, rice, and milk). - Cancellation by decree of 1.5 percent of appropriations made available under the original 2018 budget law (equivalent to CFAF 30 billion) (prior action). - Joint letter to Gabon’s sovereign wealth fund to put a hold on all new asset acquisitions through the end of 2018 (prior action). - Government to prepare a time-bound action plan for privatization by end-September to mobilize privatization receipts in a timely manner. ### C. Arrears Management — stock and strategy - Stock of arrears as of end-December 2017: total arrears equivalent to 6.6 percent of GDP. - External arrears: 1.3 percent of GDP. - Domestic arrears: 5.3 percent of GDP, composed of: - 0.5 percent of GDP of arrears on domestic debt service. - 3.8 percent of GDP of arrears on VAT refunds. - 1.0 percent of GDP on unpaid Treasury float. - Arrears repayment outcomes and challenges - Stock of arrears declined by 2 percentage points of GDP, including a 0.4 percentage points of GDP decline in VAT arrears. - Cashflow pressures prevented clearing all external arrears as envisaged; about 75 percent of external arrears accumulated before 2017 was cleared, but new external arrears were also accumulated. - New arrears on domestic debt service offset prior reductions. - Arrears clearance strategy - External arrears clearance to be completed by end-2018; external debt arrears to official creditors (bilateral, multilateral and commercial guaranteed claims) will be cleared by the second review of the Fund-supported program. - Intend to clear approximately CFAF 37.8 billion in commercial (non-guaranteed) arrears by end-2018. - Ongoing meetings to update monthly cashflow plan (revenues, expenditures, loan disbursements, debt repayment schedules, and remaining arrears clearance plan). - Build a reasonable buffer into cash-flow plan; funds to cover shortfalls proactively mobilized (e.g., issuing short-term T-bills with maturity of less than a year). - VAT arrears will be repaid through 2021. - A VAT escrow account operational since February 2018 to facilitate VAT refund and prevent new arrears. - A deferred payment mechanism to be tested with two oil companies and the national mining company and included in the 2019 Budget Law (new structural benchmark, end-October 2018). - Remaining stock of exceptional budgetary float to be cleared during 2018; accumulation of new float limited to 15 percent of total expenditure on goods and services, transfers and domestically-financed investment. ### D. Measures to prevent accumulation of new expenditure arrears and strengthen cashflow management - Expenditure execution systems and coverage - Systematic use of VECTIS application to process purchase orders since June 2017 strengthened commitment controls at central government level. - E-BOP information system deployed to nine provinces as of June 2018; processing of purchase orders at local governments to be made effective by the second review of the Fund-supported program (prior action). - For public agencies and semi-autonomous units lacking information systems, a calendar for deployment of required systems compliant with the new expenditure execution procedure will be defined (new structural benchmark, end-October 2018). - Arrears monitoring and audit - VECTIS and E-BOP modules for tracking payment deadlines and alerts for past due payments were activated in June (structural benchmark, end-June 2018). - First version of report presenting evolution and composition of budgetary float and expenditure arrears at end-2017 issued; to be published with the quarterly budget execution report. - Service provider for independent audit of arrears during 2015 and 2016 selected via public tender in March 2018; service agreement awaiting signature; audit to be completed four months from the start of work (revised structural benchmark, end-September 2018). Audit results to be published. - Active cashflow management measures - Debt management strategy updated and attached to the Supplementary Budget Law. - Treatment and assumption of responsibility for domestic debt: creditors formed Club of Libreville; Government to pay Club CFAF 285.7 billion under agreed terms: - Receivables bear net interest at 5.5 percent per annum. - Repayment in 74 monthly installments (first repayment made in May 2018). - Repayments in constant monthly installments of CFAF 5 billion. - Government’s Cashflow Committee reactivated with broader mandate; decree foresees committee meetings every fifteen days, to be held regularly from end of June. - Treasury Single Account (TSA) consolidation and repatriation of central government accounts at the state depository corporation (Caisse des Dépôts et consignations, CDC) to the TSA. - Current fragmentation: 52 accounts opened with the BEAC; agreement sought to create and manage TSA sub-accounts to enable TSA to play pivotal role and convert provincial liaison accounts into operations accounts at BEAC auxiliary agencies. - More than 479 accounts opened at the CDC collecting funds from semi-autonomous agencies and other public entities; Government committed to transform the public deposits CDC account into a subsidiary account of the TSA (new structural benchmark, end-September 2018) to repatriate public funds into the TSA and assess account relevance account-by-account. - Census of accounts in commercial banks was launched; to accelerate inventory and produce list before program review (prior action), Government to issue immediate decree to: - Resume the census process. - Schedule dates for gradual closure. - Prohibit opening of new accounts with commercial banks. - Review listed accounts to set schedule for closures in dialogue with BEAC, repatriate credit balances into TSA, and define treatment of debit balances. - Safeguarding VAT credit payments: escrow account opened in January 2018; General Directorate of Tax began to replenish in February 2018; efforts to improve functions and extend use to General Directorate of Customs. - Deferred payment mechanism to be tested with two oil companies and the mining company (which received 83 percent of payments in 2017) to eliminate cash advances for import VAT and avoid refunds; to be introduced by the 2019 budget law with draft provision to modify the Tax Code and define eligibility criteria (new structural benchmark, October 2018). A letter of the Minister of Economy to the three targeted companies to present the mechanism and requirements (new structural benchmark, October 2018). *Source: IMF — Chapter/section "8. Medium-term prospects remain relatively promising if adequate policies are implemented as planned."* ### 23. Rationalization and control of customs and tax exemptions will continue. The amount ### Rationalization and control of customs and tax exemptions will continue. ### Exemptions: scope, controls, and reporting - Exemptions still account for 65 percent of customs receipts and 19 percent of total tax revenues collected. - The amount of tax expenditure slightly decreased in 2017. - Counterparty controls carried out under the program “tax justice” remain ongoing. - The suppression of illegal exemptions will be accelerated; stricter follow-up of the number of tax exempt imported goods will be instituted. - A decree detailing conditions for granting tax and customs incentives will be completed with a calendar of imports or domestic purchases required for an investment project. - By the end of 2018, tax and customs departments will carry out joint controls of recipients of exonerated goods, focusing on high-risk areas (e.g., investment projects with a slow rate of implementation, projects with social aims that have not been achieved). - The Government will produce an annex to the Supplementary Budget Law listing granted exemptions and detailing their economic, budgetary, and social impact. - Eligible enterprises must fulfill the following conditions to benefit from the VAT deferred payment mechanism: compliance with reporting requirements and payment of taxes and duties; tax and customs compliance, non-existence of customs or tax arrears and/or serious customs or fiscal offences; removal credit with an agent approved by customs staff; and compliance with solvency requirements: fixed assets, assets, bank guarantee. - The VAT deferred