## 1gnqea2019001

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---

### EXECUTIVE SUMMARY — Context and current situation
- Macroeconomic imbalances have narrowed in the last few years, supported by fiscal consolidation, but the economy remains in deep recession.
- GDP is expected to contract for the sixth consecutive year in 2019.
- Key recent indicators:
  - Real GDP contracted in 2018 by -5.7 percent, driven by hydrocarbon output decline of -9.7 percent.
  - Inflation was 1.3 percent year-on-year in 2019Q3.
  - The government generated an overall surplus of 0.5 percent of GDP in 2018 (from a deficit of 2½ percent of GDP in 2017).
  - The non-hydrocarbon primary balance (NHPB) improved by 1.8 percent of non-hydrocarbon GDP in 2018.
  - External current account deficit estimated at 5.4 percent of GDP in 2018.
  - Domestic arrears were estimated at 23 percent of GDP at end-June 2019 (declined through 2019Q3).
  - Imputed net foreign assets (NFAs) at the BEAC turned positive in 2019Q2 but remain very low and are projected to remain below one month of imports by end-2019.
- Banking sector is weak, with high non-performing loans (NPLs) related to government arrears hindering non-oil sector recovery.
- Reported system CAR stood at 27 percent in June (this figure includes generic reserves of the systemic bank).

### SMP performance and transition to EFF
- SMP implementation and performance:
  - The staff-monitored program (SMP) was implemented with fiscal consolidation and important structural measures.
  - Performance under the SMP was broadly satisfactory despite delays in some key structural measures for the second review.
  - All but one quantitative performance measures (PMs) were met for the second review (end-July 2018); one PM on the NHPB was missed.
  - Three out of five structural benchmarks (SBs) were implemented by the second review; additional SBs implemented in 2019H1.
  - SBs not met under the SMP will be implemented ahead of Board consideration of the EFF arrangement.
- SMP provided the basis for proposing an Extended Fund Facility (EFF).

### Proposed EFF arrangement: objectives, access, and modality
- Program objectives:
  - (i) Further reduce macroeconomic imbalances to maintain public debt sustainability, rebuild NFAs and support the CEMAC strategy.
  - (ii) Promote human capital development and improve social protection, including mitigating the impact of adjustment on the poor.
  - (iii) Address financial sector vulnerabilities.
  - (iv) Foster good governance and transparency and fight corruption.
  - (v) Promote economic diversification.
- Proposed access:
  - Equivalent to 130 percent of quota (205 million SDR).
  - Uniform disbursements over a 36-month arrangement.
- Frontloading of key transparency, governance, and anti-corruption measures is emphasized.

### Key program elements and policies
- Fiscal consolidation:
  - Continue containing low-efficiency expenditure and increasing non-hydrocarbon revenue.
  - Cumulative improvement in the non-hydrocarbon primary balance (NHPB) of 18.8 percent of non-hydrocarbon GDP (8.2 percent of total GDP) over 2019–22.
  - Frontloaded adjustment with a reduction in the NHPB of 6.3 percent of non-hydrocarbon GDP in 2019.
  - Program envisages moderate overall surpluses, reducing public debt to 44 percent of GDP by 2022.
- Expenditure reallocation:
  - Reallocate spending toward social sectors and human capital formation; modest increase in the wage bill.
  - Fuel subsidies were 0.8 percent of GDP in 2018 and are projected to decline to 0.6 percent of GDP in 2019.
  - Prepare comprehensive strategy to introduce a more flexible domestic fuel pricing system during the program period.
- Revenue measures:
  - Estimated increase in non-hydrocarbon revenue by 3.6 percent of non-hydrocarbon GDP during the program period.
  - Steps taken: reducing exemptions, raising the withholding tax for non-resident foreign contractors, introducing a tax on hotel occupancy.
  - In process: adopting new excise tax legislation; Congress to approve excise taxes and amend the 2017 tax amnesty law (structural benchmarks, end-December 2019).
  - Implementation of the ASYCUDA system expected to resume in early 2020.
- Arrears, banking and financial stability:
  - Regularization and repayment of domestic arrears to stabilize and strengthen the banking sector.
  - Program envisages paying down 611 billion CFA (9 percent of GDP) of domestic arrears during 2019–22.
  - Securitization of validated arrears with interest-bearing government bonds repayable over a maximum period of 10 years (structural benchmark, end-March 2020).
  - Stabilization and recapitalization of weak banks; work with bank owners and COBAC to recapitalize banks with capital shortfalls.
  - Ensure banks meet COBAC regulations and reduce BEAC short-term liquidity support to COBAC-consistent levels.
- Public Financial Management (PFM) and safeguards:
  - Strengthen PFM: adopt systems to track and control expenditure commitments, improve budget preparation, implement medium-term fiscal framework, and transpose CEMAC Directive on PFM in 2020.
  - A Fiscal Safeguards Review (FSR) by FAD during the first year and a Fiscal Transparency Evaluation (FTE) planned.
- Governance and transparency:
  - Publish governance diagnostic report and strategy (prior action).
  - Submit membership application to EITI (prior action; application submitted in November).
  - Publish audits of GePetrol and Sonagas (structural benchmark, end-June 2020) and publish comprehensive hydrocarbon sector report for 2019 (structural benchmark, end-September 2020).
  - Publish all active oil and gas contracts by end-June 2020 (structural benchmark).
  - Adopt anti-corruption law in line with UNCAC (structural benchmark, end-March 2020); upgrade decree on asset declarations and operationalize the Accounts Tribunal during the program period.
- Structural reforms:
  - Improve business climate: operationalize VUE one-stop shop; simplify taxes and filings; centralize and make transparent public procurement; simplify construction permitting; establish property registry; reform labor laws; roll out ASYCUDA; establish single window for cross-border commerce.
  - Promote economic diversification: tourism, fisheries, agriculture, financial services, digital economy; create investment and non-hydrocarbon export promotion agencies.

### Recent developments, outlook, and medium-term prospects
- Macroeconomic outlook:
  - Overall GDP projected to decrease by 5.9 percent in 2019 (sixth consecutive annual contraction).
  - Hydrocarbon output continues to drive contraction; several medium-sized hydrocarbon projects coming on stream (starting late 2019) improve short- to medium-term outlook.
  - Imputed NFAs projected to remain below one month of imports at end-2019; projected to reach three months of imports only in 2021 and the ARA metric for commodity exporters in 2022.
  - Recovery supported by continued fiscal surpluses and higher government deposits at the BEAC.
- Risks to the outlook:
  - Upside: higher oil prices or faster/higher hydrocarbon output could strengthen fiscal balances and support activity.
  - Downside: financial sector health concerns, capacity constraints, governance and corruption vulnerabilities, and lower oil prices could delay reforms, weaken confidence and financing.

### Hydrocarbon sector prospects (selected projections and projects)
- Hydrocarbon output projected to decline by an average 6.3 percent over 2019–24 (compared to a projected decline of 11 percent before considering project delays).
- Notable projects and figures:
  - Gas backfilling project: $170 million pipeline to transport previously-unutilized gas from Alen field to Punta Europa; gas reserves to be monetized about 0.7 trillion cubic feet (tcf) during 2021–27; project coming on stream in 2021 will slow gas production decline from an average 10 percent to 2 percent during 2019–24.
  - Noble Energy discovery in Block I (August 2019) expected to increase output by about 10,000 barrels/day by late 2019.
  - Renovation works in Zafiro during 2019 expected to increase production by about 20 percent in the field during 2019–24 compared to previous estimates.
  - Together, the Block I discovery and Zafiro renovation slow projected crude oil output decline to 9.6 percent during 2019–24 (compared to 11.6 percent projected previously).
  - Block EG-27 contains proven gas reserves of 3.5 tcf; first gas could be extracted over the next 3 to 5 years with annual production in the range of 2.2–2.5 million tons per year.
  - Ongoing exploration/licensing: Kosmos drilling in block S (2019) and planned exploration in blocks W, EG-21 and EG-24 for 2020–21; EG Ronda 2019 launched with winners to be announced in late November 2019.

### Financial sector and banking system issues
- NPLs increased through 2019H1 due to stricter loan classification and deterioration in loan portfolios as non-hydrocarbon activity remained depressed.
- Most NPLs stem from heavy lending to construction companies with government contracts that became unable to service loans when government arrears accumulated.
- Government securitized its arrears to a large construction company in early 2019 to improve health of a systemic bank; because the securitized loans had not been classified as NPLs, securitization reduced gross loans but raised the bank’s and system NPL ratio.
- Liquidity remains tight at some banks, with continued reliance by the systemic bank on BEAC funding at significantly lower levels compared to 2018.
- Loan provisioning is low and needs to be increased in line with good international practices.
- COBAC-reported CAR for the system was 27 percent in June (includes generic reserves of the systemic bank which artificially boost Tier 1 capital).

### Fiscal policy, budget, arrears, and financing
- Fiscal targets and composition:
  - Cumulative improvement in NHPB of 18.8 percent of non-hydrocarbon GDP over 2019–22.
  - Program envisages paying down 611 billion CFA (9 percent of GDP) of validated domestic arrears during 2019–22.
  - In 2022, government will begin amortizing BEAC debt, to be repaid in 10 years with amortization payments averaging about 1 percent of GDP in 2022–24.
- 2020 budget:
  - The 2020 budget was submitted to parliament in November (prior action) and is consistent with program targets.
  - Floor on social spending raised to 2.0 percent of GDP in 2020.
- External arrears and settlements:
  - Belgian construction company transferred claims estimated at 34 billion CFA to Credendo; these are being audited and were classified as official external arrears.
  - Spain indicated Equatorial Guinea was in arrears (10 billion CFA) on an expired debt swap agreement not implemented; authorities agreed to clear these official arrears by the time of the first program review.
- Program financing:
  - Envisages financing from multilateral sources of US$631 million over 2019–22.
  - Total IMF funding amounts to about US$284 million (SDR 205 million or 130 percent of quota).
  - The remainder (US$347 million) would come from the African Development Bank (AfDB).
  - EG will continue to draw financing from the existing Chinese loan facility during the program period under loans already contracted, but will not contract new collateralized debt.
  - Program is fully financed.

### State-owned assets, privatization, and debt management
- Privatization modalities:
  - (i) restructuring autonomous agencies and public enterprises;
  - (ii) concession of assets to the private sector;
  - (iii) sale of public assets to private operators (privatization).
- Authorities will present for approval to the Council of Ministers a substantive list of state assets to be privatized and entities for restructuring or concession (structural benchmark, end of June 2020).
- Proceeds prioritized to pay down validated domestic arrears and rebuild EG’s NFAs at the BEAC.
- Authorities will not contract new collateralized loans or new collateralized loan facilities during the program period.
- Collateralized debt amounted to CFA 664 billion (8.7 percent of GDP) at end-2018, or about 20 percent of total public debt.

### Governance, transparency, AML/CFT, and rule of law
- Governance and anti-corruption measures:
  - Publish governance diagnostic report and governance strategy (prior action).
  - Adopt anti-corruption law (structural benchmark, end-March 2020) criminalizing corruption offenses and enhancing preventive measures, investigative capacity, specialized courts, and international cooperation.
  - Upgrade decree on asset declarations for senior public officials in 2020 and implement asset declaration system during the program period.
  - Accounts Tribunal to be made operational during the program period.
- Hydrocarbon transparency:
  - Submitted EITI membership application in November (prior action); expect Board consideration in first half of 2020.
  - Publish final audits of GePetrol and Sonagas (structural benchmark, end-June 2020); publish annual hydrocarbon sector report for 2019 by end-September 2020.
  - Publish all active oil and gas contracts by end-June 2020.
- AML/CFT:
  - Plan to become a member of the Egmont Group with application submitted by end-March 2020.
  - ANIF to develop guidance during 2020 to assist financial institutions to better identify and verify politically-exposed persons and beneficial owners.
- Rule of law and information access:
  - Set up Official Gazette website and publish all laws, orders and decrees adopted since 2000 by end-June 2020 (structural benchmark).
  - Disseminate information on judicial performance and publish court and prosecution staffing and case statistics (deadlines in Annex).

### Social protection, human capital, and data
- Social spending and targeting:
  - Program envisages further increasing budget allocation to social sectors (MEFP, ¶21).
  - Higher social spending financed mainly by reallocating resources from investment in hard infrastructure.
  - Aim: address pressing needs, provide protection to low-income groups during adjustment, and reduce poverty.
  - Authorities will work with the Fund, WB staff and UN agencies to develop priorities for reallocation and increased spending on low-income households.
- Data improvements:
  - Conduct regular household budget surveys, starting with the ongoing survey to be concluded in 2020, to inform a social safety net and assess interventions.
  - Adopt a functional classification of spending, starting with a partial functional classification in the 2020 budget.
- Socio-economic indicators (Text Table 6, 2017 comparators):
  - GNI per capita (PPP US$): Equatorial Guinea 19,513; Medium HDI 6,849; Sub-Saharan Africa 3,399.
  - HDI rank / Life expectancy at birth / Expected years of schooling: Equatorial Guinea 141 / 57.9 / 9.3; Medium HDI 131 / 69.1 / 12.0; Sub-Saharan Africa 155 / 60.7 / 10.1.

### Program risks, mitigation, and staff appraisal
- Principal risks:
  - Governance-related risks and recurring PFM weaknesses that could result in expenditure overruns.
  - Financial sector vulnerabilities; large swings in energy prices; weaker-than-expected global growth; geopolitical tensions.
- Mitigating measures:
  - Frontloading transparency, governance and anti-corruption measures.
  - Operationalizing expenditure tracking and monitoring system as a fiscal safeguard.
  - Early clearance of government arrears to sharply reduce NPLs.
  - Proactive recapitalization plans with COBAC and conditionality for additional measures if warranted.
  - FSR and FTE to identify weaknesses and recommend corrective steps.
- Staff appraisal:
  - Macroeconomic imbalances have declined, but economic situation remains challenging.
  - Fiscal consolidation has helped move government accounts into surplus and strengthen external position.
  - Growth remains negative and NFAs at the BEAC are very low; banking sector remains weak.
  - Authorities face the challenge of maintaining macroeconomic and financial stability while restoring non-oil growth and diversifying the economy.

### Program financing, purchases, and timing under the EFF arrangement
- Access and schedule:
  - Access equivalent to SDR 205 million (130 percent of quota, quota = SDR157.5 million).
  - Table of scheduled purchases and conditions (date / condition / amount, Million SDRs):
    - December 16, 2019 — Approval of the extended arrangement under the EFF. — 29.287
    - May 18, 2020 — Observance of PCs for end-December 2019, continuous PCs, and completion of the first review. — 29.287
    - November 18, 2020 — Observance of PCs for end-June 2020, continuous PCs, and completion of the second review. — 29.287
    - May 18, 2021 — Observance of PCs for end-December 2020, continuous PCs, and completion of the third review. — 29.287
    - November 18, 2021 — Observance of PCs for end-June 2021, continuous PCs, and completion of the fourth review. — 29.287
    - May 18, 2022 — Observance of PCs for end-December 2021, continuous PCs, and completion of the fifth review. — 29.287
    - November 18, 2022 — Observance of PCs for end-June 2022, continuous PCs, and completion of the sixth review. — 29.287
  - Total 205.009 130.2
- Program financing composition:
  - IMF: SDR 205 million (about US$284 million).
  - AfDB: US$347 million.
  - Total multilateral financing envisaged: US$631 million over 2019–22.
  - Remaining financing needs largely via rolling over existing short-term domestic-currency debt with local and regional banks.

