## 1gnqea2021001

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---

### Executive summary — context and immediate impact
- On March 7, accidental explosions at a military compound in Bata killed "107" people and caused widespread damage; "around 19,000" were directly affected.
- Staff initial estimate: direct damages and losses amount to about "2.5 percent of 2020 GDP".
- As of July 20, "8,848" COVID-19 cases had been reported.
- The Bata explosions, on top of the COVID-19 pandemic, weakened economic activity and fiscal and external positions relative to the EFF-supported program approved in December 2019, creating a substantial financing gap.
- The EFF-supported program is off-track owing to slower-than-envisaged governance reforms, pandemic-related operational constraints, and capacity limitations.

### Request for Rapid Financing Instrument (RFI) support
- Authorities request support equivalent to "30 percent of quota (SDR 47.25 million)" under the RFI.
- Intended use: disbursed fully as direct budget support to address the urgent balance of payments need.
- The RFI purchase would cover about "13 percent of the identified external financing gap for 2021" on its own; combined with expected EFF disbursements (including missed and scheduled reviews), it could cover up to "45 percent of the 2021 external financing gap".
- Authorities will seek additional budget support from the international community and accelerate repatriation of financial assets held abroad.
- IMF staff supports the authorities’ request; rationale: without addressing the balance of payments gap, an immediate and severe economic disruption would occur.

### SDR allocation
- In August 2021, Equatorial Guinea received an SDR allocation of "$215 million".
- Authorities have not decided the specific use of the SDR allocation; possible uses to be discussed in the first review under the EFF and must be consistent with regional policy objectives, including rebuilding regional reserves and addressing urgent pandemic-related needs and domestic financing constraints.

### Macroeconomic background and outlook
- 2020 performance:
  - Real GDP contracted by "4.9 percent".
  - Non-hydrocarbon output declined by "3.4 percent" in 2020.
  - Inflation registered "7.6 percent (year-on-year) in June 2020", before decelerating by end-2020.
- 2021 outlook and revisions:
  - Real GDP growth for 2021 projected at "4.1 percent", implying end-2021 real output remains below its 2019 level.
  - Real non-hydrocarbon growth revised to "2.2 percent" (marked down by 0.7 percentage points relative to the EFF-supported program) with downward adjustments reflecting: explosions disruption ("0.2 percentage points"), pandemic effects ("1.3 percentage points"), and partially offsetting increased construction activity ("0.8 percentage points") for rebuilding.
  - Hydrocarbon growth projected at "5.9 percent" for 2021 reflecting a one-time effect from a new LNG pipeline.
  - Inflation expected to moderate in 2021 amid lifting of restrictions and CFAF appreciation.
- Fiscal impacts:
  - Overall fiscal balance projected at "-0.8 percent of GDP" for 2021, compared to a surplus of "1.6 percent" under the EFF-supported program.
  - Emergency measures for Bata projected to increase spending by "1.1 percent of GDP".
  - Lower economic activity projected to result in a "2.0 percent of GDP" fall in non-hydrocarbon revenues.
  - Combined effect weakens the non-hydrocarbon primary fiscal balance by "3.4 percent of GDP" relative to the EFF projection.
- External sector and needs:
  - Net foreign assets (NFA) at the BEAC declined by "CFAF 143 billion" from end-2019, to negative "CFAF 267 billion" through end-December 2020.
  - External current account deficit expected to widen to "4.3 percent of GDP" in 2021 (vs "3.8 percent" projected under the EFF).
  - Balance of payments financing need from the 2021 shocks estimated at about "CFAF 206 billion (3.1 percent of GDP)".
  - Government financing need estimated at "CFAF 275 billion (4.1 percent of GDP)".

### Banking system condition, NPLs, and immediate measures
- At end-2020, the NPL ratio amounted to "53 percent", mainly driven by government arrears with contracts funded by banks in the construction sector.
- Much of the NPLs are concentrated in the largest bank, in which the government has recently acquired a majority stake.
- Following alignment of capital definitions with the Basel II framework by COBAC at end-2019, the banking sector is deeply undercapitalized.
- Aggregate short-term liquidity ratio remains above the prudential minimum, although deposits continue to decrease.
- Expected impacts and remediation:
  - Contraction of the non-hydrocarbon sector and Bata property damage expected to further raise banks’ NPLs.
  - Full securitization of government arrears envisaged under the program (now scheduled for 2021) is expected to sharply reduce NPLs and improve liquidity and solvency.
  - Securitization mechanics: securities provided to banks in exchange for overdue loans; valued in line with the prudential framework or IFRS; lower risk weight on securities than on NPLs; reversal of provisions expected to improve solvency; securities usable to obtain liquidity from BEAC.
- Governance and restructuring of the largest bank:
  - An audit of the largest bank is being conducted; a new board installed in November 2020.
  - After the audit, a restructuring plan will be produced and submitted for COBAC approval.
  - Authorities plan to recapitalize, restructure and privatize the bank, in line with COBAC’s advice.