payment mechanism applies exclusively to the import of materials, equipment, and spare parts of industrial materials, equipment, and machines. ### Customs and tax procedures: anti-undervaluation and targeted controls - Measures enacted to address persistent undervaluation include: - Creation of a specific unit to review declarations indicating undervaluation of goods. - Transfer of suspect cases to special units for revision and comprehensive review. - Development of an automated quotation system. - These measures will be extended through joint tax and customs controls targeting importers and distributors of palm oil to identify and regularize possible fraudulent practices on the nature or the volume of imports declared. - Specific checks of VAT credit payments will be carried out based on objective risk criteria to improve management of VAT credit payments. ### Upfront payment at customs - Upfront payment will be implemented as the regular payment method at customs. - With a note dated April 13th, 2018 the Director General of Customs initiated a communication campaign informing operators of the legal requirement of upfront payment. - Resistance from importers delayed finalization of the list of companies eligible to collect credit on an exceptional basis (structural benchmark, End-March 2018). - The list of eligibility criteria has been established in consultation with the main importers’ trade union and is being validated with concerned operators. - To facilitate implementation, payments via bank transfer through BEAC tools such as SYGMA and SYSTAC will be explored. ### VAT fraud detection and VAT regime adjustments - Measures to detect, prevent, and address VAT fraud have been initiated: - 30 audits undertaken led to tax adjustments totaling CFAF 332 million; controls will continue through the end of July. - Publication on the website of the Directorate General of Tax of all registrations has been initiated and is being gradually extended. - Low number of net contributors and many companies failing to submit declarations, or declaring no turnover or very low VAT credits, have eroded VAT collections. - The register of taxable individuals and mechanisms for tracking VAT returns must be improved. - Monitoring of VAT on taxable individuals (companies whose annual turnover is higher than CFAF 60 million) will be transferred from CIPEP to SUMMIT (revised structural benchmark, end-July 2018) to facilitate identification and regularization when turnover exceeds CFAF 60 million. - The taxable turnover threshold will be raised to CFAF 150 million. - Conditions for application of VAT will be strengthened, including obligation to maintain regular accounts, guarantees of solvency (tax history, financial capacity, economic scale, lease, etc.), and the possibility to question the VAT option if the taxpayer defaults. ### Paperless customs and IT modernization - Reforms developing paperless customs procedures will be extended and consolidated. - Migration of customs administration to ASYCUDA/SYDONIA World will be accompanied by reengineered processes and new customs clearance procedures. - Migration to ASYCUDA/SYDONIA World will be linked to the multimodal electronic single window project; a service provider was recently selected by the Ministry for private Investment Promotion, National Entrepreneurship, Small and Medium-Sized Enterprises, Trade and Industry. - Implementation of automated risk management will be reactivated. ### Establishment of the Gabon Revenue Authority (GRA) - Preparatory activities completed include: - Establishment of a project team. - Detailed presentation of the project to the Prime Minister and publicity campaigns targeting other administrations. - Finalization of the draft text establishing the GRA (currently under discussion). - Finalization of a draft decree establishing and organizing the National Commission for the Orientation of Tax Policy. - Next steps: - Adoption of the draft Law creating the GRA and defining methods, procedures, and operations. - Definition of an internal and external communication policy for rollout. - Creation of a framework for consulting and sharing between authorities and technical and financial partners to facilitate provision of resources and expertise to the Steering Committee. ### Other PFM structural reforms: earmarking, oversight, and reporting - Fiscal reporting of earmarked revenues and corresponding expenditures will be reinforced; the budget law currently includes six special accounts benefiting from earmarked revenues. - Review of earmarking will continue, covering creation of new special accounts or recourse, other procedures under the organic budget law, and elimination of earmarks that do not comply with legal criteria for exceptions to budgetary universality. - A new administrative unit for gathering and coordinating financial information from public entities and departmental agencies will be created (new structural benchmark, end-September 2018); a first draft of terms of reference is available. - A new decree establishing a harmonized statute of departmental agencies will be published (new structural benchmark, end-September 2018) to harmonize statutes, identify resources, define management methods in line with the organic budget law, reinforce financial monitoring conditions, and repeal contrary former provisions. - The Government will revisit the law creating the FGIS to propose inclusion of representatives of the Ministers of Economy and Budget in the strategic committee of the FGIS. - For public enterprises, the Government confirms commitment to: (i) develop text specifying the objectives of the policy of State shareholding; and (ii) develop a dashboard with the comprehensive census of public enterprises in which the State holds participations, along with their administrators. - Quarterly fiscal reporting on budget execution will be improved and regularly published: two quarterly fiscal reports were issued (Q1 2017 report available online since May 2018; Q3 2017 report produced and posted in April 2018 — structural benchmark, end-February 2018). - The Government will accelerate production and publication of these reports and enhance information on execution of social expenditures, following the budgetary nomenclature and comparing outturns with quarterly targets under the program. - PFM reforms since 2015 will be consolidated; Gabon transposed PFM directives and presented and executed in 2015 a program-based budget. - Strict application of the rules on virements and transfers defined in article 45 will be enforced to safeguard optimal execution of appropriations, especially for social spending. ### Public procurement, public investment, and transparency - Commitments to reinforce transparency of public procurement and efficiency of public investment management are maintained. - Single tenders represented 87 percent of the total amount of public procurement agreements concluded in January 2018; threshold under the public procurement code is 15 percent. - All public-private partnerships concluded to date used non-competitive procedure. - Government commits to publishing quarterly reports on the Budget Ministry website on public procurement and PPPs, including nature and value of tenders accepted by direct negotiation and exemptions granted under negotiated procedure. - Commitment to carry out cost-benefit analyses of new investment projects was not adhered to in 2018; the Government will respect this commitment under forthcoming budget laws as projects are added to the triennial public investment strategy (revised structural benchmark, end-December 2018). - Government plans to dedicate funds in the annual budget to finance feasibility studies. - For 2018 supplementary budget, priority was given to investment projects with direct population impact (e.g., school renovation programs); selection of suppliers is based on systematic competitive procedures and largely relayed in the Gabonese press. ### Social sector policies - Government committed to improve predictability and quality of social spending; social spending remained low relative to the program target since 2017 due to tight cashflow. - To meet the social spending floor in 2018, the government (jointly with the World