### Debt sustainability, stress tests, and scenarios
- Public debt outlook:
  - Public debt rose rapidly over 2013–16, then stabilized around 43 percent of GDP at end-2018.
  - With full implementation of program policies, staff assesses debt as sustainable.
  - Baseline path: public debt remains near current levels over first three years, then declines, rising slightly to 47 percent of GDP in 2020 before falling to 21 percent at end-2029.
  - External debt projected to peak at 16 percent of GDP in 2022.
- DSA assumptions and outcomes:
  - Non-hydrocarbon primary deficit will decline from 21.8 percent of non-hydrocarbon GDP in 2019 to 17.6 percent in 2020 and to about 9.4 percent by 2022.
  - Overall balance surplus would increase from -1.6 percent of GDP to 2.3 percent in 2022.
  - Growth outlook: after five consecutive years of negative growth averaging 6.6 percent during 2015 to 2019, average growth projected to become less negative, starting in 2020 with -1.9 percent and averaging -0.1 percent from 2021 to 2029.
- Stress tests:
  - Full implementation of adjustment yields stable and resilient public debt under standard stress tests.
  - Failure to maintain adjustment results in upward debt and GFN paths.
  - One standardized combined macro-fiscal shock can lead to sustained elevations in debt and GFNs; customized scenario with a permanent -2 percent shock to baseline growth and non-interest revenues leads to rising GFN ratio toward the end of the projection horizon.
  - Gross financing needs elevated in 2020 due to securitization transaction but remain below high-risk threshold overall; under some scenarios GFNs would exceed 15 percent of GDP.

### Program monitoring, reporting, and conditionality
- Monitoring:
  - Semi-annual reviews, semi-annual quantitative performance criteria (PCs), and quarterly indicative targets (ITs).
  - PCs on non-hydrocarbon tax revenue, NHPB, external arrears, contracting and guaranteeing external debt, and BEAC net claims on the central government.
  - ITs on net lending by domestic banks to the government, domestic arrears, and social spending.
- Reporting:
  - Data shall be reported to the IMF no later than 45 days after the assessment date.
  - Monthly reporting on monetary, fiscal, external debt, external sector, and real sector variables per the Technical Memorandum of Understanding.
- Prior actions and structural benchmarks (selected):
  - Publish governance diagnostic report and governance strategy (prior action).
  - Submit EITI membership application (prior action).
  - Operationalize system to track and control expenditure commitments (prior action).
  - Submit to parliament a 2020 budget consistent with the program (prior action).
  - Other SBs include sharing active oil and gas contracts with BEAC (end-December 2019); congressional approval of excise tax and tax amnesty amendments (end-December 2019); clear validated domestic arrears through exchange with government bonds (end-March 2020); publish audits of GePetrol and Sonagas (end-June 2020); set up Official Gazette website and publish laws since 2000 (end-June 2020); present list of assets for privatization to CoM (end-June 2020); publish comprehensive hydrocarbon report for 2019 (end-September 2020).

### Technical assistance and capacity building
- TA provided during the SMP: PFM, tax administration and policy, national accounts and external-sector statistics, macroeconomic analysis and forecasting training.
- IMF resident representative office opened in Malabo in October 2018.
- Authorities requested resident advisors to strengthen tax administration and PFM.
- Identified TA needs: strengthen debt management; improve investment efficiency; strengthen administration of hydrocarbon fiscal regime; introduce more flexible fuel pricing; increase fiscal transparency; strengthen financial system and foster financial inclusion.

*Source: 1gnqea2019001 - IMF PDF chapter.*

### EXECUTIVE SUMMARY-

### EXECUTIVE SUMMARY

### Context and current situation
- Macroeconomic imbalances have narrowed in the last few years, supported by fiscal consolidation, but the economy remains in deep recession.  
- GDP is expected to contract for the sixth consecutive year in 2019.  
- Key recent indicators:
  - Real GDP contracted in 2018 by -5.7 percent, driven by hydrocarbon output decline of -9.7 percent.  
  - Inflation was 1.3 percent year-on-year in 2019Q3.  
  - The government generated an overall surplus of 0.5 percent of GDP in 2018 (from a deficit of 2½ percent of GDP in 2017).  
  - The non-hydrocarbon primary balance (NHPB) improved by 1.8 percent of non-hydrocarbon GDP in 2018.  
  - External current account deficit estimated at 5.4 percent of GDP in 2018.  
  - Domestic arrears were estimated at 23 percent of GDP at end-June 2019 (declined through 2019Q3).  
  - Imputed net foreign assets (NFAs) at the BEAC turned positive in 2019Q2 but remain very low and are projected to remain below one month of imports by end-2019.  
- Banking sector is weak, with high non-performing loans (NPLs) related to government arrears hindering non-oil sector recovery. Reported system CAR stood at 27 percent in June (this figure includes generic reserves of the systemic bank).

### SMP performance and transition to EFF
- The staff-monitored program (SMP) was implemented with fiscal consolidation and important structural measures.  
- Performance under the SMP:
  - Broadly satisfactory despite delays in some key structural measures for the second review.  
  - All but one quantitative targets were met for the second review.  
  - Three out of five structural benchmarks (SBs) were implemented.  
  - Significant progress on structural initiatives, including measures to foster transparency and address governance problems.  
- SBs not met under the SMP will be implemented ahead of Board consideration of the EFF arrangement.  
- The SMP provided the basis for proposing an Extended Fund Facility (EFF).

### Proposed EFF arrangement: objectives, access, and modality
- Program objectives:
  - (i) Further reduce macroeconomic imbalances to maintain public debt sustainability, rebuild NFAs and support the CEMAC strategy.  
  - (ii) Promote human capital development and improve social protection, including mitigating the impact of adjustment on the poor.  
  - (iii) Address financial sector vulnerabilities.  
  - (iv) Foster good governance and transparency and fight corruption.  
  - (v) Promote economic diversification.  
- Proposed access: equivalent to 130 percent of quota (205 million SDR), with uniform disbursements.  
- Program places strong emphasis on increasing transparency, strengthening governance, and fighting corruption, with frontloading of key measures in these areas.

### Key program elements and policies
- Continued fiscal consolidation by containing low-efficiency expenditure and increasing non-hydrocarbon revenue.  
- Reallocation of expenditure to create fiscal space for social spending to improve social protection and support human capital development.  
- Regularization and repayment of domestic arrears to stabilize and strengthen the banking sector.  
- Stabilization and recapitalization of weak banks to preserve financial stability and support non-oil sector recovery.  
- Strengthening public financial management (PFM) to support fiscal discipline and foster good governance.  
- Implementation of a strategy to improve governance, increase transparency, and support the fight against corruption.  
- Improvement of the business climate and adoption of structural reforms to foster non-hydrocarbon growth and economic diversification.

### Recent developments, outlook, and medium-term prospects
- Outlook summary:
  - Overall GDP projected to decrease by 5.9 percent in 2019 (sixth consecutive annual contraction).  
  - Hydrocarbon output continues to drive the contraction, but several medium-sized hydrocarbon projects coming on stream (starting late 2019) have improved the short- to medium-term outlook.  
  - Imputed NFAs would continue to rise driven by fiscal consolidation, external budget support, and repatriation of “available” government deposits abroad, but remain below one month of imports at end-2019; reach three months of imports only in 2021 and the ARA metric for commodity exporters in 2022.  
  - Recovery supported by continued fiscal surpluses and higher government deposits at the BEAC.  
- Risks to the outlook are broadly balanced:
  - Upside: higher oil prices or faster/higher hydrocarbon output could strengthen fiscal balances, reduce arrears, and support non-hydrocarbon activity.  
  - Downside: financial sector health concerns, capacity constraints, governance and corruption vulnerabilities that could delay fiscal and structural reforms; lower oil prices could weaken confidence and financing, tightening constraints and hurting growth.

### Hydrocarbon sector prospects (Box 1 highlights)
- Hydrocarbon output projected to decline by an average 6.3 percent over 2019–24 (compared to a projected decline of 11 percent before considering project delays).  
- Notable projects and figures:
  - Gas backfilling project: $170 million pipeline, to transport previously-unutilized gas from Alen field to Punta Europa; gas reserves to be monetized from this project about 0.7 trillion cubic feet (tcf) during 2021–27; project coming on stream in 2021 will slow gas production decline from an average 10 percent to 2 percent during 2019–24.  
  - Noble Energy discovery in Block I (August 2019) expected to increase output by about 10,000 barrels/day by late 2019.  
  - Renovation works in Zafiro during 2019 expected to increase production by about 20 percent in the field during 2019–24 compared to previous estimates.  
  - Together, the Block I discovery and Zafiro renovation slow projected crude oil output decline to 9.6 percent during 2019–24 (compared to 11.6 percent projected previously).  
  - Block EG-27 contains proven gas reserves of 3.5 tcf; first gas could be extracted over the next 3 to 5 years with annual production in the range of 2.2–2.5 million tons per year (project delay will dampen near-term effects but raise output in the second half of the 2020s).  
  - Ongoing exploration/licensing: Kosmos drilling in block S (2019) and planned exploration in blocks W, EG-21 and EG-24 for 2020–21; EG Ronda 2019 launched with winners to be announced in late November 2019.

### Financial sector and banking system issues
- NPLs increased through 2019H1 due to stricter loan classification and deterioration in loan portfolios as non-hydrocarbon activity remained depressed.  
- Most NPLs stem from heavy lending to construction companies with government contracts that became unable to service loans when government arrears accumulated.  
- Government securitized its arrears to a large construction company in early 2019 to improve health of a systemic bank; because the securitized loans had not been classified as NPLs, securitization reduced gross loans but raised the bank’s and system NPL ratio.  
- Liquidity remains tight at some banks, with continued reliance by the systemic bank on BEAC funding at significantly lower levels compared to 2018.  
- Loan provisioning is low and needs to be increased in line with good international practices.  
- COBAC-reported CAR for the system was 27 percent in June (includes generic reserves of the systemic bank which artificially boost Tier 1 capital).

### Implementation, technical assistance, and program design
- The SMP helped strengthen technical capacity, improve PFM, and increase data generation and dissemination.  
- The authorities intend to leverage the EFF to facilitate policy implementation and broaden/deepen reforms initiated under the SMP.  
- Structural benchmarks not met under the SMP will be implemented before Board consideration of the EFF.  
- Program includes provisions for capacity building and technical assistance (details provided in program annexes and attachments).

*Source: EXECUTIVE SUMMARY (1gnqea2019001)*

### 6. All quantitative performance measures (PMs), except one, and indicative targets (ITs)

### 6. All quantitative performance measures (PMs), except one, and indicative targets (ITs)

### Compliance with PMs and ITs (Second SMP review, end-July 2018)
- All quantitative performance measures (PMs), except one, and indicative targets (ITs) set for the second SMP review (end-July 2018) were met.
- Fiscal targets:
  - The PM on non-hydrocarbon tax revenue was met by a small margin.
  - The PM on the NHPB of the central government was missed by a large margin. This reflected the accumulation of capital expenditures in 2018H1 due to weaknesses in PFM, notably the lack of coordination between the public investment agency and the Finance Ministry, which has since been remedied.
  - After incorporating data revisions, the PM on the NHPB for end-April 2018 (first review’s test date) was also missed, contrary to what was reported in the staff report for the first review (IMF Country Report 18/146).
- Debt targets:
  - The ceilings on contracting and guaranteeing new external debt and on new BEAC credit were both met.
  - No new external arrears were accumulated (except cases discussed below).
- Indicative targets:
  - The targets on net domestic bank credit to the government and on social spending were both met.

### Structural reforms and benchmarks
- Overall progress on structural reforms was made but at a slower pace than anticipated.
- Structural benchmarks (SBs) for the second review:
  - Three out of five SBs set for the second review were implemented, albeit some with substantial delays.
  - Congress ratified the UN convention against corruption in May 2018.
  - Two additional SBs were implemented in 2019H1 through hiring firms to (i) audit the state-owned oil and gas companies (Gepetrol and Sonagas), and (ii) audit the domestic arrears.
  - The benchmarks on (i) submitting a membership application to the Extractive Industries Transparency Initiative (EITI) and (ii) implementing a system to track and control expenditure commitments and strengthen treasury management were not met. These two measures were set as prior actions in the context of the EFF-arrangement request.
- Other reforms:
  - Measures adopted to improve tax administration, modernize the PFM framework, increase transparency, and improve the business climate for non-oil investment (IMF Country Report 18/146, and ¶23–24).
  - A governance diagnostic report was prepared; authorities have put in place important measures to increase transparency, promote good governance and limit opportunities for corruption.
  - Begun addressing banking sector vulnerabilities (¶3).
  - Progress on increasing non-hydrocarbon revenue and adequately addressing financial sector weaknesses fell short of SMP goals.

### EFF program objectives and macroeconomic framework
- The proposed EFF arrangement will broaden and deepen reforms launched under the SMP. Objectives:
  - (i) further reducing macroeconomic imbalances to rebuild buffers and support the CEMAC strategy;
  - (ii) expanding the fiscal space to support human capital development and improve social protection, including mitigating the impact of adjustment reforms on the poor;
  - (iii) addressing financial sector vulnerabilities;
  - (iv) fostering good governance and transparency and fighting corruption, including by further strengthening the PFM framework;
  - (v) promoting economic diversification.

### Fiscal policy, targets, and measures
- Fiscal consolidation continuation justified by declining hydrocarbon revenue and need to keep public debt manageable and rebuild buffers.
- Program fiscal target:
  - Cumulative improvement in the non-hydrocarbon primary balance (NHPB) of 18.8 percent of non-hydrocarbon GDP (8.2 percent of total GDP) over 2019–22.
  - Frontloaded adjustment with a reduction in the NHPB of 6.3 percent of non-hydrocarbon GDP in 2019.
  - Program envisages moderate overall surpluses, reducing public debt to 44 percent of GDP by 2022.
- Adjustment composition:
  - Derived from lower capital expenditures and higher non-hydrocarbon revenues.
  - Shift in composition of spending toward social sectors; allow for substantially raising government deposits and NFAs at the BEAC.
- Revenue measures and administration:
  - Steps already taken: reducing exemptions, raising the withholding tax for non-resident foreign contractors, introducing a tax on hotel occupancy.
  - In process: adopting new excise tax legislation.
  - Implementation of the ASYCUDA system expected to resume in early 2020 after a standstill due to funding constraints.
  - The proposed program measures are estimated to increase non-hydrocarbon revenue by 3.6 percent of non-hydrocarbon GDP during the program period.
  - Plans to become a member of the World Customs Organization (WCO) and present a membership application in early 2020.
  - Strengthen administration of the hydrocarbon fiscal regime and effectiveness of tax audits in the sector.
- Expenditure priorities (MEFP, ¶13):
  - Rationalization of capital expenditure; higher spending in social sectors and human capital formation.
  - Modest increase in the wage bill.
  - Gradual reduction of fuel subsidies; fuel subsidies were 0.8 percent of GDP in 2018 and are projected to decline to 0.6 percent of GDP in 2019.
  - Prepare comprehensive strategy to introduce a more flexible domestic fuel pricing system during the program period, including communication campaign, sequencing, and a safety net informed by a social spending strategic plan using the 2020 household budget survey and improved functional budget classification (¶15).
- Tax policy reforms (MEFP, ¶11–12):
  - Adopt excise taxes on imported beverages, tobacco and vehicles, and repeal the provisions of the 2017 tax amnesty law that forgave outstanding tax obligations (structural benchmarks, end-December 2019).
  - Continue efforts to limit tax fraud and exemptions, strengthen large-taxpayer management, and improve customs enforcement via full implementation of ASYCUDA at all customs posts starting with Bioko Island and Bata regions in 2020.