### Near-term outlook, risk scenarios, and sensitivity
- Baseline assumptions:
  - Authorities secure sufficient financing to commence rebuilding, compensate victims and purchase sufficient vaccines.
  - Macroeconomic effects of the pandemic are temporary and conditions start to improve in H2 2021.
- Downside risks:
  - Persistent or worsening pandemic (including new variants) or delays in Bata reconstruction could slow recovery, lower growth in 2021, and further deteriorate external and fiscal balances.
  - Capacity constraints, governance and corruption vulnerabilities could more strongly reduce revenue and weaken fiscal accounts and tax enforcement.
  - Fiscal and external financing needs would be larger, requiring greater domestic policy actions and support from development partners.
- Upside factor:
  - Higher oil prices could contribute to faster improvement in fiscal and external balances.

### Policy responses and social measures
- Bata-specific emergency measures:
  - Initial allocation of "CFAF 10 billion (0.2 percent of GDP)" for immediate emergency needs.
  - Support provided to about "5,000" vulnerable households; eight shelters for minors with more than "500" orphaned children and a shelter for the elderly.
  - In March, cash grants totaling "CFAF 1.5 billion" provided for over "2,800" families.
  - A task force established to develop and coordinate rehabilitation and reconstruction strategy; pace depends on external financing availability.
- COVID-19 measures:
  - Government secured "820,000 doses of COVID-19 vaccines": China donated "320,000" doses; government purchased "500,000" doses for about "CFAF 5.8 billion".
  - Under a UN agreement, an additional "600,000 full doses" financed by the Equatorial Guinea Multi-Partner Trust Fund to complement efforts to inoculate "70 percent of the adult population by end 2021".
  - As of July 20, 2021, authorities had administered over "289,000" doses, with about "118,000" individuals fully inoculated.
  - Early pandemic measures included a social assistance scheme for the most vulnerable, resources to facilitate continued education, limited and temporary tax relief to the private sector, and delaying domestically financed capital spending and other non-priority expenditures.
  - BEAC eased monetary conditions while COBAC allows banks to use capital buffers to absorb pandemic-related losses.
- Social spending and reforms:
  - In 2020, social spending maintained at "1.9 percent of GDP", with composition shifting toward healthcare.
  - Staff suggested strengthening the social protection framework and adopting an appropriate social protection law (currently in drafting).
  - To implement a mobile transfer system, priorities include strengthening the payment acceptance network and digital inclusion.

### Financing strategy, arrears, and reserve issues
- Authorities reducing non-priority expenditures to create room for rehabilitation, reconstruction and COVID-related spending.
- Financing plans include RFI assistance and other emergency support, including from the African Development Bank (AfDB); discussions ongoing with other institutions.
- Repatriation of government financial assets held abroad planned between "2021 and end-2023".
- Projected residual external financing gap of about "$335 million" for 2021–22 (compared to the SDR allocation of about "$215 million"), assuming projected RFI, EFF, and AfDB disbursements over 2021–22.
- Authorities working to finalize settlement of validated domestic arrears through securitization, accompanied by cash payments on small debts; expect to conclude and issue securities at market rates by H2 2021.
- Authorities advancing talks with Spain and Belgium to clear external arrears before the first review of the extended arrangement under the EFF.
- For a Chinese commercial entity, in 2021 authorities made two of three debt service payments outstanding at end-2020; the outstanding payment would be made by end-2021 upon conclusion of negotiations.