Bank) launched a performance-based financing program to prioritize social spending and improve delivery efficiency. - Under the program, identified priority social protection units will receive budget transfers based on quantity and quality of services provided, focusing on outcomes. - Government agreed with the World Bank to increase priority social spending, to be monitored under the Fund-supported program. - Once the national household survey is completed in September 2018, the government is committed to redefining the poor in Gabon (GEF) to better target the economically vulnerable. ### Financial sector: arrears, bank resolution, privatization, and SME financing - Government committed to implement a credible and transparent plan to repay domestic arrears. - Rising overdue loans to banks remain a key financial sector vulnerability. - With the “Club de Libreville,” the government intends to convert a large share of domestic debt into marketable securities to improve SME cashflow and address rising NPLs. - To speed resolution of insolvent public banks, the government will hire by end-July a reputable international consultant to develop a resolution plan minimizing cost; Terms of Reference (to be agreed with Fund Staff) will request evaluation (feasibility and cost) of available options by end-September 2018, including orderly liquidation (structural benchmark delayed from end-March 2018). - In consultation with COBAC, liquidation processes of Postebank and Banque de l’Habitat du Gabon (BHG) will continue; the government will refrain from deciding on creditor compensation before resolution options are evaluated. - The government will refrain from actions at Banque Gabonaise de Développement (BGD) that may interfere with the project or use public funds until a credible plan is submitted and discussed with Fund Staff. - Privatization: government will privatize its non-strategic 75 percent shareholding in BICIG by end-March 2019; the 75 percent share shall be sold using competitive bidding in line with international best practice. To initiate the process, a reputable firm will be hired by end-September 2018 and the government will refrain from interfering in the bank’s governance or affairs until shares are sold. - By end-October 2018, the High Council for the Promotion of Investment (HCPI) will deliver the strategy for clearance of loans in arrears (new structural benchmark); strategy to be developed with the Ministry of Justice and detailed into action plans to: (i) expedite training of specialized judges and improve judicial effectiveness, including establishment of commercial courts by end-March 2019; and (ii) modernize the registry regarding trade and real estate credit. An interim version shall be provided for comments by end-September 2018. - By end-December 2018, the government will restructure SME funding to support economic development and financial inclusion: - Efforts to finance SMEs via direct loans from BGD failed to catalyze private sector growth; government will support diversification exclusively through indirect channeling of funds to SMEs through commercial banks. - The government will establish a shared guarantee fund for SMEs; the concept paper will be timely shared with Fund Staff for comments. - The guarantee fund will: - Allow only for indirect public financing through commercial banks. - Regroup all Gabonese Funds and initiatives aiming at funding SMEs to enhance impact, coordination, and visibility. - Support SMEs in preparing funding and business plans to obtain funding from commercial banks; this support would be publicly funded but provided by the private sector. ### Diversification and business environment reforms - Government renews commitment to structural reforms to improve business climate and reinforce attractiveness. - Short-run actions concentrate on two pillars: preserving financial stability and ensuring the financial sector supports private sector activity; continuation of the Economic Recovery Program (PRE) and Strategic Plan for Emerging Gabon (PSGE). - Improvement of the business climate is a principal pillar for diversification; government aims to: (i) lower costs of running a business; (ii) provide a stable business environment; and (iii) reduce barriers to entry. - Follow-up report of PRE and PSGE focuses on institutional and legal framework and incentives for private companies; recommendations organized around a priority short-term axis and a strategic medium/long-term axis. - Short-term priorities with deadlines and initiatives: - Land titles: complete a complete cartography of occupation and land use (available online on www.pnat.ga) by end 2018; resolve conflicts between concessions and set up the "Natural Resources and Land Use Regulation Commission". Next steps: resolution of all land disputes (by [October] 2018); approval of the national master plan (by [October] 2018). - Public-Private Partnerships (PPPs): PPP Committee set up by ANPI; committee implementing new normative framework for new PPP projects; placed within the Ministry of Economy to ensure competition rules among service providers. - Arbitration Chamber: unveiled in April 2018; will start work by September 2018 to provide out-of-court settlement options and reduce judicial caseload. - Judicial and registry reforms: commitments include improving training of specialized judges; setting up commercial courts (Ministry for Justice); modernizing trade and mortgage registry (Ministry for Justice); creating an Arbitration Chamber within the Chamber of Commerce. - Building permits: commitment to reduce time and average costs to obtain permits to remove constraints for investors. - One-stop shop: impact analysis survey under preparation for centers in Libreville, Libreville airport, and Nkok industrial park. - Labor Code reform: work begun to modernize the Labor Code to make it more flexible and increase formal employment, alongside vocational training initiatives for youth. *IMF staff report content as provided in the supplied PDF excerpt.* ### 42. To increase the transparency of the management of oil and mining revenues, the ### 42. To increase the transparency of the management of oil and mining revenues, the ### Extractive revenue transparency and EITI - Government commitment to step up efforts to join the Extractive Industries Transparency Initiative (EITI). - Government will facilitate and accelerate formation of a tripartite group (Government, extractive companies, civil society) to produce and submit the necessary report to the EITI Secretariat without further delay. - EITI’s goals of transparency will be upheld in the development of new oil and mining codes being prepared by the Ministry for Hydrocarbons and the Ministry of Mines. ### Statistics program and data improvements - Government has started an ambitious program to improve economic statistics in Gabon. - Demographic and health surveys will be completed and published in 2018 and 2019, respectively. - Other surveys (including poverty, companies, employment, informal sector, and household surveys) will be conducted by 2019. - With support from AFRITAC and BEAC, efforts intensified to improve quality, coverage, and timeliness of statistics, including national accounts, fiscal data, and balance of payments. - National accounts were revised for the period 2011 to 2015; preparations underway to finalize those for 2016 and 2017 by October 2018. - Government financial statistics for 2012 to 2016 were transposed according to the IMF Handbook of Government financial statistics (GFS) classification and transmitted to IMF statistical databases. ### Support for high-level public-private dialogue - Platform for high-level public-private dialogue has begun work; Government committed to supervising it. - High Council of Investment (HCI) held two meetings since 2017: one to adopt procedural rules and action plan, and another to discuss domestic arrears clearance strategy. - Government determined to continue supervising dialogue and to increase frequency of HCI meetings to secure private sector support for business-climate reforms. ### Program monitoring framework - Program implementation monitored through prior actions, semi-annual reviews, quantitative performance criteria and indicative