### Budget, arrears, and financing
- 2020 budget:
  - The 2020 budget submitted to parliament in November (prior action) is consistent with program targets.
- Domestic arrears:
  - Arrears audit expected to be concluded before year-end and followed by clearance of validated arrears through securitization (structural benchmark, end-March 2020).
  - Government bonds from securitization will be interest-bearing with terms comparable to public securities in the CEMAC region.
  - Authorities’ goal: fully repay these obligations over a maximum period of 10 years.
  - Program envisages paying down 611 billion CFA (9 percent of GDP) of these debts during 2019–22.
  - In 2022, the government will begin amortizing debt to BEAC, to be repaid in 10 years. Amortization payments will average about 1 percent of GDP in 2022–24.
  - Authorities may use part of any oil revenue windfall and potential proceeds from asset privatization to amortize faster and provide liquidity to the banking system.
- External arrears:
  - Belgian construction company transferred claims estimated at 34 billion CFA to Credendo; these are being audited and were classified as official external arrears.
  - Spain indicated Equatorial Guinea was in arrears (10 billion CFA) on an expired debt swap agreement not implemented. Authorities agreed to clear these official arrears by the time of the first program review.
  - Staff has no reports of arrears to any other external creditors.
- Program financing:
  - Envisages financing from multilateral sources of US$631 million over 2019–22.
  - Total IMF funding amounts to about US$284 million (SDR 205 million or 130 percent of quota).
  - The remainder (US$347 million) would come from the African Development Bank (AfDB).
  - EG will continue to draw financing from the existing Chinese loan facility during the program period under loans already contracted, but will not contract new collateralized debt (¶12).
  - Remaining financing needs will be filled mostly by rolling over existing short-term domestic-currency debt with local and regional banks.
  - The program is fully financed.

### State-owned assets, privatization, and debt management
- Privatization and private-sector involvement (MEFP, ¶18):
  - Modalities: (i) restructuring autonomous agencies and public enterprises; (ii) concession of assets to the private sector; (iii) sale of public assets to private operators (privatization).
  - Authorities will present for approval to the Council of Ministers a substantive list of state assets to be privatized and entities for restructuring or concession (structural benchmark, end of June 2020).
  - After CoM approval, an action program for privatization will be presented during the second half of 2020.
  - Proceeds prioritized to pay down validated domestic arrears and rebuild EG’s NFAs at the BEAC. Sales and concessions via open and transparent international tenders.
- Debt management improvements (MEFP, ¶16):
  - Authorities will not contract new collateralized loans or new collateralized loan facilities during the program period.
  - With IMF technical assistance, adopt debt management practices to minimize costs and increase flexibility while keeping external debt under control.
  - Collateralized debt amounted to CFA 664 billion (8.7 percent of GDP) at end-2018, or about 20 percent of total public debt.

### FX regulations and regional commitments
- Authorities committed to enforcing FX regulations (MEFP, ¶27):
  - Ensure (i) all public entities repatriate and surrender their forex receipts; (ii) “available” government deposits held abroad are repatriated; (iii) customs strictly enforce domiciliation of all export transactions with a resident commercial bank; (iv) all active oil and gas contracts are shared with the BEAC (structural benchmark for end-December 2019).
  - Local BEAC branch working with commercial banks to make FX available for documented external transactions within 2 business days.

### Social protection, human capital, and data
- Social spending and human capital:
  - Program envisages further increasing budget allocation to social sectors (MEFP, ¶21).
  - Higher social spending financed mainly by reallocating resources from investment in hard infrastructure.
  - Aim: address pressing needs, provide protection to low-income groups during macroeconomic adjustment, and reduce poverty.
  - Authorities will work with the Fund, WB staff and UN agencies to develop priorities for reallocation and increased spending on low-income households.
- Socio-economic indicators (Text Table 6, 2017 comparators):
  - GNI per capita (PPP US$): Equatorial Guinea 19,513; Medium HDI 6,849; Sub-Saharan Africa 3,399.
  - HDI rank / Life expectancy at birth / Expected years of schooling: Equatorial Guinea 141 / 57.9 / 9.3; Medium HDI 131 / 69.1 / 12.0; Sub-Saharan Africa 155 / 60.7 / 10.1.
- Data and monitoring improvements:
  - Develop a strategy to guide social spending and improve information to assess interventions.
  - Conduct regular household budget surveys, starting with the ongoing survey to be concluded in 2020, to inform a social safety net and better assess interventions.
  - Adopt a functional classification of spending, starting with a partial functional classification in the 2020 budget.

### Banking sector strengthening and financial inclusion
- Banking sector strategy (MEFP, ¶29) three key pillars:
  - Clearing validated arrears to construction companies via securitization and cash payments to sharply reduce NPLs and improve liquidity. Arrears securitization expected by end-March 2020; program provides for cash payments during the year and sizable amortization of securitized obligations during the program period.
  - Work with bank owners and COBAC to recapitalize banks with capital shortfalls as early as feasible. Some banks can meet shortfalls by converting generic reserves into capital.
  - Ensure all banks fully meet COBAC regulations, particularly prudential and governance requirements, and permanently reduce BEAC short-term liquidity support to levels consistent with COBAC norms. Banks relying on substantial BEAC funding have plans to achieve this by end-2020, aided by clearance of government domestic arrears.

*Source: IMF staff.*

### 17. The authorities are aware of the need to implement each of the components of this

### 17. The authorities are aware of the need to implement each of the components of this

### Financial inclusion
- Credit supply by local banks is mainly targeted to medium and large companies.
- Authorities plan a strategy to promote financial inclusion so small enterprises, entrepreneurs and consumers can benefit from better access to credit.
- They are studying the successful use of financial technologies (or FinTech) in other African countries to make it part of their strategy to improve financial infrastructure.
- Financial inclusion is seen as a tool to:
  - diversify the economy,
  - create employment,
  - reduce inequality.
- Roadmap to improve the business climate includes reforms such as:
  - mechanism for resolving insolvencies as contained in OHADA,
  - adoption of a regional uniform credit information law,
  - adoption of a legal framework to support electronic payments.

### Strengthening Public Finance Management (PFM)
- Measures adopted under the SMP included tighter control over spending and the merger of the ministries of Economy and Finance.
- The new Finance Ministry implemented procedures for expenditure approvals and oversight for current and capital spending:
  - Current spending reviewed by the Directorate General of Budget Control.
  - Capital spending reviewed by a standing committee of technicians that reviews projects and determines commitments.
  - Budget preparation revamped; all projects reviewed by a budget committee in the context of government policy priorities.
- Additional steps to modernize PFM (prior action) (MEFP, ¶2 2):
  - Strengthening expenditure tracking and monitoring, especially for capital spending, through adoption of a system to adequately track commitments, including within a multi-year framework.
  - Improved tracking of commitments on current spending.
- New expenditure system will include:
  - maintaining an accurate record of all spending commitments (on a monthly frequency for the current year);
  - ensuring full control of all spending approvals by the Minister of Finance;
  - documenting key steps in the expenditure control chain (verification of availability of appropriations and the level of expenditure commitment, certification of delivery of good/service, approval of payment, and payment instructions).
- The authorities will transpose CEMAC Directive on PFM in 2020. The directive aims to:
  - reinforce the budgeting framework,
  - decentralize budgeting functions across ministries over time,
  - strengthen audit functions, including through enhanced internal controls.
- Concrete CEMAC requirements include inter alia:
  - addition of a medium-term fiscal framework,
  - budget annexes informing about fiscal risks, debt, and the debt management strategy.
- Authorities plan to increase dissemination of fiscal information, including on domestic and external debt and any contingent liabilities.

### Improving Governance and Transparency and Fighting Corruption
- Government devised a strategy to improve governance and transparency and fight corruption to be implemented during the program; strategy builds on SMP measures and a governance diagnostic report prepared by Fund staff (MEFP, ¶24).
- The government will publish both the governance diagnostic report and the strategy (prior action).
- Full and effective implementation aims to:
  - address longstanding governance problems,
  - support sustainable and inclusive growth by improving the business climate,
  - strengthen institutions and reduce legal uncertainty to make the non-hydrocarbon sector more attractive.
- Program’s key governance, anti-corruption and transparency measures:
  - Anti-corruption framework:
    - Following ratification of the United Nations anti-corruption convention in May 2018, Parliament will adopt an anti-corruption law in line with UNCAC.
    - The law will criminalize corruption offenses; enhance preventive measures (asset declaration for senior public officials, conflict of interests, access to public information); strengthen investigative and prosecutorial capacity and powers; enhance role of courts specialized in anti-corruption; bolster international cooperation (structural benchmark, end-March 2020).
    - Authorities plan to upgrade the decree on asset declarations for senior public officials in line with the law and international best practices in 2020.
    - Aim to implement the asset declarations system during the program period.
    - The Accounts Tribunal will be made operational during the program period by equipping it with adequate personnel and facilities.
  - Hydrocarbon sector transparency:
    - In November, authorities submitted a membership application to the EITI (prior action). Government expects application to be considered by the EITI Board in the first half of 2020.
    - Authorities will publish final audit and reconciliation reports of state-owned companies GePetrol and Sonagas (structural benchmark, end-June 2020).
    - They will draw up a plan to address issues arising from the audits’ findings and have it approved by the CoM.
    - They will reassess revenue potential based on audit findings, with any additional resources allocated to boost NFAs at the BEAC and social spending.
    - Authorities plan to publish annual reports containing comprehensive hydrocarbon sector data and information in line with the EITI standard; the first report, for 2019, is scheduled to be published by end-September 2020 (structural benchmark).
    - Authorities will publish all active oil and gas sector contracts by end-June 2020.
  - Rule of law:
    - Strengthen rule of law through effective implementation of existing legislation and enhance public data access on laws, orders and judicial decisions.
    - Set up a website for the Official Gazette and publish all laws, orders and decrees relevant to EG; first step: publish all laws, orders and decrees adopted since 2000 by end-June 2020 (structural benchmark).
    - Disseminate information on judicial system performance.
  - AML/CFT:
    - Commit to strengthening AML/CFT framework and enforcement.
    - Plan to become a member of the Egmont Group; a membership application will be submitted to Egmont by end-March 2020.
    - National Agency for Financial Investigations (ANIF) will develop guidance during 2020 to assist financial institutions to better identify and verify politically-exposed persons and beneficial owners.
  - Fiscal safeguards review (FSR):
    - EFF arrangement requires an FSR by the Fund’s FAD during its first year to assess the treasury’s framework (controls and audit procedures, fiscal monitoring and reporting, budget execution processes).
    - Assessment will suggest measures to ensure funds are spent on legally approved expenditures and all revenues are channeled through a single treasury account.
    - Findings from the FSR will inform potential additional program measures.
    - Program also envisages preparation of a Fiscal Transparency Evaluation (FTE) by FAD.
  - Data dissemination:
    - Authorities use the Finance Ministry website launched in 2018 to post historical fiscal data and other relevant information.
    - Implemented the e-GDDS subscription and launched national data summary page in May 2019.
    - Authorities will use the Finance Ministry and National EITI Committee websites to disseminate more fiscal and hydrocarbon sector data and information on a monthly basis.

### Structural Reforms to Boost Non-Hydrocarbon Growth
- Authorities have begun steps to promote economic diversification to boost non-hydrocarbon growth (MEFP, ¶25).
- Economic diversification strategy:
  - National economic conference in April/May 2019 informed revision of Horizonte 2020 development strategy.
  - Revised plan integrates Sustainable Development Goals and environmental considerations.
  - With assistance from the Korean Development Institute, authorities are drawing on other countries’ experiences to design diversification strategy.
  - Revised strategy expected to guide diversification and sectoral policies over the medium to long term.
  - An economic-recovery agenda contains concrete actions planned for the next three years and is aligned with the EFF.
- Business environment:
  - During the SMP authorities amended the foreign investment law by eliminating the requirement to have a local partner in the non-hydrocarbon sector.
  - Created and operationalized a one-stop shop for establishing a firm (VUE).
  - In March 2019 launched an action plan for improving the business climate, based on diagnostic studies by the WB and the Singapore Corporation Enterprise.
- Box 2 highlights on business facilitation:
  - VUE opened in January 2019; centralizes steps for company creation with agents from each relevant ministry authorized to sign off.
  - Official statistics: VUE has registered more than 900 companies and reduced registration time to 7 days (contrasted with 33 days in the World Bank’s Doing Business survey).
  - VUE facilitates renewal, issues NIF, allows registration of autonomous workers and entrepreneurs and provides advice.
  - 2018 elimination of local partner requirement for foreign investments outside hydrocarbon sector to increase attractiveness and facilitate technology transfer.
  - Special committee chaired by the Prime Minister to oversee action plan to increase implementation speed.
  - Further measures envisaged: simplify taxes/tax filings; centralize and make transparent public procurement; simplify construction permitting; establish property registry; reform labor laws; implement ASYCUDA; establish single window for cross-border commerce; investment promotion agency; free issuance of certificates of origin; strengthen contract enforcement and application of OHADA.
- Additional structural plans:
  - Financing requirements for updated development plan integrated into the medium-term fiscal framework.
  - Private sector role central to diversification strategy to boost investment and productivity and reduce fiscal burden.
  - Non-hydrocarbon export sector development:
    - Plan to create an investment agency and a non-hydrocarbon export promotion agency.
    - Plans to foster tourism, fisheries, agriculture and facilitate issuance of special tourist and business visas.
  - Labor market reform:
    - Implement reforms to improve labor productivity and reduce labor market rigidities.
    - Measures to address high redundancy costs, provide training to address skill mismatches and support sector development.
  - Business environment improvements to address:
    - streamlining and reducing procedures, time and cost for business transactions,
    - broadening access to credit (financial inclusion),
    - improving insolvency framework,
    - reducing barriers to trading across borders in line with AfCFTA, particularly with CEMAC partners,
    - improving telecommunications and reducing its cost.

### Capacity Building
- Authorities implementing capacity building agenda and will need further support to implement the program.
- During the SMP the Fund provided TA in PFM, tax administration and policy, national account and external-sector statistics, and training in macroeconomic analysis and forecasting.
- In October 2018 the Fund opened a resident representative office in Malabo.
- Authorities requested resident advisors to support strengthening tax administration and PFM.
- Technical assistance needs identified include:
  - strengthen debt management,
  - improve investment efficiency,
  - strengthen administration of hydrocarbon fiscal regime,
  - introduce a more flexible system for pricing of fuel products,
  - increase fiscal transparency.