### Structural reforms, governance, and transparency measures
- Fiscal sustainability and revenue administration reforms:
  - Authorities committed to growth-friendly fiscal adjustment to bring the non-hydrocarbon primary deficit to sustainable levels after the crisis.
  - Core measures: improved revenue administration, rationalization of capital spending, and safeguarding social spending.
  - Customs and tax administration reforms include UNCTAD’s Automated System for Customs Data (operational in Malabo since mid-July 2021) and tax administration measures: (i) unification of management of large taxpayers, (ii) separation of management and operation functions, (iii) reform of the audit function, and (iv) development of the tax information system. Most reforms expected to be completed by end-2022.
  - Medium-term diversification: Agenda 2035 and proposed privatization of government assets.
- Anti-corruption and transparency:
  - April 2021: Parliament passed the anti-corruption law in line with the 2020 decree-law and UNCAC obligations; law signed by the President in May 2021 and published in June 2021 (prior action).
  - Authorities plan a Presidential decree requiring senior public officials to submit asset declarations for publication prior to the first review of the EFF-supported program.
  - With Fund TA, authorities will prepare implementation regulation(s) related to the asset declaration regime and governance of the Anti-Corruption Commission within "60 days" specified in the anti-corruption law.
- Structural benchmarks and deliverables in progress:
  - (i) Securitization of domestic arrears: tax reconciliation of construction companies’ past-due tax obligations completed; aim to complete securitization execution during H2 2021.
  - (ii) Audit of government-owned oil and gas companies being facilitated by a local consultant to provide credible accounts for the gas company.
  - (iii) A website for the Official Gazette set up and uploading begun; commitment to upload all laws, orders and decrees applicable since 2000.
  - (iv) Discussions on list of assets for privatization and private management to finalize for submission to the Council of Ministers prior to the first review of the EFF-supported program.
  - (v) Hydrocarbon data and information report close to finalization and expected to be published by mid-2021.
  - Draft National Strategy for the Development of Statistics developed to strengthen statistics and provide timely, higher quality data.

### Audits, safeguards, procurement, and transparency of emergency spending
- Safeguards and audits:
  - Authorities requested a fiscal-safeguards review (FSR) in February 2020; timing deferred due to pandemic-related travel restrictions.
  - An independent international firm hired to audit all COVID-related spending; first batch of documents sent to the audit firm (prior action).
  - An independent international firm hired to audit Bata emergency and rehabilitation spending (prior action); terms of reference prepared in consultation with IMF staff.
  - Authorities committed to finishing the COVID and Bata audits and publishing results on the Ministry of Finance’s website by end-September 2021 and end-April 2022, respectively.
- Financial controls and procurement transparency:
  - Two escrow accounts opened at the BEAC (prior action)—one for COVID and one for Bata emergency spending—to be replenished by the existing BEAC IMF account where the RFI purchase will be made; drawings subject to BEAC rules, including transparency and anti-money laundering.
  - Authorities will issue regulations by end-August 2021 requiring beneficial ownership information of awarded companies in all procurement contracts for Bata emergency and pandemic.
  - All procurement contracts for Bata emergency and pandemic awarded after issuance of beneficial ownership regulations to be published on a government website by end-September 2021 and regularly thereafter.
  - Fund technical assistance to be provided as needed to support these commitments.
- Reporting commitments:
  - Quarterly reports of RFI spending will be published periodically on the Ministry of Finance website.
  - Pandemic-related public procurement contracts, including names of awarded companies and their beneficial owners, will be published on the Ministry of Finance website.

### Debt vulnerabilities, stress tests, and DSA highlights
- External risks and structure:
  - Limited options to issue CFA-franc denominated debt to local investors; reliance on external creditors, especially the Eximbank China facility.
  - Shares of foreign-held debt, FX-denominated debt, and external financing needs are above the lower early warning thresholds.
  - Collateralization requirements limit scope for buffer accumulation.
- Short-maturity debt and banking vulnerabilities:
  - Share of short-term debt above both the lower and upper warning thresholds, but short-term debt equals "4.4 percent of GDP", implying rollover risks are low given available government deposits at the BEAC and commercial banks.
  - NPLs in the banking system about "50 percent", concentrated in the largest bank.
- Stress-test outcomes:
  - Under macro-fiscal stress-tests (COVID-19 impact), debt levels and gross financing needs (GFNs) rise but remain below benchmark levels of "70 percent of GDP" for debt and "15 percent of GDP" for GFNs, except in 2021 due to planned debt securitization.
  - Under alternative stress tests, public debt ratio could reach as high as "69 percent of GDP in 2026", then gradually decline.
  - GFNs breach the "15 percent of GDP" threshold once in 2021 (the year with planned debt securitization), thereafter gradually falling.
  - GFNs are above the historical average over the projection horizon.
- DSA projections and sensitivities:
  - External debt: "14 percent of GDP in 2019", projected to jump to "16.1 percent of GDP in 2021" (vs "14.8 percent" in the EFF DSA), peak at "27.7 percent of GDP in 2028", then decline to "23 percent of GDP by 2031".
  - External financing requirements: "6.3 percent of GDP in 2021" (from "5.1 percent" in the EFF DSA), peak at "19.8 percent of GDP in 2026"; absent large FDI projects, average external financing requirements about "6 percent of GDP" during "2020–2029", about "3.3 percentage points of GDP higher than in the EFF DSA".
  - Sensitivity: external debt most sensitive to the non-interest current account shock (21 percent of GDP increase), combined shock and real depreciation shock (each raise external debt by about 11 percent of GDP by 2031), and the growth shock.