targets, continuous performance criteria, and structural benchmarks. - Third review set for December 2018, based on end-June 2018 quantitative performance criteria, the continuous performance criterion, and relevant structural benchmarks. - For all reviews, quantitative performance criteria will include: - a floor on non-oil revenue, - a floor on the primary fiscal balance, excluding oil revenue (on a payment order basis), - a ceiling on the stock of net claims of the banking system on the central government, - a ceiling on central bank net claims on central government, excluding the use of IMF credit, - a ceiling on contracting or guaranteeing of external debt (program and project), - a ceiling on the accumulation of new external arrears by the central government. - Prior actions and structural benchmarks are set out in Tables 3 and 4. Quantitative targets through end-June 2018 and a continuous quantitative performance criterion are set out in Tables 1 and 2. ### Selected quantitative program target outcomes (2017) — illustrative figures from Table 1 - Floor on primary fiscal balance, excluding oil revenue (on a payment order basis): Prog. -646.1; Adj. Rev. -646.1; Act. -167.1; Status: Met / later instances: Not Met. - Unadjusted target (floor): -167.1; -331.2; -358.6; -559.3. - Adjustment for lower (higher) than expected external program disbursements: -53.0; 80.0; 80.0; 80.0. - Ceiling on stock of net claims of the banking system on the central government: examples include 574.2; 653.7; 521.4; 547.9; 662.1; Status: Not Met / Met across reporting dates. - Unadjusted target (ceiling): 600.9; 724.2; 742.7; 819.1. - Ceiling on central bank net claims on central government, excluding use of IMF credit: examples 240.7; 220.6; 252.9; 210.5; 217.9; Status: Not Met / Met across reporting dates. - Ceiling on contracting or guaranteeing of external debt (program and project): examples 191.9; 138.9; 329.4; 329.4; 225.8; Status: Met. - Continuous performance criterion — Ceiling on accumulation of new external arrears by the central government: targets include 0; reported accumulations include 66; Not Met across reviews. - Indicative targets — Ceiling on the stock of domestic arrears: targets and reports include 638.6; 638.5; 589.0; 637.2; 577.6; 610.3; Status: Met / Not Met. - Indicative targets — Floor on government tax revenue, excluding oil revenue: examples include 899.4; 196.9; 212.5; 379.2; 463.0; 693.9; 617.3; Status: Met / Not Met. - Floor on social protection spending: reported figures include 30.3; 68.2; 49.4; 106.1; 58.5; 151.6; Status: Not Met. ### Proposed quantitative program targets and indicative figures (2017–19) — illustrative from Table 2 - Floor on primary fiscal balance, excluding oil revenue (on a payment order basis): examples include -559.3; -581.6; -104.3; -24.3; -194.5; Status: Not Met or Estimated Not Met for certain review dates. - Ceiling on stock of net claims of the banking system on the central government: examples include 819.1; 664.4; 861.1; 941.1; 864.7; Status: Met for specified dates. - Ceiling on central bank net claims on central government, excluding use of IMF credit: examples 220.6; 138.0; 219.2; 341.6; Status: Not Met / Estimated Not Met. - Ceiling on contracting or guaranteeing of external debt (program and project): examples 916.2; 779.5; 99.7; 205.9; 284.0; Status: Met / Unadjusted target values provided. - Continuous performance criterion — Ceiling on accumulation of new external arrears: reporting indicates "0...46", "0...78.2", and repeated Not Met status. - Indicative target — Ceiling on the stock of domestic arrears: examples 453.5; 553.8; 379.0; 572.6; Status: Not Met for certain dates. - Indicative target — Floor on government tax revenue, excluding oil revenue: examples 860.9; 770.0; 275.1; 179.9; 570.5; 423.1; Status: Not Met on some reporting dates. - Indicative target — Floor on social protection spending: examples 151.6; 58.5; 30.3; 68.2; 106.1; 150.0; 151.6; 214.3; Status: Pending or Not Met on some dates. ### Structural benchmarks for 2017–18 (selected) - Public Expenditure Management (PFM) measures and statuses: - Implement the VECTIS module to allow systematic issuance of mandatory payment orders; sensitize suppliers and administrative officers. Timeframe End-June 2017. Status: Met. - Publish quarterly reports on amount and composition of unpaid payment orders and arrears. Timeframe End-September 2017 (for preceding quarter). Status: Not Met. - Publish cost-benefit analyses for investment projects authorized by budget law with budgets exceeding CFAF 20 billion. Timeframe End-December 2017. Status: Not Met; Proposed new timeframe End-December 2018. - Complete independent audit of 2015 and 2016 domestic expenditure arrears. Timeframe End-March 2018. Status: Not Met; Proposed new timeframe End-September 2018. - Publish quarterly budget execution reports within 55 days from quarter end, transmitted to Parliament, using budget law nomenclature and including social spending analysis. Timeframe End-February 2018. Status: Not Met. - Adapt the E-BOP information system to new expenditure execution procedure to allow systematic issuance of purchase orders and train local staff. Timeframe End-January 2018. Status: Not Met. This was a prior action for the 2nd EFF review. - List all central government entities whose funds are not deposited in the Treasury single account and strictly limit opening of new bank accounts. Timeframe End-January 2018. Status: Not Met. This was a prior action for the 2nd EFF review. _Italic: Sources: Gabonese authorities and IMF staff estimates._ ### 2018. The report for the fourth quarter of 2017 has not yet bee ### cr18269 - 2018. The report for the fourth quarter of 2017 has not yet bee ### Structural benchmarks for 2017–18 (selected measures and status) - Tax Policy/Revenue Administration - Publish an annex to the Budget Law covering derogations from the existing tax exemption regime, including details on their economic, budgetary, and social impact. - Macroeconomic rationale: Strengthen revenue mobilization - Related documentation: Copy of the annex to the 2018 Budget Law. - Timeframe: End-December 2017 - Status: Not Met - Proposed New Timeframe: End-July 2018 - Note: This annex is expected to be attached to the 2018 Supplementary Budget. - Eliminate tax and customs exemptions from computer software system that do not have a legal basis. - Macroeconomic rationale: Boost revenue collection - Related documentation: Report providing the list of custom codes extracted from the IT system on the nature and amounts of the retained tax and custom exemptions. - Timeframe: End-March 2018 - Status: Met - Inform importers that upfront payment is the regular procedure for the clearance of customs debts and define the list and selection criteria for importers eligible for a bonded bank guarantee (crédit d’enlèvement). - Macroeconomic rationale: Boost revenue collection - Related documentation: Report on the sensitization campaign and the list and selection criteria for importers eligible for the removal credits. - Timeframe: End-March 2018 - Status: Not Met - Note: The sensitization campaign has been completed. The list of selection criteria for importers eligible for the removal credits is currently being validated. - Regularize tax situation of importers not subject to VAT, but whose transactions exceed the VAT liability threshold. - Macroeconomic rationale: Boost revenue collection - Related documentation: Report on completed tax adjustments. - Timeframe: End-March 2018 - Status: Not Met - Proposed New Timeframe: End-July 2018 - Note: This measure is expected to be fully implemented at end-July 2018. - Debt Management - Clear all external arrears to official external creditors. - Macroeconomic rationale: Strengthen debt and cash management - Related documentation: Signed letter of confirmation from the Minister of Economy - Status: Prior Action — Met - Update the debt management strategy that is annexed to the budget law, including a strategy for the clearance of arrears based on transparent criteria for prioritization of external and domestic arrears payments. - Macroeconomic rationale: Ensures government’s gross financing needs and payment obligations are met on a timely