### Program modalities and risks
- A 36-month arrangement proposed to support sizable fiscal consolidation and structural reform agenda.
- Arrangement would include structural benchmarks in several areas, semi-annual quantitative performance criteria (PC) and quarterly indicative targets (ITs) (MEFP, Table 1).
- PCs and ITs monitoring:
  - PCs on non-hydrocarbon tax revenue, the non-hydrocarbon primary balance, external arrears, contracting and guaranteeing external debt, and BEAC net claims on the central government (excluding the use of IMF credit).
  - ITs on net lending by domestic banks to the government, domestic arrears, and social spending.
  - Except for the non-hydrocarbon revenue target and social spending, the program would be monitored from below the line.
- Access, phasing and burden sharing:
  - Proposed access under the EFF arrangement is 130 percent of quota, or SDR 205 million, with a uniform disbursement schedule.
  - Fund financing will help meet balance of payments needs arising from the depletion of its NFAs at the BEAC (which were close to US$2.9 billion in 2014), following the large deterioration in the terms of trade over 2014-19 and the protracted decline in hydrocarbon production and exports.
  - Program targets an accumulation of EG’s NFAs of about 7 percent of GDP by

*Source: 1gnqea2019001 - IMF PDF chapter.*

### 2022. The proposed access is also predicated on the strength of the fiscal adjustment, which

### 2022. The proposed access is also predicated on the strength of the fiscal adjustment, which 

### Program financing and repayment capacity
- The fiscal adjustment targets an improvement in the NHPB of 18.8 percent of non-hydrocarbon GDP over 2019–22.
- The Fund will account for 45 percent of total program financing, with the remainder coming from the AfDB.
- EG currently has no IMF obligations (Table 8).
- While program financing would increase significantly external debt, it would be from a low base: 10 percent of GDP in 2018.
- External debt is projected to peak at 16 percent of GDP in 2022.
- A DSA incorporating the economic policies and adjustment envisaged under the program shows sustainable public and external debt burdens (Annex I).
- The DSA features a ten-year projection period given the declining trend in hydrocarbon output.
- There are downside risks around the current baseline (¶5 and below) that could weaken EG’s repayment capacity; upside risks include potential higher hydrocarbon output from ongoing projects.

### Program risks and mitigation
- Principal program risks include governance-related risks and recurring PFM weaknesses that could result in expenditure overruns.
- Design features to mitigate risks:
  - Strong emphasis on increasing transparency, strengthening governance and fighting corruption, with frontloading of key measures in these areas.
  - Implementation of other important measures as early as feasible during the arrangement; further conditionality can be added if warranted.
  - Operationalization of the expenditure tracking and monitoring system as a fiscal safeguard.
  - The FSR and FTE might identify weaknesses and propose recommendations.
  - Early clearance of government arrears to sharply reduce NPLs.
  - Authorities committed to proactively working with COBAC to ensure early recapitalization of banks with capital shortfalls.
  - Proactive adjustment of macroeconomic policy settings in consultation with staff and authorities.

### BEAC assurances and safeguards implementation
- The BEAC provided updated policy assurance on end-December 2019 and end-June 2020 NFAs in support of CEMAC countries’ Fund-supported programs.
- BEAC presented revised NFA projections reflecting in part the strong performance through mid-2019.
- BEAC reiterated commitment to implement an adequately tight monetary policy, together with member states implementing fiscal adjustment agreed in the context of IMF-supported programs, to achieve the NFA projections.
- The regional assurances on regional NFAs are critical for the success of EG’s program and will help bolster the region’s external sustainability.
- The BEAC continues to implement the remaining recommendations of the 2017 safeguards assessment.
- BEAC’s full transition to IFRS for FY 2019 is progressing broadly as planned.
- Adoption of revised secondary legislations was extended beyond June 2018 to allow further consultation with stakeholders, including IMF staff.

### Staff appraisal — macroeconomic context and outlook
- Macroeconomic imbalances have declined in recent years, but the economic situation remains challenging.
- Fiscal consolidation has helped move the government accounts into surplus and strengthen the external position.
- Economic growth remains negative while EG’s NFAs at the BEAC are very low.
- The overall growth outlook features a gradual recovery of the non-hydrocarbon sector but remains challenging owing to declining hydrocarbon output.
- The banking sector remains weak, weighed down by high NPLs and low capital.
- The authorities face the challenge of maintaining macroeconomic and financial stability while restoring non-oil growth, diversifying the economy away from hydrocarbons, and making growth more inclusive and equitable.

### Fiscal strategy and public financial management (PFM)
- The authorities’ strong fiscal program is key to responding to current challenges.
- Fiscal adjustment is needed to address the secular decline in hydrocarbon output, maintain debt sustainability, strengthen the external position and help rebuild NFAs.
- The program would help diversify government receipts by substantially increasing non-hydrocarbon revenue, creating space for spending on social protection and human capital development.
- Fiscal adjustment, multilateral financing, privatization and concession of public enterprises to the private sector will help address financing constraints, repay government domestic arrears, and bolster private confidence.
- Strengthening PFM is critical:
  - Enhance expenditure tracking and monitoring, improve budget preparation and expenditure controls.
  - Revamp the PFM framework, including by transposing the CEMAC directive.
  - Undertake a fiscal safeguards review and a fiscal transparency evaluation to feed into the PFM reform agenda.
  - Increase dissemination of fiscal information, including on domestic and external debt and any contingent liabilities.

### Banking sector actions
- Clearance of domestic arrears through securitization and cash payments is key to reducing NPLs and strengthening the banking sector.
- Ensure banks with capital shortfalls are recapitalized as early as possible.
- Banks heavily reliant on short-term liquidity from the BEAC should reduce this support to levels consistent with COBAC regulations.
- Work with COBAC to ensure banks strictly adhere to prudential and governance requirements.

### Transparency, governance, and anti-corruption priorities
- Authorities’ strategy to increase transparency, improve governance and fight corruption is welcome and builds on measures launched during the SMP and a governance diagnostic by IMF staff.
- Priority measures:
  - Strengthen the legal and institutional anti-corruption framework and put in place a robust asset declaration regime for public officials.
  - Foster transparency in the oil and gas sectors, including through EITI membership, publication of audits of national companies and periodic data reports on the hydrocarbon sector.
  - Improve the rule of law and the AML/CFT framework.
- These reforms will support the fiscal strategy, resource mobilization, efficient and equitable use of public resources, and economic diversification by fostering a conducive business environment.

### Economic diversification and private sector development
- An ambitious reform agenda is needed to promote economic diversification.
- Authorities have begun implementing reforms to improve the business climate to boost non-hydrocarbon domestic and foreign investment.
- Recommendations to deepen reforms:
  - Enable the private sector to play a leading role in diversification.
  - Open to competition sectors where public enterprises currently operate.
  - Develop and implement a strategy for financial inclusion to ease access to finance for micro and small enterprises.
  - Reduce labor rigidities and address skills mismatch to help support job creation.

*Source: 1gnqea2019001*

### 36. Staff supports the authorities’ request for a program under the EFF with access

### 36. Staff supports the authorities’ request for a program under the EFF with access

### Program request, access, and staff assessment
- Staff supports the authorities’ request for a program under the EFF with access equivalent to SDR 205 million (130 percent of quota).
- The Letter of Intent and Memorandum of Economic and Financial Policies set out policies to pursue the program’s objectives.
- Implementation of the regional policy assurances is adequate.
- The capacity to repay the Fund is also adequate.
- Risks to program implementation are manageable given program design and the authorities’ commitment to reforms.
- Staff proposes that completion of the first review under the extended arrangement be conditional on the implementation of critical policy assurances at the union level, as established in the November 2019 union-wide background paper.

### Financing, purchases, and timing under the EFF arrangement
- Equatorial Guinea’s quota is SDR157.5 million.
- Table of scheduled purchases and conditions (date of availability / condition / amount, Million SDRs):
  - December 16, 2019 — Approval of the extended arrangement under the EFF. — 29.287
  - May 18, 2020 — Observance of PCs for end-December 2019, continuous PCs, and completion of the first review. — 29.287
  - November 18, 2020 — Observance of PCs for end-June 2020, continuous PCs, and completion of the second review. — 29.287
  - May 18, 2021 — Observance of PCs for end-December 2020, continuous PCs, and completion of the third review. — 29.287
  - November 18, 2021 — Observance of PCs for end-June 2021, continuous PCs, and completion of the fourth review. — 29.287
  - May 18, 2022 — Observance of PCs for end-December 2021, continuous PCs, and completion of the fifth review. — 29.287
  - November 18, 2022 — Observance of PCs for end-June 2022, continuous PCs, and completion of the sixth review. — 29.287
- To t a l205.009130.2

### Key fiscal findings and projections (selected)
- Overall fiscal balance (levels and percent of GDP shown in tables):
  - 2016 overall fiscal balance: -727 (Percent of GDP: -10.9)
  - 2017 overall fiscal balance: -183 (Percent of GDP: -2.6)
  - 2018 overall fiscal balance: 393 (Percent of GDP: 0.5)
  - 2019 overall fiscal balance (Out./Prog.): 51 (Percent of GDP: 1.3)
  - 2020 overall fiscal balance (Proj./Prog.): 134 (Percent of GDP: 1.1)
- Revenue and composition (selected levels, Billions of CFA francs):
  - 2016 Revenue: 1,126
  - 2017 Revenue: 1,238
  - 2018 Revenue: 1,447
  - 2019 Out./Prog. Revenue: 1,240
  - Hydrocarbon revenue 2016: 850; 2017: 988; 2018: 1,178; 2019: 995
  - Non-hydrocarbon revenue 2016: 276; 2017: 250; 2018: 268; 2019: 245
- Expenditure and primary balance (selected):
  - Expenditure 2016: 1,853; 2017: 1,422; 2018: 1,408; 2019: 1,149
  - Expense (primary) 2016: 662; 2017: 702; 2018: 714; 2019: 706
  - Net acquisition of non-financial assets 2016: 1,164; 2017: 689; 2018: 647; 2019: 398
- Debt and deposits (selected):
  - Outstanding public debt (percent of GDP) 2015–24 shown in tables (examples): 2016: 43.4; 2017: 38.0; 2018: 43.0; 2019: 46.2; 2020: 45.9
  - Gross government deposits (Billions of CFA francs) 2016: 761; 2017: 543; 2018: 684; 2019: 659; 2020: 770

### External sector assessment and reserve adequacy
- Current account dynamics:
  - The current account deficit narrowed from 13 percent of GDP in 2016 to around 5.4 percent in 2018.
  - Narrowing reflects: stabilization of hydrocarbon-related trade balance, substantial narrowing of non-hydrocarbon trade deficit due to import compression in line with fiscal adjustment, and improved services account largely due to slower hydrocarbon sector activity.
  - Non-hydrocarbon exports expected to remain low given limited diversification.
- Exchange rates and reserve projections:
  - As of July 2019, the nominal effective exchange rate depreciated about 1 percent y/y; the real effective exchange rate decreased about 3.6 percent y/y.
  - Net foreign assets (NFA) at the BEAC projected to rise to CFAF 52 billion (US$88 million) by end-2019, equivalent to less than one month of prospective imports of goods and services.
  - With budget support from the IMF and the African Development Bank under the proposed Extended Arrangement, gross reserves are projected to reach CFAF 102 billion (US$173 million) at end-2019, equivalent to 20percent of the IMF’s ARA metric.
  - Without such financing, reserves would amount to just 15 percent of the ARA metric at end-2019.
  - Over the period of the Extended Arrangement, program financing would allow gross reserves to reach 154 percent of the ARA metric by end-2022 (6.  1 months of prospective imports), above the threshold of 120 percent of the ARA metric considered relevant for commodity exporters.
  - Absent program financing, reserves would reach only 77 percent of the ARA metric by the end of the Extended Arrangement.
  - The net international investment position (NIIP) turned negative in 2017, expected to deteriorate further in 2019, but revert to positive territory from 2020.
- External sector assessments and REER:
  - Standardized exchange rate assessment techniques indicate the REER is stronger than warranted.
  - EBA-Lite current account model (comparison across assessments): Projected current account balance and gaps reported in tables; REER Gap (percent, + indicates overvaluation) 18.837.6 (as shown in source tables).
  - The revised EBA-lite current account model shows an exchange rate overvaluation of around 54 percent (noted as substantially above the last assessment).

### Risks and policy recommendations (from Risk Assessment Matrix)
- Domestic risks:
  - Financial sector exposure to affected non-hydrocarbon sectors — Relative likelihood: Medium; Impact: Medium.
    - Recommended response: Ensure full compliance with prudential requirements. Take early actions to stabilize and restructure weak banks.
  - Weak governance and weak capacity — Relative likelihood: High; Impact: High.
    - Recommended response: Press ahead with governance and PFM reforms; provide technical assistance and training to raise capacity.
- External risks:
  - Large swings in energy prices — Relative likelihood: Medium; Impact: High.
    - Recommended response: Identify contingency fiscal adjustment measures and financing; save at least a portion of any additional revenue.
  - Rising protectionism and retreat from Multilateralism — Relative likelihood: High; Impact: High.
    - Recommended response: Take measures to facilitate trade with the CEMAC region and with other African CFTA countries. Implement the AfCFTA agreement.
  - Weaker-than-expected global growth: China — Relative likelihood: High; Impact: Medium.
    - Recommended response: Diversify external financing sources and identify contingency fiscal measures to protect the program fiscal targets.
  - Intensification of geopolitical tensions and security risks — Relative likelihood: High; Impact: Medium.
    - Recommended response: Enhance trade relations in the CEMAC and harmonize policies on security.

### Technical assistance and capacity-building
- Annex II lists proposed Technical Assistance under the Program, 2019–22 (source: IMF staff). Specific TA areas are presented in the source annex.

*Source: IMF staff.*

### 1.3 percent of GDP to -5.8 percent of GDP (causing the estimated exchange rate

### 1gnqea2019001 - 1.3 percent of GDP to -5.8 percent of GDP (causing the estimated exchange rate

### Natural resource wealth, current account and fiscal norms
- Expenditure allocation rules treat natural resource wealth as an annuity, from which consumption and saving can be derived.
- Because natural resource production is declining, the value of Equatorial Guinea’s resource wealth is expected to decrease over time.
- This implies a current account norm that is in surplus (e.g. higher saving), and well above what is currently projected for the medium-term (both overall and in real per capita terms).
- Gaps between norms and projections are distorted by large imports induced by major hydrocarbon projects projected for the later years of the forecast horizon.
- The fiscal savings norm is positive, reflecting decreasing government wealth (due to a lower present value of exhaustible hydrocarbon revenues, which are not offset by rising deposit assets), in contrast to the fiscal balance that is roughly in balance in the medium term.
- Numerical indicators appearing in the discussion:
  - Estimated exchange rate misalignment rising from 19 percent to 38 percent.
  - Current account norms and fiscal norms discussed in percent of GDP (exact tabulations in source figures and tables).

### Structural competitiveness and business climate
- Equatorial Guinea’s results in the World Bank’s Doing Business 2019 report improved between 2018 and 2019, including a reform that improved contract enforcement (adoption of a law regulating mediation as alternative dispute resolution).
- Performance on Doing Business sub-indices is about average for the CEMAC region but remains substantially behind extra-regional commodity producers (average of Bolivia, Canada, Chile, Malaysia, and Norway).
- Continued implementation of structural reforms—including those under the proposed EFF—is essential to create an enabling environment for private sector development and economic diversification.

### Annex IV — Public Debt Sustainability Analysis: overview and baseline projections
- Public debt rose rapidly over 2013–16, then stabilized around 43 percent of GDP at end-2018.
- With full implementation of the program’s policies, staff assesses debt as sustainable.
- Public debt path under baseline:
  - Remains broadly near current levels over the first three years, then declines over the remaining seven years of the projection horizon.
  - Debt is expected to rise slightly to 47 percent of GDP in 2020 (from about 43 percent in 2018) before falling to 21 percent at end-2029.
- Factors affecting the baseline:
  - Fiscal adjustment implemented to date and a rise in international petroleum prices from 2015–16 troughs provided some relief.
  - Petroleum reserves are set to be depleted in coming years; continued adjustment and reforms are necessary.
  - A major hydrocarbon project (Fortuna FLNG) expected in earlier vintages is delayed by one year, pushing main macroeconomic effects beyond 2022 into 2023 and after.
- Financing package:
  - Total package of USD631million helps authorities commit to a sustainable plan for repaying high domestic payment arrears.
  - The securitization of validated domestic arrears is planned once an independent audit concludes in late 2019; securities expected with maturities of 10 to 15 years issued at going market interest rates.
  - A one-off securitization transaction in 2020 raises GFNs in 2020 but, once settled, GFNs revert below the 15 percent of GDP threshold thereafter.