### Capacity to repay the Fund and financing outlook
- Fund exposure and repayment metrics:
  - Total obligations (existing and prospective credit) to the Fund peak at "0.5 percent of GDP in 2026".
  - Outstanding Fund credit peaks at "3.0 percent in 2023".
- Regional reserves and access:
  - Equatorial Guinea maintains access to the CEMAC reserve pool, boosted by the SDR allocation to a projected "3.9 months of extra-regional imports in 2021".
  - Country deposits at the BEAC projected to remain adequate, guaranteeing continued access to the reserve pool.
- Debt trajectories and risks:
  - External debt projected to increase from "14 percent of GDP in 2019" to a peak of "27.7 percent of GDP in 2028".
  - Overall public debt estimated at about "43 percent of GDP in 2021", gradually declining to just below "42 percent by 2026".
  - Public and external debt assessed to remain sustainable but subject to risks mainly related to oil price volatility and elevated gross financing needs.

### Safeguards, operational arrangements, and staff recommendations
- Safeguards and operational arrangements:
  - The BEAC implemented priority recommendations from the 2017 safeguards assessment, including alignment of secondary legal instruments with the BEAC Charter and issuance of FY2019 audited financial statements in full compliance with IFRS.
  - The RFI support will be channeled to the Treasury by the BEAC and made into the existing BEAC IMF account; escrow accounts for COVID and Bata spending will be replenished from that account; drawings subject to BEAC rules.
- Staff recommendations and priorities:
  - Staff supports the RFI purchase to meet urgent funding needs arising from the Bata explosions and the COVID-19 shock, while noting RFI resources will cover only a fraction of total needs and urging authorities to secure additional external emergency support.
  - Urgent near-term focus: fiscal accommodation to address emergency needs and efforts to protect vulnerable groups.
  - Banking sector stability measures needing timely implementation: settlement of domestic arrears and recapitalization of the largest bank.
  - Authorities should prepare and publish, in consultation with staff, a list of meaningful public assets for privatization inclusive of highly liquid assets of high market value.
  - Once the emergency phase passes, resume growth-friendly fiscal consolidation to bring the non-hydrocarbon primary deficit back in line with program parameters to ensure public debt sustainability.
  - Staff emphasizes sustained implementation of governance reforms, including issuance of implementation decree(s) related to the asset declaration regime and governance of the Anti-Corruption Commission, and prompt adoption of a Presidential decree requiring key high-level public officials to submit asset declarations for publication on an easily accessible official website.
  - Staff urges completion and publication of ex post independent audits of COVID and Bata emergency and recovery-related expenditures.

*Source: EXECUTIVE SUMMARY and sections from 1gnqea2021001 (IMF staff report).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and immediate impact
- On March 7, accidental explosions at a military compound in Bata, the largest city, killed over 100 people and caused widespread damage to surrounding neighborhoods.
- Staff initial estimate: direct damages and losses amount to about 2.5 percent of 2020 GDP.
- Confirmed casualties and impacts:
  - "107" people died from the explosions.
  - "around 19,000" were directly affected.
  - As of July 20, "8,848" COVID-19 cases had been reported.
- The shocks from the Bata explosions, on top of a still-unfolding COVID-19 pandemic, have adversely impacted economic activity and weakened fiscal and external positions relative to the EFF-supported program approved in December 2019, creating a substantial financing gap.
- The EFF-supported program is off-track owing to slower-than-envisaged governance reforms, pandemic-related operational constraints, and capacity limitations.

### Request for Rapid Financing Instrument (RFI) support
- Authorities request financial assistance under the RFI for "30 percent of quota (SDR 47.25 million)".
- Intended use: disbursed as direct budget support to address the urgent balance of payments need.
- Authorities will seek additional budget support from the international community and accelerate repatriation of available financial assets held abroad.
- IMF staff supports the authorities’ request for RFI assistance.
- Rationale: without addressing the balance of payments gap, an immediate and severe economic disruption would occur.

### SDR allocation
- In August 2021, Equatorial Guinea received an SDR allocation of "$215 million".
- At this stage, the authorities have not decided the potential specific use of the SDR allocations resources.
- Possible uses will be discussed in the context of the first review under the EFF and must be consistent with regional policy objectives, including rebuilding regional reserves and addressing urgent pandemic-related needs and domestic financing constraints.