basis at a reasonable cost - Related documentation: Publication of the updated debt management strategy and of the arrears liquidation plan on Economy and Budget Ministries websites’ homepage - Timeframe: End-January 2018 - Status: Not Met - Proposed New Timeframe: End-July 2018 - Note: This strategy should be based on a quarterly cash flow plan; the strategy is expected to be attached to the 2018 supplementary budget. - Financial Sector - Prepare a plan for the orderly resolution of the activities of the three distressed state-owned banks. - Macroeconomic rationale: Reduce financial sector vulnerabilities and fiscal risks. - Related documentation: Copy of the document signed by Minister of Economy. - Timeframe: End-July 2017 - Status: Met - Prepare a national strategy to strengthen legal and supervisory frameworks concerning non-performing loans. - Macroeconomic rationale: Reduce financial sector vulnerabilities and fiscal risks. - Related documentation: Copy of the document presenting the national strategy signed by Minister of Economy. - Timeframe: End-September 2017 - Status: Met - Prepare an assessment of options, reviewed and agreed by staff, for the resolution/restructuring of the public banks that protects financial stability while minimizing the costs to the state. The report will include description of key assumptions; fiscal cost to the state; and an assessment of forward-looking viability. - Macroeconomic rationale: Reduce financial sector vulnerabilities and fiscal risks - Related documentation: Copy of the document signed by Minister of Economy - Timeframe: End-March 2018 - Status: Not Met - Business Climate and Diversification - Establish assessment, validation, and monitoring bodies for PPPs in the Ministry of Economy as provided for by the PPP Law. - Macroeconomic rationale: Leverage private sector expertise to support investment projects. - Related documentation: Copy of the Presidential decree. - Timeframe: End-September 2017 - Status: Met ### Proposed new structural benchmarks for 2018 (selected measures and status) - Fiscal and PFM Prior Actions (Met) - Cancellation of 1.5 percent expenditure appropriations under the 2018 Budget Law equivalent to 0.3 percent of GDP. - Related documentation: The executive order prepared by the Budget Minister, signed by the Prime Minister and transmitted to the Parliament for information. - Status: Prior action, Met 7/11/18 - Senate Adoption of 2018 Supplementary Budget. - Related documentation: Copy of the draft 2018 Supplementary Budget and press release announcing adoption of the Supplementary Budget - Status: Prior action, Met 6/29/18 - Public Expenditure Management (PFM) — Prior actions (Met) - Adapt the E-BOP information system to the new expenditure execution procedure to allow the systematic issuance of purchase orders, and train local staff concerned in the new procedure. - Macroeconomic rationale: Improve transparency and efficiency of public spending - Related documentation: Copies of the order forms issued by the system and launch of the training program. - Status: Prior action, Met 7/10/18 - List all central government entities whose funds are not deposited on the Treasury single account. - Macroeconomic rationale: Improve and rationalize cash flow management - Related documentation: Inventory submitted to IMF staff. - Status: Prior action, Met 7/11/18 - Note: These include accounts managed by social security funds and other trust funds, extra-budgetary funds and autonomous government entities. - Transmit a letter to the Fonds Gabonais d’Investissements Strategiques (FGIS) requesting to put on hold planned acquisition of assets in 2018. - Macroeconomic rationale: Maintain fiscal discipline and sustainability - Related documentation: Copy of the letter signed by Economy and Budget Ministers. - Status: Prior action, Met 7/10/18 - PFM reforms (timed) - Adopt an action plan to upgrade financial information systems of public entities, notably extrabudgetary units managing special accounts, to comply with the new expenditure procedure. - Macroeconomic rationale: Reduce fiscal risks - Related documentation: Action plan adopted by the Budget Minister submitted to IMF staff. - Proposed Timeframe: End-October 2018 - Create a single unit responsible for the financial oversight of public entities, including for gathering and coordinating financial information provided by these entities. - Macroeconomic rationale: Reduce fiscal risks - Related documentation: Copy of the enactment creating the policy unit and detailing its tasks. - Proposed Timeframe: End-September 2018 - Publish a new decree establishing harmonized statutes for public administrative institutions and repealing earlier provisions. - Macroeconomic rationale: Reduce fiscal risks - Related documentation: Copies of the decree and verification of online posting. - Proposed Timeframe: End-September 2018 - Decree should include provisions to (i) harmonize statues of public administrative institutions, (ii) identify own revenues of those institutions, (iii) comply with the new PFM legal framework, (iv) strengthen financial oversight of these entities, (v) repeal existing regulations establishing statues for public administrative institutions. - Close central government’s accounts opened with the deposits and consignments fund (Caisse des dépôts et consignations, or CDC) and repatriate their balances to the TSA. - Macroeconomic rationale: Improve and rationalize cash flow management - Related documentation: List of closed accounts including their balances. - Proposed Timeframe: End-September 2018 - Tax Policy/Revenue Administration (selected proposed actions) - Elimination of duty exemptions under the “programme de lutte contre la vie chère”. - Macroeconomic rationale: Boost revenue collection - Related documentation: Order of the Economy Minister listing relevant goods and tariffs and requesting the update of the customs IT system; Provision in the 2018 Supplementary Budget detailing exemptions that are maintained; Published press release announcing the measure. - Status: Prior action, Met 7/10/18 - Introduce a VAT deferred scheme targeting the two oil companies and the national mining company. - Macroeconomic rationale: Avoid VAT arrears accumulation and reduce liquidities pressure - Related documentation: (i) Revision of the tax code included in the 2019 draft budget law, (ii) order of the Economy minister detailing criteria and procedures, and (iii) letters to the three companies specifying criteria and procedures. - Proposed Timeframe: End-October 2018 - Collect 40 percent of recoverable tax arrears. - Macroeconomic rationale: Boost revenue collection - Related documentation: Reports on completed tax adjustments. - Proposed Timeframe: End-September 2018 - Clear 50 percent of expired suspensive customs procedures. - Macroeconomic rationale: Boost revenue collection - Related documentation: Report on completed recovery procedures, including a list of targeted companies and detailing reached outcomes. - Proposed Timeframe: End-December 2018 ### Technical Memorandum of Understanding (TMU) — scope and valuation conventions - Document date: July 24, 2018 - Purpose: Sets out understandings between Gabonese authorities and the IMF regarding definition of quantitative performance criteria (QPC) and indicative targets (IT), QPC/IT adjusters, and data reporting requirements for the duration of the extended arrangement under the Extended Financing Facility as described in the authorities’ Letter of Intent (LOI) dated July 24, 2018, and attached MEFP. - Exchange rate conventions (program accounting exchange rates unless otherwise indicated; government fiscal balances measured at current exchange rates): - U.S. dollar denominated components of BEAC balance sheet valued at official exchange rate of the CFAF to the U.S. dollar of 546.89 as of June 1, 2018. - Cross-rates for conversion into U.S. dollars: - Euro: 1.1994 U.S. dollars - Pound Sterling: 0.7868 U.S. dollars - Chinese Yuan: 6.8812 U.S. dollars - Special Drawing Right (SDR): 1.4331 U.S. dollars - Official gold holdings valued at 1,314.42 U.S. dollars per fine ounce. ### Definition and reporting of central government (CG) and fiscal year - Definition of CG: All institutions, government