### Public sector DSA: drivers and staff assessment
- Key macro-fiscal assumptions and paths:
  - Non-hydrocarbon primary deficit will decline from 21.8 percent of non-hydrocarbon GDP in 2019 to 17.6 percent in 2020, and to about 9.4 percent of non-hydrocarbon GDP by 2022.
  - Overall balance surplus would increase from -1.6 percent of GDP to 2.3 percent in 2022.
  - Growth outlook: after five consecutive years of negative growth averaging 6.6 percent during 2015 to 2019, average growth is projected to become less negative, starting in 2020 with -1.9 percent and averaging -0.1 percent from 2021 to 2029.
- Rationale for sustainability judgment:
  - Fiscal adjustment is ambitious but feasible given substantial prior adjustment during 2014–2019 (primarily through reduction of capital spending).
  - Favorable economic outlook driven by new projects and output projections that could slow the hydrocarbon-sector output decline.
  - Financing package and securitization support manageable GFNs under baseline and many scenarios.

### Debt vulnerabilities and risks
- External and structural risks:
  - Limited options to issue CFA-franc denominated debt to local investors; increased use of Eximbank facility.
  - Current account deficit remains high; shares of foreign-held debt, FX-denominated debt, and external financing needs are above lower early warning thresholds.
- Secured lending and collateralization:
  - Collateralization requirements limit buffer accumulation and entail less resilience to shocks, though mitigated by ready availability of the Eximbank facility.
- Other diagnostics:
  - As a small, commodity-based, open economy, Equatorial Guinea faces significant macroeconomic volatility (notably international fuel price movements) causing wide fan charts for potential debt outcomes and large historical forecast errors for growth, inflation, and the primary balance.
  - Past adjustments over 2016–18 reduce some risks by improving attainability of targets.

### Stress tests, scenarios, and resilience
- If adjustment measures are fully implemented:
  - Public debt trajectory would be stable and resilient to shocks under standard stress tests and broadly so in the customized scenario.
  - In the medium term, with total GDP still declining, positive real interest rates, and a need to accumulate deposit buffers, expected debt reduction comes mainly from a stronger primary fiscal balance.
- If adjustment is not maintained:
  - Public debt and GFNs would be on an upward path (illustrated by divergence between constant primary balance and historical scenarios).
- Exceptions in stress outcomes:
  - One standardized test (combined macro-fiscal shock) can lead to sustained elevations in debt and GFNs; this shock includes a sharp re-intensification of economic contraction and much higher borrowing costs.
  - In the customized scenario featuring a permanent -2 percent shock to both baseline growth and baseline non-interest revenues to GDP, GFN ratio to GDP begins to rise at the end of the projection horizon towards the threshold.
- Public external debt outlook and sensitivity:
  - External debt projected to rise from about 9.5 percent of GDP in 2018 to around 16.2 percent of GDP by 2022, then decline to 10.4 percent by 2029.
  - Stress scenarios most sensitive to the non-interest current account shock, combined shock, and real depreciation shock.
  - Non-interest current account shock produces the largest increase in external debt (reflecting historical volatility), while real depreciation and growth shocks raise external debt by about 4 percent of GDP by 2029 in the scenarios shown.
- Gross financing needs (GFN):
  - Elevated gross financing needs in 2020 reflect a transaction to securitize existing domestic arrears but remain below the high-risk threshold overall.
  - Under some scenarios GFNs would exceed the 15 percent of GDP threshold during the projection horizon.

*INTERNATIONAL MONETARY FUND*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Background and recent developments
- Context and request
  - Date and place: Malabo, November 22, 2019.
  - Government requests a 36-month Extended Fund Facility (EFF) arrangement with the IMF with access equivalent to SDR 205 million (130 percent of quota or about US$284 million).
  - Request that program reviews be semi-annual.
- Macroeconomic shock and response
  - Since mid-2014 the economy was severely impacted by a fall in oil/hydrocarbon prices and a secular decline in hydrocarbon output.
  - The government completed a 2018-19 staff-monitored program (SMP) and has substantially reduced macroeconomic imbalances and built technical capacity.
- Recent performance and indicators
  - Economic activity is projected to contract by 5.9 percent in 2019.
  - Non-hydrocarbon output has stabilized after prior declines but remains constrained by fiscal consolidation, weak private-sector confidence, and lack of new bank private credit.
  - Overall fiscal balance: an overall surplus of 0.5 percent of GDP in 2018, compared with a deficit of 2.6 percent of GDP in 2017.
  - Imputed net foreign assets (NFA) at the BEAC turned positive in 2019Q2 after over two years in negative territory, reflecting fiscal consolidation and repatriation of some government deposits in 2019H1.
  - Financial sector: NPLs have increased and remain high; loan provisions are low; capital levels at some banks are below minimum requirements; liquidity is tight at some banks. Regularization of government payment arrears to construction companies began in early 2019 and has helped asset quality and liquidity; loan provisions are being applied more rigorously.
- Medium-term outlook and risks
  - Recent hydrocarbon discoveries and projects could slow the pace of hydrocarbon-sector decline; a large liquid gas project could come on stream in 2025; two other large projects have substantial upside potential.
  - Downside risks include faster-than-expected hydrocarbon output decline, lower hydrocarbon prices, or a global growth shock.
  - Mitigating actions include implementing an arrears repayment plan, modernizing macroeconomic governance, enhancing public sector management capacity, increasing transparency in public finances and the oil sector, fighting corruption, and pressing ahead with economic diversification (including exploiting AfCFTA opportunities).

### Second review of the Staff-Monitored Program (SMP)
- Quantitative performance and indicative targets (end-July 2018)
  - Floor on non-resource tax revenue of the central government: 9,093 (Billions of CFA Francs, cumulative for the quarter) — Met.
  - Floor on non-resource primary balance of the central government: −540 (Prog.) vs −696 (Actual) — Not met.
  - Ceiling on external debt arrears accumulation (continuous measure): 1 (Prog.) vs 0 (Actual) — Met.
  - Ceiling on contracting and guaranteeing new external debt: 100 (Prog.) vs 100 (Actual) — Met.
  - Ceiling on new BEAC credit to the government: 0 (Prog.) vs 0 (Actual) — Met.
  - Ceiling on net domestic bank credit to the government: −127 (Prog.) vs −204 (Actual) — Met.
  - Floor on social spending (education and health): 2,607 (Prog.) vs 4 (Actual) — Met (note: floor for social spending is based on SMP definition).
  - Data revisions imply the PM on the non-hydrocarbon primary balance for end-April 2018 was also missed.
- Structural measures and audits
  - Implemented three of five structural measures under the SMP.
  - Ratified the United Nations Convention Against Corruption in May 2018.
  - Hired internationally renowned firms to audit Gepetrol and Sonagas (state oil and gas companies); audit of these companies expected March–April 2020.
  - Hired an internationally renowned company to audit government arrears; arrears audit to be completed in December 2019.
  - Structural measures not met under the SMP were set as prior actions for the EFF request: (i) implementation of a system to track and monitor expenditure commitments and (ii) presentation of a membership application to the Extractive Industries Transparency Initiative (EITI).
- Other reform steps under the SMP
  - Measures to improve tax administration, modernize the PFM framework, increase transparency, and improve the business climate for non-oil investment.
  - IMF governance diagnostic mission (June 2018) informed a governance strategy to be implemented under the EFF.
  - A financial-sector strategy to address banking vulnerabilities has begun implementation.

### Program objectives and strategy under the EFF
- Overarching objectives (2019–22)
  - Strengthen macroeconomic and financial stability.
  - Reform the economy and the governance framework.
  - Reduce corruption, promote inclusive growth, and contribute to the CEMAC regional adjustment strategy.
- Four central, interrelated pillars
  - (i) Further reduce macroeconomic imbalances while promoting social spending for human capital development and mitigating impacts on low-income groups.
  - (ii) Address weaknesses in the financial sector.
  - (iii) Promote economic diversification.
  - (iv) Foster good governance and transparency and fight corruption, including strengthening the PFM framework.
- Social mitigation
  - Program designed to share adjustment burden across society, with safeguards to ensure social spending continues to increase and improved targeting for vulnerable groups.

### Macroeconomic program — Fiscal policy and tax reform
- Debt and deficit projections
  - Public debt ratio projected to decline slightly from 46.2 percent of GDP to 44.4 percent during 2019–22.
  - Public debt ratio projected to reach 38.5 percent of GDP in 2024.
  - Central government non-hydrocarbon primary deficit projected to fall from 21.8 percent of GDP (non-hydrocarbon GDP) in 2019 to 17.6 percent in 2020 and 9.4 percent in 2022.
- Strategy to achieve fiscal targets
  - Combination of spending measures (including improving spending efficiencies), revenue measures, and actions to improve revenue administration.
  - Government committed to submit a 2020 budget consistent with the program and to take additional measures if needed to meet targets.
- Tax reform objectives and quantified impact
  - Reform the 2004 Tax Code by harmonizing taxes regionally, streamlining deductions, and adjusting rates.
  - Tax policy and administration measures intended to increase non-hydrocarbon tax revenue by 3.6 percent of GDP during the program period.
  - Specific tax policy measures to include adoption of new excise taxes on imported beverages, tobacco, vehicles and others (structural benchmark, end-December 2019).
  - Maintain the higher personal income tax rate for non-residents introduced in early 2019.
  - Estimate that the policy measures will increase tax revenue by 1.1 percent of non-hydrocarbon GDP.
- Strengthening tax and customs administration — estimated impact and measures
  - Improved tax administration during 2019–22 expected to increase revenues by 2.5 percentage points of non-hydrocarbon GDP.
  - Measures include:
    - Strengthening large and medium-size taxpayer units; single taxpayer identification number; streamlined tax returns; transfer of tax collection management from the Treasury to tax and customs administrations; all companies now required to file taxes in Malabo.
    - Resume implementation of the ASYCUDA customs system (resuming after ~one-year standstill) starting with Bioko island and Bata, with eventual roll-out to all customs posts.
    - Implement Decree 134 of 2015 to penalize tax evasion and reduce exemptions; all exemption requests routed through the Ministry of Finance with a preparatory study for the paymaster.
    - Strengthen auditing capacity (including audits of companies in the oil and gas sector) and coordinate with the Directorate General of state office to conduct joint audits.
    - Unified Directorate of taxes and collections to improve controls on payments and collections.
    - Request IMF technical assistance in the form of a tax resident advisor to implement recommendations from the IMF 2018 TA report.
    - Amend the 2017 Tax Amnesty Law to replace provisions for write-offs of multi-year tax liabilities with provisions allowing negotiated payment arrangements (structural benchmark, end-December 2019).
    - Begin training to create a specialized corps of tax inspectors and apply for membership in the World Customs Organization (WCO).
    - Develop more effective public campaigns and communication strategies to encourage tax compliance and expand the tax base.

_Appendix I. Letter of Intent — Republic of Equatorial Guinea (Malabo, November 22, 2019)_

### 13. We recognize that further streamlining and reprioritization of spending will also be

### 1gnqea2019001 - 13. We recognize that further streamlining and reprioritization of spending will also be

### Expenditure program and budget implementation
- 2019 budget implemented in line with the fiscal program agreed with the IMF.
- Capital expenditure reduced to make room for more social spending; intent to continue creating room to increase social and human capital development expenditure.
- 2020 budget submitted to parliament consistent with program targets (prior action); government working to secure approval and will rigorously implement it.
- Capital expenditure details:
  - Public investment needs declined after intensive capital projects leading up to 2014.
  - From 2014 to 2018 government reduced capital spending due to lower oil prices and production.
  - Intend to further reduce capital expenditure to lower the non-hydrocarbon primary balance, while considering projects underway, their economic impact, and diversification commitments.
  - New public investment priorities: education, health, housing, roads, and waterworks.
  - Will improve expenditure tracking and monitoring to ensure capital expenditure does not exceed budget allocations.
- Current expenditure details:
  - Will explore avenues for reducing unproductive and inefficient spending.
  - Plan to limit growth of current expenditure through stricter control and prioritization while reducing the fuel subsidy during the program period.
  - Subsidy reduction to occur gradually; maintain subsidy for certain fuels at least until an adequate social safety net is introduced.
  - Introduce gradually a more flexible fuel pricing system to ensure pass-through of international price changes to local prices; accompanied by a social safety net.
  - Will request technical assistance from the IMF and other development partners for implementation of the new pricing system and for the design and implementation of the social safety net.

### Domestic and external arrears
- Domestic arrears:
  - Committed to regularizing and repaying all legitimate domestic arrears to strengthen the banking sector and support non-hydrocarbon recovery.
  - In May 2019 hired an internationally recognized company to audit domestic arrears; audit work will be completed in December.
  - Plan to make cash payments on a portion of validated arrears and exchange remaining obligations for interest-bearing government bonds with terms comparable to public securities in the CEMAC region (structural benchmark, March 2020).
  - Engaged in discussions with holders of domestic arrears on clearance and repayment plan details.
- External arrears:
  - Besix claims transferred to Credendo estimated at 34 billion CFA; being audited as part of domestic arrears audit.
  - Spain indicated government was in arrears for about 10 billion CFA on an expired debt swap agreement not implemented.
  - Government engaged with both creditors aiming for mutually satisfactory settlements and agreed to clear outstanding arrears by the time of the first program review (planned for May 2020).

### Debt management and program financing
- Debt management:
  - Committed to containing public debt growth.
  - Under the program public debt would peak at 46.6 percent of GDP in 2020, then is expected to begin a gradual decline.
  - Strategy to achieve this: sustained fiscal discipline and prudent debt management; reduce balance sheet vulnerabilities; rebuild financial buffers; expand financing sources; develop and deepen domestic bond market.
  - Plan to reduce external collateralized debt; will not contract new collateralized loans or new collateralized loan facilities.
  - Will increase use of loans from multilateral and regional financial institutions.
  - Enhancing debt management function through institutional strengthening and training; requested IMF TA on modernizing debt management.
- Program financing needs and composition:
  - Government envisages the need for financing from multilateral sources of US$631 million over the next three years.
  - Total funding from the IMF is expected to be SDR 205 million or 130 percent of quota (about US$284 million).
  - Program financing over the next three years from the AfDB are US$347 million.
  - Continue to draw financing from existing Chinese loan facility during the program period under loans already contracted.
  - Remaining financing needs to be filled by rolling over existing short-term domestic-currency debt with local and regional banks.

### Privatization and private management of state assets
- Will implement recommendations of the Third National Economic Conference: (i) restructuring of autonomous agencies and public companies, (ii) concession of public assets to private sector, (iii) sale of public assets to private operators (privatization).
- Will open sectors to competition where possible to minimize monopolistic practices.
- Strengthen existing public company restructuring committee to assess viability and recommend actions.
- Present for approval to the Council of Ministers (CoM), in consultation with the National Parliament:
  - A substantive list of state assets to be privatized and a list of entities to be restructured or placed under concession regime with the private sector (structural benchmark, end of June 2020).
  - Process to respect strategic interests of the State in each sector.
- Prioritize privatization to support immediate revenue generation; present during second half of 2020 an action program for sale of assets once CoM approves plan.
- Sales and concessions to be carried out through open and transparent international tenders that include national and subregional investors.
- Bata Port excluded from this program because it is already under negotiation for concession to Dubai Ports.
- Use proceeds from privatization to pay validated internal arrears and rebuild net external assets, protecting net worth of the State.
- Expected outcomes: create space for private sector, improve efficiency, generate non-oil growth, develop a larger local market, and contain fiscal risks.

### Social spending, social statistics, and public finance management (PFM)
- Social spending:
  - During the SMP increased spending on health and education and increased social spending to create “urban districts” bringing basic conveniences and public services to rural and poorer regions.
  - Under the EFF arrangement intend to further increase budget allocation to social sectors efficiently and effectively.
  - Priorities:
    - Social sector strategy: working on a strategic plan guiding social spending, strengthening social indicators, reducing poverty, and fostering human capital development; informed by social sector studies with development partners.
    - Conduct regular household budget surveys to improve data collection on living conditions and other social indicators, starting with the 2020 survey which is already underway. Funding for the household survey and census of businesses was approved by the Inter-ministerial Council this month; results expected by late 2020.
    - Adopt a functional classification of government spending starting with the 2020 budget to help quick identification of spending allocations.
    - Social and anti-poverty spending: continue reallocating spending towards social sectors; increased the floor on social spending in the program to 2.0 percent of GDP in 2020.
    - Will work with the Fund and WB staff, and UN agencies to develop priorities guiding reallocation of resources and improve allocation of social spending for low-income households.
    - Assessing interventions: plan to more carefully document impact and efficiency of social spending, with interest in measuring impact on human capital, living conditions and protection of vulnerable groups.
- Public finance management strengthening:
  - Institutional arrangements: merged ministries of Economy, Planning and Finance to facilitate tighter control over spending; ensure commitments on current spending are adequately tracked and monitored; revamped budget preparation process with projects reviewed by a budget committee.
  - Expenditure tracking and monitoring (prior action): operationalize an enhanced and modern system to track commitments on capital spending, including a multi-year framework.
    - System will facilitate: (i) maintaining an accurate record of all spending commitments (on a monthly frequency for the current year); (ii) ensuring full control of all spending approvals by the Minister of Finance; (iii) documenting key steps in the expenditure control chain (verification of availability of appropriations and level of expenditure commitment, certification of delivery, approval of payment, and payment instructions).
    - Plan to fine tune system via training technicians, updating procedures manuals, and computerizing processes.
    - Created a certifications committee to validate all claims for payment on investment projects monthly; validated claims transmitted to the paymaster for payment.
    - Legislation grants the Minister of Finance sole responsibility for approval of current and capital expenditure; government will ensure adherence in practice.
  - Transposition of the CEMAC Directives: will complete transposition and implementation of the CEMAC Directives on PFM harmonization to improve programming and control of spending and strengthen recording of financial data.
  - Transparency: starting in 2020 will publish on the MFEP website comprehensive data on internal and external debt, including contingent liabilities.

### Governance, transparency, anti-corruption, and AML/CFT
- Governance strategy:
  - Worked with IMF staff in 2018-19 to prepare a governance diagnostic report identifying weaknesses and areas for improvement.
  - Designed, with IMF staff, a strategy to enhance governance and modernize approaches including in PFM.
  - Will publish the governance diagnostic report and governance strategy (prior action).
- Anti-corruption framework:
  - Ratified the UN anti-corruption convention in May 2018.
  - Working to adopt an anti-corruption law (structural benchmark, end-March 2020) to criminalize corruption offences, strengthen investigative and prosecutorial capacity and powers, enhance role of courts specialized in combatting corruption, and bolster international cooperation.
  - Updating decree on asset declarations for senior public officials in line with law and international best practices during 2020; aim to implement by June 2021.
  - Plan to operationalize the Accounts Tribunal over the medium term by equipping it with adequate personnel and facilities.
- Hydrocarbon sector transparency:
  - Plan to become a full complying member of the EITI; submitted membership application in November 2019, expected to be considered by the EITI Board in early 2020.
  - Plan to publish on the Ministry of Mines website the final audit and reconciliation reports of GEPetrol and Sonagas (structural benchmark, end-June 2020).
  - Plan to have a CoM-approved plan to address audit report findings at these companies and to reassess revenue potential; any additional resources allocated to boost NFAs at the BEAC and social spending.
  - Plan to publish annual reports of comprehensive hydrocarbon sector data starting with 2019 results (structural benchmark, end-September 2020); content to be agreed with IMF staff.
  - Intend to publish all active oil and gas sector contracts by end-June 2020.
- Rule of law and information access:
  - Launch an Official State Gazette website to publish all existing GE laws, orders and decrees; first step to publish all laws, orders and decrees in force since 2000 (structural benchmark, end-June 2020) and keep it updated.
- AML/CFT:
  - Continue strengthening AML/CFT system; adopted legal and institutional measures including transposition of the CEMAC directives and creation of the financial information unit (ANIF).
  - Mandated ANIF to develop better guidance to assist financial institutions to identify politically exposed persons and beneficial owners.
- Fiscal safeguards and transparency reviews:
  - Will request the IMF to conduct a Fiscal Safeguards Review (FSR) by end-September 2020 to assess the treasury’s framework; intend to fully implement all recommendations.
  - Will request the IMF to conduct a Fiscal Transparency Evaluation (FTE) of EG fiscal operations and intend to publish these reports on the Ministry of Finance’s website.
  - Use Finance Ministry website launched in 2018 to post historical fiscal data; completed e-GDDS subscription in May 2019 and posted national data summary page.
  - Intend to disseminate more fiscal and hydrocarbon sector data and information (including fiscal legislation) on a monthly basis via the Finance Ministry website.

### Structural reforms to boost non-hydrocarbon growth
- Continue steps to promote economic diversification and jump-start non-hydrocarbon growth.
- April 2019 national economic conference launched revision of the Horizonte 2020 strategy to guide diversification and sectoral policies medium to long term, incorporating sustainable development goals and environmental considerations.
- Integrated revised development plan with short-term fiscal consolidation program.
- With Korean Development Institute drawing on successful transformation experiences to finalize strategy.
- With support from the WB and the Singapore Corporation Enterprise, designed a plan to improve the business climate.
- Measures to enhance business environment implemented, including operationalizing the one-stop shop for establishing firms, in line with the action plan on the business environment of March 2019.

*Republic of Equatorial Guinea — International Monetary Fund content unit*

### 26. Going forward, we plan to build on these initial efforts by fully embracing the

### 26. Going forward, we plan to build on these initial efforts by fully embracing the

### Development strategy and private-sector role
- Plan to fully embrace the private sector as a critical actor in the revised development strategy.
- Clearly articulate financing requirements for the updated development plan and fully integrate these requirements into the budget, consistent with the fiscal program.
- Government strategies:
  - Articulate a full-fledged strategy for non-hydrocarbon export sector development:
    - Pursue activities where EG has a comparative advantage or can develop one over the medium term.
    - Create investment promotion and export agencies to attract foreign investment and promote non-hydrocarbon exports.
  - Priority sectors identified as part of economic diversification strategy:
    - tourism, fishing, agriculture, financial services, and digital economy.
    - Tourism: draft a national tourism development plan; roll out special tourist and business visas to make it easier to visit EG.
    - Fishing: operationalize a training institute for fisherfolk to move from artisanal to semi-industrial and industrial fishing to generate higher value-added exportable products.
    - Develop special logistics and economic zones in the Bata region.
    - Longer term goal: transform Malabo into a financial services center for Africa, leveraging AfCFTA.
    - Agriculture: firm proposals still under development.
  - Labor market reform:
    - Launch a comprehensive labor market reform strategy to improve export competitiveness and macroeconomic flexibility.
    - Specific measures to address high redundancy costs, training, and aligning wage growth with labor productivity; reduce long-standing labor market rigidities.
  - Business environment improvements:
    - Streamline and reduce procedures, time and cost for business transactions.
    - Increase access to credit (financial inclusion).
    - Improve framework for resolving insolvencies.
    - Reduce barriers to trading across borders (time, cost and procedures) in line with AfCFTA commitments, particularly within CEMAC.
    - Work with internet and telecom providers to reduce fees and improve service quality.
  - Regional integration:
    - Commit to African Union’s Agenda 2063 and position economy to benefit from AfCFTA.
    - Explore selling excess electricity produced in EG to neighboring countries.
    - Signed electricity grid inter-connectivity agreement with Cameroon and Gabon.

### Foreign exchange policy (Section E)
- Endorse and support regional efforts to strictly enforce existing FX regulations and contribute to regional strategy to rebuild CEMAC’s reserves.
- Ensure the following:
  - (i) All public entities repatriate and surrender their forex receipts and do not hold deposit accounts abroad which were not authorized by BEAC;
  - (ii) “Available” government deposits (i.e., deposits whose purpose is not guaranteeing debt payments) held abroad will be repatriated by December 2020.
  - (iii) For accounts held abroad to guarantee loan payments, work with BEAC and creditors to replace them for BEAC accounts with creditors by March 2020. In return, BEAC will keep in its balance sheet a liability with Equatorial Guinea;
  - (iv) Customs officers will strictly enforce the domiciliation of all export transactions with a resident commercial bank;
  - (v) Report to the BEAC all exports licenses as required in the forex regulation;
  - (vi) All active oil and gas contracts will be shared with the BEAC (structural benchmark, end-December 2019).
- Work closely with the local BEAC branch to uphold its commitment to make available FX for documented external transactions within 2 business days of the initial transaction request.
- Sensitize commercial banks to expediently hand on applications for FX to BEAC within 2 business days.
- Rebuilding imputed NFA:
  - Goal: start rebuilding EG’s imputed NFA starting in 2019.
  - Imputed NFA at the BEAC is projected to increase to 546 billion by 2022, owing largely to strong fiscal consolidation and expected inflow of external budget support.
  - Additional resources may come from higher hydrocarbon revenues than currently projected and proceeds from privatization of state-owned assets.

### Addressing financial sector vulnerabilities (Section F)
- Continue strengthening the banking sector (¶3) with a three-pillar strategy to stabilize and strengthen bank balance sheets:
  - (i) Clear validated arrears to construction companies through cash payments and exchange remaining overdue obligations for government bonds to lower NPLs, increase capital, and improve bank liquidity.
  - (ii) Work with owners of undercapitalized banks to recapitalize them through conversion of existing generic provisions into capital and injection of new capital if necessary.
  - (iii) Work closely with COBAC to ensure full compliance with COBAC regulations, particularly prudential regulations and governance requirements.
- Actions taken:
  - Initiated exchange of overdue obligations with government bonds in early 2019, improving asset quality.
  - Cleared arrears through cash payments in 2019, improving bank liquidity and reducing reliance on short-term BEAC funding.
- Commitment:
  - Continue to reduce BEAC funding to levels consistent with COBAC norms by end-2020.
  - Consult with IMF staff before taking any banking-system actions not included in this section.
- Financial inclusion:
  - Implement a strategy to promote financial inclusion to provide access to financial services and credit to small enterprises, entrepreneurs and consumers.
  - Promote the use of financial technologies (eg FinTech) and improve financial infrastructure in EG.

### Capacity building (Section G)
- Implementing a capacity building agenda to support the economic reform program and will need additional TA.
- TA received during the SMP: PFM, tax administration and policy, national accounts and external-sector statistics; training in macroeconomic analysis and forecasting.
- IMF resident representative office opened in Malabo in October 2018.
- Requested resident advisors to strengthen tax administration, PFM; technical assistance needed in debt management, strengthening the hydrocarbon fiscal regime, introducing a more flexible system for pricing of fuel products, and increasing fiscal transparency.
- Anticipate technical advice to strengthen the financial system and foster financial inclusion.

### Safeguards assessment (V.)
- 2017 Safeguards Assessment conclusion: enough progress by BEAC on governance reforms to end safeguards rolling measures and replace them with a regular safeguards assessment every four years.

### Program monitoring (VI.)
- Program monitored through semi-annual reviews, performance criteria, and structural benchmarks.
- First and second reviews tentatively planned for May 2020 and November 2020, based on quantitative targets for end-December 2019 and end-June 2020, respectively, and corresponding structural benchmarks.

### Key quantitative performance criteria and indicative targets (Table 1 — cumulative for each quarter; Billions of CFA Francs)
- A. Quantitative performance criteria
  - Floor on non-hydrocarbon tax revenue of the central government:
    - End-Dec. 2019: PC 175
    - End-Mar. 2020: IT 441
    - End-Jun. 2020: IT 1115
    - End-Sept 2020: IT 221
    - End-Dec. 2020: 226
  - Floor on non-hydrocarbon primary balance of the central government:
    - End-Dec. 2019: PC -861
    - End-Mar. 2020: -150
    - End-Jun. 2020: -367
    - End-Sept 2020: -554
    - End-Dec. 2020: -723
  - Ceiling on external arrears accumulation (continuous): PC 000000 (all quarters)
  - Ceiling on contracting and guaranteeing new external debt\2\3:
    - PC 0 (End-Dec. 2019)
    - 39 (End-Mar. 2020)
    - 39 (End-Jun. 2020)
    - 39 (End-Sept 2020)
    - 39 (End-Dec. 2020)
  - Ceiling on net BEAC credit to central government\4:
    - End-Dec. 2019: PC 413
    - End-Mar. 2020: 410
    - End-Jun. 2020: 362
    - End-Sept 2020: 298
    - End-Dec. 2020: 239
- B. Indicative Targets
  - Ceiling on net accumulation of domestic arrears: IT 000000 (all quarters)
  - Ceiling on net commercial bank credit to the government:
    - IT -58 (each quarter: End-Dec. 2019, End-Mar. 2020, End-Jun. 2020, End-Sept 2020, End-Dec. 2020)
  - Floor on social spending\5:
    - IT 114 (End-Dec. 2019)
    - 357 (End-Mar. 2020)
    - 105 (End-Jun. 2020)
    - 140 (End-Sept. 2020)
    - 140 (End-Dec. 2020)
- Memorandum items:
  - External budget support, excluding IMF: 0007373
  - Hydrocarbon revenue: 995187443709874
  - External Disbursements (project loans): 503060105150
  - Social and human capital development spending: 1604999148197

### Prior actions and structural benchmarks (Table 2)
- Prior actions (target: Five days before the Board date):
  - Publish the governance diagnostic report and a governance strategy as developed in consultation with IMF staff — Promote good governance and combat corruption — Publication of documents on the MF website.
  - Submit a membership application to the EITI — Increase transparency in the hydrocarbon sector — Share with the IMF the complete final folder sent to EITI; folder review by IMF technical staff.
  - The Ministry of Finance, Economy and Planning to operationalize a system to track and control expenditure commitments (paragraph 22) — Improve Public Financial Management and enhance budget execution — Verification by IMF staff.
  - Submission to parliament of a 2020 budget consistent with the program targets — Maintain fiscal discipline — Verification by IMF staff.
- Structural benchmarks and target dates:
  - Share active oil and gas contracts with the BEAC — End-December 2019 — Maintain fiscal discipline — Official transmission letter sent to BEAC.
  - Congressional approval of legislation to implement excise taxes (paragraph 11) — End-December 2019 — Increase non-hydrocarbon tax revenue and encourage tax compliance — Publication of the Law on the MF website.
  - Congressional approval of amendments to the 2017 tax amnesty law (paragraph 12) — End-December 2019 — Increase non-hydrocarbon tax revenue and encourage tax compliance — Publication of the Law on the MF website.
  - Clear through its exchange with government bonds the domestic arrears validated through the audit (paragraph 14) — End-March 2020 — Regularize all public debt, support banking sector stability — Verification by Fund staff.
  - Congressional approval of an anti-corruption law in line with international obligations under the UNCAC — End-March 2020 — Bring the domestic anti-corruption framework in line with best practices — Publication of the Law on the MFEP website.
  - Publish audits of GEPetrol and Sonagas on Hydrocarbon Ministry’s website — End-June 2020 — Improve transparency in the hydrocarbon sector — Publication of the complete audit reports on the HM website.
  - Set up a website for the Official Gazette and publish all laws, orders and decrees applicable in EG since 2000 — End-June 2020 — Increase transparency and accountability in government — Share the website address with IMF staff; verification by IMF staff.
  - Prepare a meaningful list of assets for privatization and a list of assets subject to other forms of private management, submit lists to the Council of Ministers for approval (paragraph 18) — End-June 2020 — Increase transparency and accountability in government; bolster deposits and NFAs and reduce arrears — Share lists with IMF staff.
  - Publish a comprehensive hydrocarbon data and information report for 2019 (paragraph 25) — End-September 2020 — Increase transparency in the hydrocarbon sector — Publication on the HM website; review by IMF staff.