units, and special funds (including the Road Fund) currently covered under the state budget. Excludes local government authorities, the BEAC, or any government-owned entity with separate legal status. - Authorities will inform Fund staff of any new funds or special budgetary and extra-budgetary programs created during the program period and ensure incorporation within CG definition. - Fiscal year: Calendar year, January 1 to December 31. - Reporting cadence: Data will be provided to the Fund with a lag of no more than six weeks after the end of the month (paragraph 11 and repeated elsewhere for other items). ### Quantitative performance criterion A — Cumulative floor on the Non-Oil Primary Fiscal Balance on a Payment Order Basis - Definition of non-oil primary fiscal balance of the CG on a payment order basis: - Measured as difference between: i. total central government revenue on a cash basis (excluding oil revenue), and ii. total central government expenditure on a payment order basis excluding interest payments. - Revenue and expenditure specifics: - Total CG revenue (excluding oil) measured on cash basis; includes offsetting revenue and expenditure operations and earmarked revenues (Road Fund and special funds). Oil revenue includes payments received in cash and in crude (see Text Table 1). - Revenue received by the treasury registered after encashment, at most 7 days after date of receipt; oil revenue received in kind recorded at transaction value on the day of sale. - Total CG expenditure includes spending on payment order basis (ordonnancements), treasury advances (avances à régulariser), and outlays on special funds and from earmarked revenues. TOFE presentation to recognize additional government expenditures including certain capital transfers and year-end current transfers used for financing deficits on Treasury and local government accounts. - Reporting: Data to Fund within six weeks after month end. - Adjusters: - The cumulative floor will be adjusted downward (upward) to the extent that external financing is more (less) than external program disbursements given in Text Table 1, to a maximum of CFAF 80 billion. - Text Table 1: External Program Disbursements (Baseline Projection) (In US$ Millions) - External loans for budget support: - End March 2018 0.0 - End June 2018 0.0 - End September 2018 147.4 - End December 2018 757.4 - End March 2019 0.0 - End June 2019 147.8 - External loans for project financing: - End March 2018 15.5 - End June 2018 38.7 - End September 2018 97.8 - End December 2018 173.1 - End March 2019 128.0 - End June 2019 256.1 - External loans from commercial sources and international capital markets: - End March 2018 4.9 - End June 2018 10.0 - End September 2018 17.7 - End December 2018 25.5 - End March 2019 6.4 - End June 2019 12.7 ### Quantitative performance criterion B — Ceiling on the Net Claims of the Banking System on the Central Government - Definition: Net claims of the banking system on the CG measured per BEAC accounting practice; sum of: i. Central bank net claims on CG — including deposits, loans, advances, accounts receivable, and any other government claim or liability as defined in the monetary survey. ii. Other depository corporation net claims on CG — including securities of the CG, loans to central government, other advances to CG, and deposits of the central government with depository corporations. - Stock example (Text Table 2, CFAF billions, stock): - Banking system, Net claims on central government - Dec-15 143.5 - Dec-16 653.7 - Jun-17 646.9 - Central Bank, Net claims on central government - Dec-15 -79.5 - Dec-16 220.6 - Jun-17 268.5 - Claims on central government - Dec-15 452.9 - Dec-16 452.7 - Jun-17 511.0 - Loans to central government - Dec-15 452.5 - Dec-16 452.5 - Jun-17 452.5 - Use of IMF credit - Dec-15 0.0 - Dec-16 0.0 - Jun-17 58.0 - Other - Dec-15 0.4 - Dec-16 0.2 - Jun-17 0.4 - Liabilities to central government - Dec-15 532.4 - Dec-16 232.1 - Jun-17 242.4 - Treasury vault cash - Dec-15 18.6 - Dec-16 36.8 - Jun-17 36.8 - Fund for Future Generations/Sovereign Wealth Fund - Dec-15 146.6 - Dec-16 150.2 - Jun-17 122.3 - Treasury current accounts at the BEAC - Dec-15 367.2 - Dec-16 45.1 - Jun-17 83.3 - Other Depository Corporations, net claims on central government - Dec-15 223.0 - Dec-16 433.1 - Jun-17 378.4 - Claims on central government - Dec-15 412.0 - Dec-16 621.7 - Jun-17 582.7 - Securities Central Government - Dec-15 357.7 - Dec-16 517.6 - Jun-17 500.1 - Regional bonds - Dec-15 54.3 - Dec-16 104.2 - Jun-17 82.5 - Liabilities to central government - Dec-15 189.1 - Dec-16 188.6 - Jun-17 204.3 - Treasury deposits - Dec-15 42.2 - Dec-16 42.2 - Jun-17 36.1 - Other deposits - Dec-15 146.9 - Dec-16 146.4 - Jun-17 168.2 - CCA - Dec-15 0.0 - Dec-16 0.0 - Jun-17 0.0 - Source: BEAC - As of June 30, 2017, net claims of the banking system on the central government amounted to CFAF 646.9 billion (Text Table 2). - Exclusions: Ceiling does not apply to new agreements for restructuring of domestic debt or securitization of domestic arrears. - Reporting: Data to IMF with a lag of no more than six weeks after the end of the month. - Adjusters for the ceiling: i. The program ceiling will be adjusted downward (upward) by the full amount of the cumulative excess (shortfall) in external program disbursements relative to the baseline projections in Text Table 1, up to a maximum of CFAF 80 billion. ii. Oil price related adjusters to shield fiscal objectives: - a. If Brent oil price projections as reported by IMF-WEO decline by up to 25 percent relative to the program baseline (US$73.258 per barrel), the ceiling will be adjusted upward to accommodate the shortfall in oil revenue in a given quarter. - b. If Brent oil price projections as reported by IMF-WEO decline by more than 25 percent relative to the baseline program projection, then a consultation between the government and the IMF is required. - c. If Brent oil price projections as reported by IMF-WEO rise relative to the baseline program projection for 2018, the entirety of oil revenues additional to the baseline program projection should be deposited in Gabon’s Fund for Future Generations at the BEAC. iii. The program ceiling will be adjusted upward to reflect any purchase by commercial banks of outstanding contractual government credit (rachat de créances) and government bonds issued on the CEMAC market held by non-bank private sector creditors as of end-2017. ### Quantitative performance criterion C — Ceiling on Net Claims of the BEAC to the Central Government, Excluding the Use of IMF Credit - (Section title present; definitions and details continue beyond provided excerpt.) *Source: IMF staff and Gabonese authorities (excerpts from the TMU and structural benchmark tables).* ### 18. Definition. The ceiling on net claims of the BEAC to the central government, excluding IMF ### cr18269 - 18. Definition. The ceiling on net claims of the BEAC to the central government, excluding IMF credit ### Definition of the ceiling on net claims of the BEAC to the central government - The ceiling is calculated as: gross claims of the BEAC on the central government, including BEAC statutory advances to the CG and other BEAC claims on the CG (excluding BEAC claims on the CG created by the on-lending of IMF credit), less the gross liabilities of the BEAC to the CG, including treasury vault cash, deposits of the Future Generation Fund, deposits of the Sovereign Wealth Fund, and other central government deposits held at the central bank. ### Reporting requirements (BEAC net claims) - Data will be provided to the IMF with a lag of no more than six weeks from the end of the month. ### Adjusters for the performance criterion on net claims of the banking system on the central government - Objective: shield fiscal objectives from uncertainties regarding oil prices. - Adjustment rules: - If Brent oil price projections as reported by IMF-WEO decline by up to 25 percent relative to the program baseline (US$73.258 per barrel), the ceiling will be adjusted upward to accommodate the shortfall in oil revenue in a given quarter. - If Brent oil price projections as reported by IMF-WEO decline by more than 25 percent relative to the baseline program projection, then a consultation between the government and the IMF is required. - If Brent oil price projections as reported by IMF-WEO rise relative to the baseline program projection for 2018, the entirety of oil revenues additional to the baseline program projection should be deposited in Gabon’s Fund for Future Generations at the BEAC. ### Ceiling on Contracting or Guaranteeing External Debt by the Central Government — Definition - Debt definition: as set out in paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to IMF Executive Board Decision No. 15688-(14/107), adopted on December 5, 2014. - For these guidelines, “debt” means a current (not contingent) liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, requiring future payments in assets or services to discharge principal and/or interest. - Primary forms of debt specified: - loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements); - suppliers’ credits (deferral of payment after delivery of goods/services); - leases (debt is the present value at lease inception of all lease payments expected during the agreement, excluding payments for operation, repair, or maintenance). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. ### Definition and scope of the external debt performance criterion - External debt for the ceiling: debt contracted or serviced in a currency other than the franc of the Financial Community of Africa (CFAF). - The PC applies to all external debt (whether or not concessional) contracted or guaranteed by the CG, including commitments or guarantees for which no value has been received. - The performance criterion is assessed on a cumulative basis during the fiscal year. - Exemptions: does not apply to: - Normal import-related commercial debt having a maturity of less than one year; - Rescheduling agreements. - For program monitoring, external debt is deemed contracted/guaranteed once all conditions for its entrance into effect have been met, including approval by the Republic of Gabon. - For eurobond issuance, the amount deemed contracted is the amount subscribed/purchased at the end of the subscription/purchase period as specified in the final documentation. ### Adjusters for the external debt ceiling - The program ceiling applicable to new external debt is adjusted upward up to a maximum of 5 percent of the ceiling on new external debt when differences vis-à-vis the PC on new debt are caused by a variation in financing conditions (interest, maturity, grace period, payment schedule, front-end fees, management fees) of the debt or debts. The adjustor may not be applied when differences result from an increase in the face value of the total debt contracted or guaranteed. - The program ceiling will be adjusted upward (downward) in cases where early (late) disbursements of specifically agreed and identified financing flows take place. ### Reporting requirements (external borrowing) - The authorities will inform IMF staff of any planned external borrowing and the conditions on such borrowing before the loans are either contracted or guaranteed by the government. ### Ceiling on the accumulation of new external arrears by the Central Government — Definition - The accumulation of external payments arrears by the CG is a continuous performance criterion with a zero limit throughout the program period. - External payment arrears are defined as contractual external debt service obligations (interest and/or principal, including moratorium and later/penalty interest, where applicable) of the CG that have not been paid within 30 days after falling due. - Exemptions: does not apply to external payment arrears arising from external debt being renegotiated with external creditors, including Paris Club creditors; specifically applies where a creditor has agreed that no payment needs to be made pending negotiations. ### Reporting requirements (external arrears) - Monitored on an ongoing basis. - The Ministry of Economy will provide final data on the stock of external arrears of the CG to the IMF, including any occurrence of new arrears accumulation, with a lag of not more than three weeks from the end of the month. ### Cumulative floor on Central Government tax revenue, excluding oil revenue — Definition and timing - Non-oil revenue: revenue from tax and non-tax collection; excludes all revenue from asset sales, grants, and oil revenue. - The floor on government tax revenue, excluding oil revenue is: - an indicative target for end-June 2018; - a performance criterion beginning with the end-December 2018 quantitative program target. ### Reporting requirements (non-oil revenue) - Data will be provided to the IMF with a lag of no more than six weeks from the end of the month. ### Quantitative indicative targets — Definitions of key variables - Cumulative floor on the net reduction of the stock of domestic arrears of the CG: - Stock of domestic payment arrears: sum of all contractual obligations unpaid 90 days after the payment order date; includes procurement contracts, statutory obligations (civil service wages, VAT reimbursements, other entitlements). - Measured as: stock of outstanding domestic arrears on the test date minus the stock of outstanding domestic arrears as of January 1, 2017. - Reporting: data on repayment and new accumulation of domestic payment arrears and remaining previous-year stock will be provided to the IMF with a lag of no more than six weeks from the end of the month. - Cumulative floor on Central Government social spending: - Floor on non-wage social spending as defined in the CG budget for a fiscal year; funded by government resources. - Includes: - spending on primary, secondary, and vocational education, including basic goods and services, and school infrastructure and rehabilitation; - spending on health programs, including basic goods and services, and transfers for primary health care facilities; - spending on social protection including health insurance and targeted safety nets. - Reporting: Data will be provided to the IMF with a lag of no more than six weeks from the end of the month. ### Program monitoring — Reporting requirements (monthly and other data) - The government will prepare and send to the IMF by e-mail data and monthly reports within six weeks following the end of the preceding month. Data include (but are not limited to): - the comprehensive monetary survey, the central bank balance sheet, and the consolidated balance sheet of the commercial banks (electronic file); - the central government financial operations on a payment order basis (ordonnancements), identifying discrepancies between the fiscal deficit and changes in domestic and external arrears and in the treasury float versus total net domestic bank/nonbank and net external financing (electronic file); - detailed breakdown of oil revenue by type (royalties, profit tax, dividends, bonuses and other) and by company/type of contract, and detailed breakdown of non-oil tax revenue (by type of tax) and nontax revenue (electronic file); - detailed breakdown of total central government expenditure, on an adjusted commitment basis, adjusted payment order basis, and cash basis as presented in the Tableau Intégré (electronic file); - details for domestic and external debt-service obligations, on a contractual and actual payments basis, with breakdown into interest and principal and by creditor, and any possible accumulation of domestic or external arrears (electronic file); - details on the stock of external and domestic debt at the end of each quarter prepared by the Generate Directorate of Debt; external debt stock evaluated at end-of-quarter exchange rates (electronic file); - details for the outstanding stock of the treasury float (month to month) and cumulative flows from January 1, 2017; net accumulation of new float since 2017 (difference between payment orders and payments made), and repayment of pre-2017 and 2017 onwards float; broken down by wages and salaries, goods and services, transfers and subsidies, interest, capital expenditure, and net lending; any stock-flow adjustment not consistent with flows should be explained (electronic file); - information on the balance of accounts relating to treasury correspondents, local governments, and other treasury financial operations