*Source: IMF staff and Equatorial Guinea authorities.*

### Annex I.  Key Policy Measures and Structural Reforms During

### Annex I.  Key Policy Measures and Structural Reforms During 2019–22

### A. Public Finance — Budget, Public Financial Management, Tax, Customs, Expenditure, Arrears, Privatization
- Budget
  - Submit to parliament a budget for 2020 that is consistent with the program’s fiscal targets (prior action) and secure its approval.
- Public Financial Management
  - Adopt mechanisms to track and control expenditure commitments, including at a minimum: (i) maintaining an accurate record of all spending commitments; (ii) ensuring full control of all spending approvals by the Minister of Finance; and (iii) documenting the key steps in the expenditure control chain (verification of the availability of appropriations and the level of expenditure commitment, certification of delivery of good/service, approval of payment, and payment instructions), supported by internal procedures manuals. (Prior action)
  - Adopt a medium-term fiscal framework to frame and strengthen budget preparation and coordination on public investment (end-December 2021).
  - Establish a public accounting unit (end-December 2020).
- Tax Policy and Administration
  - Amend the 2017 tax amnesty law passed by parliament (structural benchmark, end-December 2019).
  - Implement excise taxes on imported beverages, tobacco and vehicles as recommended by FAD (structural benchmark, end-December 2019).
  - Introduce a computerized system for tax information in the tax administration drawing on the resources of the National Center for the Computerization of the Public Administration (June 2020).
  - Improve tax compliance by strengthening enforcement of existing penalties for non-compliance with the tax rules (end-June 2020).
  - Fully implement the provisions of Decree 134 of 2015 that specify the elimination of ad-hoc tax exemptions (end-June 2020).
  - Launch a systematic program for fostering a tax-paying culture in Equatorial Guinea with components (end-March 2020): 
    - A public communication strategy;
    - Simplification of the tax system and ease of paying taxes;
    - Enforcement of sanctions for non-compliance with tax obligations.
  - Rationalize the institutional structure of the DGIC and strengthen the management of large taxpayers (end-June 2020).
  - Improve corporate tax regulations for “permanent establishments” (end-December 2019).
- Customs Administration
  - Completely implement the ASYCUDA platform in Malabo (end-December 2019), the remainder of Bioko Island (end-March 2020), Bata (end-September 2020), and the remainder of the country (end-December 2021).
  - Combine ASYCUDA implementation with a secure process for information gathering or declaration combined with a method for direct payments to the treasury (end-March 2020).
  - Submit a membership application to the World Customs Organizations (WCO) (end-December 2019).
- Expenditure Measures
  - Establish a minimum floor for social spending (including health and education) and limit capital expenditure to realistic plans, focusing on high-priority projects (ongoing, for the program period).
  - Rationalize capital spending to improve efficiency (ongoing, for the program period).
  - Include all government spending in the national budget (continuous).
  - Adopt a flexible domestic fuel pricing regime that ensures pass-through of international prices (during the program period). The introduction should be accompanied by a social safety net, stakeholder discussions, and a communication plan.
  - Enforce existing legislation which gives the Ministry of Finance full control over all spending decisions (end-December 2019).
- Domestic arrears
  - Fully complete the audit of domestic arrears (end-December 2019).
  - Clear validated arrears through securitization, with terms agreed with IMF staff (structural benchmark, end-March 2020).
- Privatization
  - Prepare a meaningful list of state-owned assets for privatization and submit to the Council of Ministers for approval (structural benchmark, end-June 2020).
  - Design an asset-sales plan in 2020H2, under which sales would be done through open and transparent international tenders.

### B. Monetary and Financial Policies — Forex Repatriation, BEAC Coordination, Extractive Contracts
- Rebuild CEMAC reserves by ensuring:
  - All public entities repatriate and surrender their forex receipts, and only keep open foreign accounts authorized by BEAC.
  - “Available” (i.e. non-encumbered) government deposits held abroad will be repatriated by end-December 2020.
  - For accounts held abroad to guarantee loan payments, work with BEAC and creditors to replace them (by March 2020) with BEAC accounts; BEAC will keep a liability with Equatorial Guinea.
  - Customs strictly enforce the domiciliation of all export transactions with a resident commercial bank.
  - Report to BEAC all export licenses as required by foreign exchange regulation.
  - All active contracts in extractive industries are shared with BEAC (structural benchmark, end-December 2019).

### C. Banking Sector — Recapitalization, NPLs, Supervision
- Implement a strategy to recapitalize banks that have shortages of capital, reduce NPLs and improve banks’ liquidity (continuous).
- Continue to work with COBAC to strengthen bank regulation and supervision and ensure compliance with prudential and corporate governance regulation (continuous).

### D. Social Policies — Data, Social Protection Strategy
- Improve data on social indicators by conducting periodic surveys of household income and expenditure (ongoing).
- Develop a strategic plan for guiding policy on social protection (including a safety net), reducing poverty and fostering human development (end-December 2020).

### E. Business Climate / Economic Diversification Policies
- Ensure the implementation of the Road Map to improve the business climate.
- Develop a strategy for boosting non-hydrocarbon exports, including creation of an agency to promote such exports (end-December 2020).
- Articulate the financing requirements for the revised development plan (ongoing).
- Create an investment agency to support policies to attract foreign investment in the non-hydrocarbon sector (end-June 2020).
- Implement specific measures to increase access to credit and to improve the framework for resolving insolvencies (end-December 2020).

### F. Governance and Anti-corruption Framework
- Publish the diagnostic report on governance and the governance strategy (prior action).
- Strengthen management of resource-related funds by documenting their operating rules (including investment policies) as part of the general fiscal policy framework (ongoing).
- Conduct a fiscal safeguards review with technical assistance from the IMF (end-September 2020).
- Request the IMF to perform a fiscal Transparency Assessment (end-March 2020).
- Continue efforts towards strengthening the AML/CFT framework.
- ANIF to apply for Egmont membership (end-March 2020).
- ANIF to develop guidance to assist financial institutions in identifying domestic politically exposed persons (PEPs) and beneficial owners (both physical and legal persons) (end-September 2021).
- ANIF to develop and implement arrangements to facilitate cooperation and exchange of information between the ANIF and COBAC and publish annual reports (end-September 2021).
- Adopt an anti-corruption law in line with international obligations under the UNCAC (structural benchmark, end-March 2020).
- Operationalize the accounts tribunal (program period).
- Update the existing decree on asset declarations for senior public officials in line with the law and international best practice during 2020, aiming to implement it by June 2021.

### G. Fiscal and Hydrocarbon Sector Transparency
- Submit a membership application to EITI (prior action).
- Publish a register of all SOEs including Statutes, and names of management on the government website (end-March 2020).
- Publish on the Finance Ministry’s website the annual financial accounts for 2020 for all state-owned enterprises (end-June 2021) and continue yearly.
- Publish on the website of the Ministry of Mines and Hydrocarbons the audit reports for the state-owned oil and gas companies and the reconciliation of oil and gas related financial flows with the government accounts (structural benchmark, end-June 2020).
- Publish on the Ministry of Finance and GE-Proyectos websites a table with all public investment projects administered by GE-Proyectos through 2019 (end-June 2020).
- Publish on the Finance Ministry’s website the internal and external debts, natural resource concessions, winning construction bids awarded by GE-Proyectos, and financial obligations of the government (in line with the CEMAC Code of Transparency) for the past 3 years, and yearly going forward (end-December 2020).
  - Note: three six-column tables for concessions (name of concession holder; the mother company; the beneficial owner; the operator company; the commencement and expiry date of the concession).
  - Note: a seven-column table for contracts (value of the contract, the contractor parties, the amount paid out to date, the status of the project, whether an audit has been conducted and by what agency).
- Publish on the Ministry of Finance website all monthly fiscal data as well as monthly data on the hydrocarbons sector (exports, prices, production and government revenues) (continuous).
- Publish annual reports with data and information on the hydrocarbons sector, starting with a report for 2019 (structural benchmark, end-September 2020).
- Publish in a budget annex each year an estimate of the value of all exemptions granted during the previous year (starting with 2021 budget).
- Publish all active oil and gas contracts (end-June 2020).

### H. Data Dissemination, Transparency of Information and Rule of Law
- Set up a website for each court and publish on each court website the number of serving judges and staff along with vacant positions, and for each prosecution work unit the number of prosecutors and staff, along with vacant positions (end-December 2020).
- Publish on the Courts’ website all Supreme Court decisions and all corruption decisions, if any, and commercial decisions commencing December 2019 (end-December 2020).
- Set up a website for the Official Gazette and publish all laws, orders and decrees applicable in EG, starting with those in effect since 2000 (structural benchmark, June 2020).
- Publish on the Ministry of Finance’s website, for each court, the number of corruption cases, AML/CFT cases, insolvency cases, foreclosure cases, and land cases for the past three years and every year thereafter, specifying how many have been closed, how many are pending, how many are new and how many are carried over from the previous year (end-December 2020).
- ANIF will publish an annual report on its activities, budget and resources, and main achievements, including typology studies on laundering of proceeds of main corruption schemes (end-September 2021).

### Attachment II. Technical Memorandum of Understanding — Reporting, Definitions, Exchange Rates, Targets
- Purpose: Describes concepts, definitions, and procedures for reporting data referred to in the MEFP for the EFF agreement period, including (a) reporting procedures; (b) definitions and calculation methods; (c) quantitative targets; (d) adjustors for quantitative targets; (e) structural benchmarks; and (f) other commitments.
- Program exchange rates (in effect as at August 30, 2019) — foreign exchange assets, liabilities, and flows will be valued at these rates except items that affect the government’s fiscal balances (valued at the current exchange rate):
  - CFAF 594.3804 to USD 1;
  - CFAF 655.957 to EUR 1;
  - CFAF 83.245 to CNY 1;
  - CFAF 723.834 to GBP 1;
  - CFAF 1958.0965 to KWD 1; and
  - CFAF 813.315 to SDR 1.
  - Program exchange rates for any currency not mentioned will be computed based on the official rates used by the Fund for August 30, 2019.
- Reporting to the IMF
  - Data on all variables subject to quantitative targets shall be transmitted periodically to the IMF in accordance with the timetable shown in Annex 1. Any updates shall be promptly reported (within one week). Authorities shall consult IMF staff if they obtain new information or data relevant for monitoring or measuring performance against program objectives.
- Quantitative Performance Targets: Definitions (select highlights)
  - Government definition: central government of the Republic of Equatorial Guinea as defined in GFSM 2001, paragraphs 2.48–2.50.
  - Fiscal year: January 1 to December 31.
  - Measurement: Quantitative objectives measured cumulatively from the start of the calendar year unless otherwise indicated.
  - Cumulative Floor for Central Government Non-Hydrocarbon Tax Revenue
    - Definition: total government tax revenue (GFSM 2001, Chapter 5, recorded on a cash basis) less tax revenue from hydrocarbons.
    - Hydrocarbon tax revenue: defined as in Article 456.1 (on Oil and Gas Sector income tax) of the Tax Law of Equatorial Guinea — sum of corporate taxes (on contractors and subcontractors), personal income tax, and taxes on the incomes of residents and nonresidents.
    - Reporting: Data reported to the IMF no later than 45 days after the assessment date.
    - Note: For 2019, a portion of non-hydrocarbon revenue (derived mainly from payments from public enterprises) will be recorded on an accrual basis. From 2020, all revenue will be recorded on a cash basis.
  - Cumulative Floor for Central Government Non-Hydrocarbon Primary Balance
    - Definition: non-hydrocarbon revenue (not including income from interest on government assets) less total government expenditure, excluding payment of interest on domestic and external debt.
    - Hydrocarbon revenue: sum of hydrocarbon tax and hydrocarbon nontax revenue (royalties on gross production; premiums or fees for surface rights; transfer and sales taxes charged on capital gains not invested in Equatorial Guinea; discovery, production, and marketing bonuses; income from export duties; net equity income from oil and gas; income from shareholders’ interests and other income flows paid by oil and gas companies; excluding indirect and special taxes).
    - Total government expenditure: sum of current expenditure on wages, goods and services, subsidies and transfers, interest payments (domestic and foreign), and capital or investment spending; recorded on an accrual basis unless otherwise indicated (GFSM 2001, paragraphs 6.1-6.88).
    - Reporting: Data sent to the IMF no later than 45 days after the assessment date.
    - Adjustor: Additional external grants for budget support to the government will adjust the floor upwards by the full amount of the grant.
  - Ceiling on Net BEAC Credit to Central Government
    - Definition: BEAC’s gross lending to central government, less central government deposits at the BEAC as at the end of the reporting period.
    - Adjustor: Ceiling adjusted upwards by shortfalls in external program disbursements received by the central government and shortfalls in government bond issuances in the CEMAC zone; adjusted downwards by excesses in those items relative to program projections.
    - Reporting: Data reported to the IMF no later than 45 days after the assessment date.
  - Ceiling on Contracting or Guaranteeing New External Debt by the Central Government
    - Definition: External debt is debt borrowed or serviced in a currency other than the CFA franc, converted to CFA francs at the program exchange rate.
    - Treatment: External debt considered contracted or guaranteed once all conditions for the debt to take effect have been met, including pertinent approvals by the Republic of Equatorial Guinea.
    - Definition of “debt” (program purposes): current, not contingent, liability created under contractual arrangement requiring future payments in assets or services; forms include loans, suppliers' credits, leases (present value at inception of lease payments expected to be made), and penalties/judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt.

*Annex I and Attachment II, Technical Memorandum of Understanding, as provided in the source document.*

### 21. Reporting. Data shall be reported to the IMF no later than 45 days after the assessment

### 1gnqea2019001 - 21. Reporting. Data shall be reported to the IMF no later than 45 days after the assessment

### Reporting deadlines and frequency
- Data shall be reported to the IMF no later than 45 days after the assessment date.
- For the monitoring of program implementation, the government will prepare and send by email to the IMF data for the items shown in Table 1 within 45 days after the end of the month.
- Provisional balance of payments statistics: Annually, within three months from the end of the year.
- Stock of domestic arrears (including arrears on interest payments): Quarterly, within 45 days from the end of the quarter.