specified in the TOFE; - the amount of new external debt contracted or guaranteed by the central government, with detailed original terms and conditions (currency of denomination, interest rate, grace period, and maturity) and envisaged disbursement path; - actual disbursements on external debt, including newly contracted loans, by creditors and by projects/programs and amounts of debt relief, if any, granted to Gabon by external creditors (electronic file); - monthly information on the oil sector: export prices, effective exchange rate, production per oil field, volume of exports and volumes provided to SOGARA based on data from the Direction Générale des Hydrocarbures (electronic file); - quarterly report on numbers and value of procurement contracts treated by the Direction Générale des Marchés Publics (DMP) by type of contracting; - indicators and other statistical data on recent economic developments, such as the household consumer price index, merchandise imports and exports (in value and volume terms) by major categories on the basis of customs data, timber production and exports by categories (in value and volume terms), quarterly reports on economic activity prepared by the General Directorate of the Economy (DGE) and six-monthly report of the balance of payments by the BEAC; - a status report on the implementation of the structural reforms specified in Table 2 attached to the letter of July 24, 2018. ### Technical Committee and additional reporting - The Technical Committee in charge of monitoring the Fund-supported program will provide the African Department of the IMF with any other information that the latter may deem necessary or request for effective monitoring of the program. *cr18269 - 18. Definition. The ceiling on net claims of the BEAC to the central government, excluding IMF credit* ### 7. The banking system remains generally sound, but vulnerabilities are rising. NPLs ### 7. The banking system remains generally sound, but vulnerabilities are rising. NPLs ### Banking system status and NPLs - NPLs increased and bank lending to the private sector declined further in 2017 and early 2018, reflecting notably stagnant economic activity and elevated domestic arrears. - Progress in developing a framework for the resolution of NPLs has taken longer than expected due to financial constraints. - Efforts by the authorities to resolve the three distressed public banks are advancing in collaboration with COBAC. - A reputable international consultant will be hired this year to develop a resolution plan to minimize the related cost. ### Program performance (end-December 2017 and early 2018) - Three out of five end-December 2017 performance criteria (PC) were met. - Financing constraints were an important factor in missing the PC related to the non-oil primary balance and the continuous PC on external arrears and the three indicative targets on: - non-oil revenue mobilization, - social spending, - domestic arrears. - It is likely that the continuous PC on external arrears and two end-June 2018 PCs (non-oil primary fiscal balance and net central bank claims on the government) were also missed at end-June 2018. - Delays occurred in implementing structural benchmarks (SBs) through end-March 2018 but most related measures have been implemented since then. ### Medium-term prospects and drivers of recovery - Medium-term prospects remain relatively promising. - Large and continuing FDI flows toward agri-business and other nontraditional sectors can help reduce dependence on oil and governmental activities. - Higher oil prices, recent oil discoveries, and ongoing work for a new fiscal regime for oil should encourage new investments and contribute to economic activity in the service sector. - Largely rural and labor-intensive agricultural and forestry projects could generate positive spillovers as business climate reforms are implemented. - Credit expansion is expected to pick up as recovery takes place. ### Authorities’ commitment and social risks - Authorities remain strongly committed to the program and intend to speed up reform momentum to strengthen macroeconomic stability and foster economic diversification while further contributing to regional external stability. - Authorities and staff agree there is a risk of social resistance to recent policy decisions to contain public spending; disorderly implementation of reforms could threaten program objectives. - To minimize those risks, authorities are strengthening coordination between government institutions. ### Fiscal policy, targets, and financing needs - Fiscal policy remains the centerpiece of the program, aiming to: - preserve fiscal and debt sustainability by targeting a reduction in the fiscal deficit in 2018, - return to an overall fiscal balance and surpluses over the medium term. - Progressive fiscal improvement is expected to reduce total public debt to below 50 percent of GDP by the end of the Fund-supported program and increase fiscal space for higher social and investment spending. - Given tight financing constraints, further assistance from international organizations will be critical to support macroeconomic and fiscal objectives, including to pay domestic and external debt. ### Fiscal reforms and public financial management (PFM) - Authorities committed to timely implementation of critical fiscal reforms presented in the MEFP, including: - Sustained efforts to increase domestic revenue mobilization with a special focus on recovering tax arrears and strictly enforcing compliance with tax policy. - Introduction in the 2019 budget law of a new deferred payment that eliminate VAT credits to provide greater visibility to creditors and address cash pressures. - Reinforced fiscal reporting of earmarked revenues and corresponding expenditures, and strengthened financial oversight of public entities and departmental agencies. - Improved transparency of public procurement and efficiency of public investment management. - Consolidation of PFM reforms undertaken since 2015. - Consolidation of the Treasury Single Account (TSA) through the transformation as TSA subaccounts of all existing government accounts in commercial banks. - Improved predictability and quality of social spending, with assistance from the World Bank. ### Arrears strategy and cash management - Authorities will pursue implementation of the arrears strategy and measures to prevent accumulation of new domestic arrears. - Measures include strengthening fiscal reporting and reinforcing cashflow management with: - regular meetings of the Government’s Cashflow Committee, - monthly fiscal cash flow plan to ensure no short-term liquidity shortfall. ### Financial sector stability and structural reforms - Preserving financial sector stability and ensuring the financial sector plays a leading role in supporting private sector activity remain top priorities. - Given the rise of overdue loans to banks, developing a framework for the resolution of NPLs will be a top priority. - Structural reforms aimed at bolstering competitiveness and underpinning a durable medium-term recovery will continue, focusing on restoring private sector confidence and including: - completion of the land titling reforms by end-2018, - operationalization of the Arbitration Chamber that was created in April 2018, - reducing time and costs pertaining to building permits, - strengthening one-stop-shop centers following their assessment study, - completing the ongoing reform of the labor code to make it more flexible and increase formal employment. ### Conclusion and requests - Despite underperforming revenue collection, authorities remain committed to program objectives and have taken decisive actions to keep it on track. - Authorities request Director’s favorable consideration of the completion of the second review of the program under the EFF arrangement. - They also request a waiver of nonobservance for: - the continuous performance criterion on external arrears accumulation, - two end-June performance criteria related to the non-oil primary fiscal balance and net central bank claims on the government. *cr18269 - 7. The banking system remains generally sound, but vulnerabilities are rising. NPLs* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18269.pdf_