### E. Ceiling on the Accumulation of External Arrears by the Central Government
- Definition:
  - External arrears = any external debt obligation (as defined in paragraph 17) that is not paid on the terms specified in the contract or legal document establishing the debt.
  - Arrears on external debt payments = difference between the amount owed under the contract or legal document and the amount actually paid after the due date specified in the contract or legal document in question.
- Reporting:
  - Given that this performance measure is applied continuously, the authorities will report to IMF staff any external payment arrears immediately when they arise.
- Coverage:
  - This quantitative performance target covers external arrears resulting from debt contracted or guaranteed by the central government.
  - The performance criterion excludes arrears on external financial obligations of the government subject to debt rescheduling.
- Monitoring:
  - This performance criterion is applied on a continuous basis.

### F. Accumulation of Domestic Arrears by the Central Government
- Definition:
  - Domestic arrears = commitments owed to residents under contractual obligations, which are still unpaid 90 days after the due date.
  - The due date refers to the deadline by which payment must be made under the applicable contract, bearing in mind contractual grace periods.
  - Domestic arrears of the central government include direct arrears on central government debt, including to suppliers, recurring payments, and capital expenditure.
  - The definition does not include changes in domestic arrears that may arise from the ongoing audit review.
- Reporting:
  - Data shall be reported to the IMF no later than 45 days after the assessment date.

### G. Ceiling on Net Commercial Bank Credit to the Government
- Definition:
  - Net commercial bank credit to the government = change in the government’s net position vis-à-vis the local banking system since the end of the previous year, plus the net issuances of bonds (i.e., placements minus amortizations) during the current year in the sub-regional market (CEMAC).
  - The cap on net domestic financing is not applicable to new agreements on domestic debt restructuring and securitization of domestic arrears.
- Reporting:
  - Data shall be reported to the IMF no later than 45 days after the assessment date.

### H. Floor for Social Spending by the Central Government
- Definition:
  - For program purposes, social spending = sum of central government expenditure on social programs and on spending targeted to the poor.
  - Goal: support inclusive growth and protect the wellbeing of low-income households and the building of human capital, including through mitigation of vulnerabilities from adverse conditions arising from macroeconomic shocks and political economy reforms.
  - For purposes of the EFF, social programs include health, education, and social safety nets.
  - Included categories:
    - (i) social assistance to poor and vulnerable groups, such as cash transfers;
    - (ii) basic public health assistance, including vaccination campaigns, HIV/AIDS programs, maternal and child health, assistance to low income people who are hospitalized or sick, financing of public health centers, expenses to reduce noncommunicable diseases (e.g., parasites), tuberculosis, cervical cancer, malaria and other priority health needs;
    - (iii) provision of basic education: spending at preschool, primary, secondary, technical and vocational training, assistance to children in low-income households so that they can attend school, and teacher training;
    - (iv) social security;
    - (v) expenses targeted to the poor in water and sanitation.
  - The floor includes both current and capital budget items in these specific categories.
  - Table 2 contains a detailed list of budget lines included in the definition.

### I. Adjustor for Hydrocarbon Revenues
- If hydrocarbon revenues are greater than expected under the program, the government shall use the difference as follows:
  - 50 percent to increase its deposits at BEAC or to face payments of domestic arrears;
  - 50 percent to increase social and other priority spending.
- If hydrocarbon revenues are less than expected under the program, the government shall:
  - Adjust upward the ceiling for net commercial bank credit to the government by 50 percent of the shortfall.
  - Adjust upward the floor for the non-hydrocarbon primary balance by an amount equal to at least 50 percent of the shortfall.
  - The expenditure cuts that might be needed will not affect the indicative target on social spending under the program.

### IV. Information requirements and Table 1 — Reporting to the IMF (selected items and deadlines)
- I. Monetary Data
  - Monetary survey. Provider: BEAC. Frequency and target date: Monthly, within 45 days from the end of the month.
- II. Fiscal Data (major lines)
  - BEAC loans to central government. Provider: BEAC. Monthly, within 45 days from the end of the month.
  - Government deposits at the BEAC. Provider: BEAC. Monthly, within 45 days from the end of the month.
  - Central government position with commercial banks: (i) loans to central government and (ii) deposits by central government. Provider: BEAC. Monthly, within 45 days from the end of the month.
  - Other sources of financing not specified above (including INSESO, bonds, Treasury notes and bills issued in CFAF). Provider: Ministry of Finance, Economy, and Planning (MFEP). Monthly, within 45 days from the end of the month.
  - Foreign deposits by the central government, by type of foreign currency and bank. Provider: MFEP. Monthly, within 45 days from the end of the month.
  - External financing: detailed information on disbursements, amortization, interest, exceptional financing, zero coupon bonds, and accumulation of arrears. Provider: MFEP. Monthly, within 45 days from the end of the month.
  - Central government budget execution, broken down by category (revenues, current and capital expenditures). Provider: MFEP. Monthly, within 45 days from the end of the month.
  - Breakdown of tax revenue by type of tax. Provider: MFEP. Monthly, within 45 days from the end of the month.
  - Income from hydrocarbons, broken down by type (tax or nontax). Provider: MFEP. Monthly, within 45 days from the end of the month.
  - Social spending (broken down by program, capital expenditure, and current expenditure). Provider: MFEP. Monthly, within 45 days from the end of the month.
  - Stock of domestic debt by category. Provider: MFEP. Monthly, within 45 days from the end of the month.
  - Disbursements, bond issuances and services of domestic debt (interest and principal) by category. Provider: MFEP. Monthly, within 45 days from the end of the month.
  - Stock of domestic arrears (including arrears on interest payments). Provider: MFEP. Quarterly, within 45 days from the end of the quarter.
- IV. External Debt
  - Stock of external debt. Include values for each type of foreign currency and the exchange rates used. Provider: MFEP. Monthly, within 45 days from the end of the month.
  - Loan-by-loan accounting of all new loans contracted or guaranteed by the public sector, including detailed information on amounts, currency, and conditions, and the relevant supporting documents. Provider: MFEP. Monthly, within 45 days from the end of the month.
  - Accounting of arrears on the external debt by creditor (if any), with detailed explanations. Provider: MFEP. Monthly, within 45 days from the end of the month.
- V. External Sector Data
  - Oil and gas exports (values, volumes, and prices) broken down by product and oilfield. Provider: MMH. Monthly, within 45 days from the end of the month.
- VI. Real Sector Data
  - Provisional national accounts (from the supply side and the expense side). Provider: INEGE. Annually, within three months from the end of the year.
  - Consumer price index. Provider: INEGE. Monthly, within 45 days from the end of the month.

### Table 2 — Social Spending Categories (high-level themes)
- Education and training: construction and rehabilitation of schools and technical institutes; teacher salaries; training programs; equipment and materials for multiple schools and centers; technical schools in Malabo and Bata; technical training in agriculture, telecommunications, mines and hydrocarbons, management and public administration; UNESCO educational program.
- Health sector: medical staff salaries; Cuban medical teams and technical assistance; grants to hospitals and health centers across regions; purchases of medical equipment and drugs (e.g., PHILIPS BRILLANCE CT G4 scanner, GENEXERT dressers); hospital infrastructure and construction of health centers in the 52 new urban districts; reproductive health installations; support for specialized treatments; retroviral medicines; other health sector expenditures.
- Social protection and welfare: social expenditure in the health sector; subsidies and grants for vulnerable groups; daycare centers; training and awareness programs; support for financial inclusion for mothers; basic water and sanitation infrastructure in the 52 new urban districts.
- The floor includes both current and capital outlays across the listed education, health, and social protection items.

### Statement by Equatorial Guinea Executive Directors and Recent Economic Developments (selected points)
- Authorities expressed gratitude for the Fund’s support following the 2014 oil price shock and for policy advice and discussions during the second and last review of the 2018–19 Staff-Monitored Program (SMP).
- Authorities seek a three-year arrangement under the Extended Fund Facility (EFF) to support policies aiming to:
  - (i) further reduce macroeconomic imbalances;
  - (ii) strengthen social protection, mitigate reform impacts on the poor and vulnerable, and support human capital development;
  - (iii) address financial sector vulnerabilities;
  - (iv) promote economic diversification;
  - (v) foster good governance and transparency.
- Recent macroeconomic indicators:
  - Real GDP is projected to contract by 5.9 percent of GDP in 2019, reflecting a decline in hydrocarbon output.
  - Non-hydrocarbon activity has stabilized after several years of decline.
  - Inflation (y-o-y) is expected to reach 0.9 percent in 2019 from 1.3 percent in 2018.
  - The overall fiscal balance turned positive in 2018, attaining 0.5 percent of GDP.
  - Current account deficit narrowed to 5.4 percent of GDP in 2018, compared to 5.8 percent the previous year.

*Source: 1gnqea2019001 - 21. Reporting. Data shall be reported to the IMF no later than 45 days after the assessment*

### 5.  The SMP performance was overall satisfactory. All quantitative performance measures

### 5.  The SMP performance was overall satisfactory. All quantitative performance measures

### SMP performance and compliance
- All quantitative performance measures (PMs), except one, and indicative targets (ITs) at end-July 2018 were met.
- The PM on the non-hydrocarbon primary balance (NHPB) of the central government was missed due to capital expenditures in the first half of 2018.
- No new external arrears were accumulated during the period under review.

### Structural benchmarks and implementation
- Three out of the five structural benchmarks (SBs) were implemented on time:
  - Ratification by Congress of the UN convention against corruption in May 2018.
  - Selection of a reputable firm to audit the state-owned oil and gas companies (Gepetrol and Sonagas).
  - Selection of an independent entity to audit domestic arrears.
- Two SBs were not met during the period under review:
  - Submitting a membership application to the Extractive Industries Transparency Initiative (EITI).
  - Implementing a system to track and control expenditure commitments and bolster treasury management.
- The two missed SBs have since been implemented as prior actions to a Fund-supported program.

### Outlook and risks
- Growth prospects are improving on the back of medium-sized hydrocarbon projects for late 2019 onwards.
- Expected macro effects:
  - Narrowing of the external current account deficit with continued fiscal consolidation under the program.
  - Gradual revival of the non-hydrocarbon sector supporting the outlook.
- Authorities’ risk assessment: risks are broadly balanced.
  - Upside risks:
    - Private sector activity could benefit from higher oil prices.
    - Hydrocarbon output growth could be strengthened by new projects.
  - Downside risks:
    - Health of the financial sector.
    - Capacity constraints.
    - Governance issues.
- Authorities’ planned mitigating actions:
  - Step up fiscal consolidation efforts.
  - Address financial sector vulnerabilities in coordination with the regional supervisory body (COBAC).
  - Enhance governance through implementation of the Good Governance and Anti-Corruption Action Plan.
  - Continue to utilize capacity development assistance from the Fund and other development partners.

### Fiscal policy and reform targets
- Main fiscal anchor: target a non-hydrocarbon primary deficit of less than 5.0 percent of GDP by 2024.
  - Historical comparators cited:
    - 14.4 percent in 2018.
    - 37.0 percent in 2015.
- Policy measures and reforms to raise revenues and improve PFM:
  - Improve tax administration.
  - Modernize the public financial management (PFM) framework.
  - Increase transparency.
  - Implement a Parliament-approved budget consistent with the EFF’s objectives as early as 2020.
  - Government views measures in the Memorandum of Economic and Financial Policies (MEFP) as adequate but stands ready to take additional actions if needed.
- Tax system overhaul plans:
  - Reform the 2004 Tax Code by harmonizing taxes with the rest of the CEMAC region, streamlining deductions, and adjusting rates.
  - Adoption by end-December 2019 of new excise taxes on imported beverages, tobacco, vehicles and other products.
  - Maintain a higher personal income tax rate for non-residents (introduced at the beginning of 2019).
- Expenditure-side measures:
  - Streamline capital outlays.
  - Gradually reduce fuel subsidies while increasing social spending.
- Public debt trajectory projections:
  - Public debt-to-GDP ratio projected to decline gradually from about 46 percent of GDP to 44 percent over the period 2019–22, and to reach 38 percent by 2024.

### Financial sector policy
- Continue implementing measures to address remaining vulnerabilities:
  - Strategy to clear important arrears to construction companies and recapitalize troubled banks.
  - Ensure compliance with COBAC prudential regulations and governance norms.
  - Strengthen banks’ balance sheets and reduce non-performing loans (NPLs).
- Financial inclusion and infrastructure measures:
  - Facilitate greater access to lending by small enterprises and entrepreneurs.
  - Consider use of financial technologies (FinTech) to develop financial infrastructure.
- Identified financial sector reforms:
  - (i) Put in place a mechanism for resolving insolvencies in line with the Organization for the Harmonization of Commercial Law in Africa (OHADA).
  - (ii) Elaborate a regional uniform credit information law.

### Support to regional strategy (CEMAC)
- Commitment to contribute to rebuilding CEMAC’s reserves and enhancing regional stability.
- Steps to promote compliance with regional foreign exchange regulations:
  - Repatriation by public entities of forex receipts and deposits held abroad.
  - Enforce domiciliation of export transactions with a resident commercial bank.
  - Ensure that oil and gas contracts are shared with BEAC.
- Fiscal consolidation viewed as integral to regional efforts to accumulate net foreign assets (NFAs).

### Structural reforms and governance
- Actions to promote economic diversification and boost non-hydrocarbon growth under the Third National Economic Conference with World Bank and other partners.
- Integration of the Sustainable Development Goals and environmental considerations in the revised strategy.
- Measures to improve the business environment (post-SMP):
  - Amended foreign investment law by eliminating the requirement to have a local partner in the non-hydrocarbon sector.
  - Created and operationalized a one-stop shop for establishing a company.
  - Launched an action plan for improving the business climate in March 2019, based on diagnostic studies by the World Bank and the Singapore Corporation Enterprise.
- Governance and transparency commitments:
  - Implement the Good Governance and Anti-Corruption Action Plan to strengthen institutions, reduce legal uncertainties, and reinforce the AML/CFT framework.
  - Accelerated measures planned under the MEFP:
    - Update the decree on asset declaration for senior public officials immediately following enactment of the new anti-corruption law, with implementation starting in the second half of 2020.
    - Make Equatorial Guinea a member of the Extractive Industries Transparency Initiative (EITI) as swiftly as possible by taking necessary post-application actions.
    - Publish all active oil and gas contracts (planned to start in the first quarter of 2020).
    - Publish the audit of GEPetrol and Sonagas (June 2020).
    - Publish a report including the reconciliation of hydrocarbon revenue data (September 2020).
    - Request Fund’s FAD to advance the fiscal safeguard review (FSR) to the first half of 2020 to strengthen fiscal monitoring and PFM controls.
- AML/CFT strengthening:
  - Transpose CEMAC directives in this area.
  - National Agency for Financial Investigations (ANIF) mandated to develop guidance to assist financial institutions in identifying politically-exposed persons and beneficial owners.

### Conclusion and Fund request
- Authorities made good progress in implementing the SMP and are committed to pursuing key policies and reforms under a new EFF-supported program.
- They will sustain efforts to buttress the fiscal position, improve governance, and protect the most vulnerable from the negative impact of fiscal adjustment.
- Given satisfactory SMP performance, completed prior actions, and commitment to sound macroeconomic policies and reforms, the staff seeks Directors’ support to the authorities’ request for a Fund Arrangement under the EFF.

*Source: IMF staff report excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1gnqea2019001.pdf_