### Policy discussions and safeguards
- Fiscal policy stance:
  - Fiscal policy would accommodate increased spending needs to address Bata and COVID-19 impacts.
  - Authorities committed to resuming fiscal consolidation when the crisis abates to meet EFF objectives.
- Emergency and pandemic spending:
  - Emergency spending for Bata victims, rehabilitation and reconstruction of housing and public infrastructure.
  - COVID-19 measures include resources for vaccination, social assistance for the most vulnerable, and limited and temporary tax relief to the private sector.
- Governance and fiscal safeguards (prior actions and measures):
  - Commitment to parliamentary approval and publication of an anti-corruption law (prior action).
  - Hiring of an international, independent company to promptly start the audit of pandemic-related expenditures (prior action) and to conduct an audit of Bata emergency and rehabilitation-related expenditures (prior action).
  - Opening of two escrow accounts at the BEAC (prior action)—one for COVID and one for Bata emergency spending—to be replenished by the existing BEAC IMF account where the RFI purchase will be made; drawings subject to BEAC rules, including on transparency and anti-money laundering.

### Macroeconomic background and outlook
- 2020 performance and drivers:
  - Real GDP in 2020 is estimated to have contracted by "4.9 percent".
  - Non-hydrocarbon output is estimated to have declined by "3.4 percent" in 2020.
  - Inflation registered "7.6 percent (year-on-year) in June 2020", before decelerating by end-2020.
- 2021 outlook:
  - Real GDP growth for 2021 is projected at "4.1 percent", implying real output at end-2021 will remain below its 2019 level.
  - Impact concentrated in the non-hydrocarbon sector.
  - Real non-hydrocarbon growth revised to "2.2 percent" (marked down by 0.7 percentage points relative to the EFF-supported program).
    - Downward adjustments reflect: explosions disruption ("0.2 percentage points"), pandemic effects ("1.3 percentage points"), and partially offsetting increased construction activity ("0.8 percentage points") for rebuilding.
  - Hydrocarbon growth projected at "5.9 percent" for 2021 reflecting a one-time effect from a new LNG pipeline, with downward trend resuming in 2022.
  - Inflation expected to moderate in 2021 amid lifting of restrictions and CFAF appreciation.
- Fiscal outlook and impacts:
  - Overall fiscal balance projected at "-0.8 percent of GDP" for 2021, compared to a surplus of "1.6 percent" under the EFF-supported program.
  - Emergency measures for Bata projected to increase spending by "1.1 percent of GDP".
  - Lower economic activity projected to result in a "2.0 percent of GDP" fall in non-hydrocarbon revenues.
  - Combined effect weakens the non-hydrocarbon primary fiscal balance by "3.4 percent of GDP" relative to the EFF projection.
- External sector and financing needs:
  - Net foreign assets (NFA) at the BEAC declined by "CFAF 143 billion" from end-2019 level, to negative "CFAF 267 billion" through end-December 2020.
  - External current account deficit expected to widen to "4.3 percent of GDP" in 2021, compared to "3.8 percent" projected under the EFF.
  - BOP financing need created by the 2021 shocks estimated at about "CFAF 206 billion (3.1 percent of GDP)".
  - Government financing need estimated at "CFAF 275 billion (4.1 percent of GDP)".

### Program implementation status and capacity issues
- Pre-pandemic EFF performance:
  - For end-December 2019, authorities met four out of five performance criteria and two out of three indicative targets; of three structural benchmarks, one was met and two not met but later implemented with delay.
- Pandemic-era implementation:
  - Since COVID-19 onset, progress slowed: mixed results across end-March, end-June, end-September, and end-December 2020 targets and structural benchmarks, with many SBs outstanding or delayed.
  - Slow reform progress and capacity constraints have delayed the first and second EFF reviews (envisaged for June and December 2020).
- Implementation capacity constraints and need for consensus building imply bringing the program back on track will take time.

*Source: EXECUTIVE SUMMARY, 1gnqea2021001.*

### 8.      The banking system remains weak. The sector has been weighed down by high non-

### 1gnqea2021001 - 8.      The banking system remains weak. The sector has been weighed down by high non-

### Banking system: condition and immediate measures
- At end-2020, the NPL ratio amounted to 53 percent, mainly driven by government arrears with contracts funded by banks in the construction sector.
- Much of the NPLs are concentrated in the largest bank, in which the government has recently acquired a majority stake.
- Following the alignment of capital definitions with the Basel II framework by COBAC at end-2019, the banking sector is deeply undercapitalized.
- The aggregate short-term liquidity ratio remains above the prudential minimum, although deposits continue to decrease.
- Expected impacts on NPLs and banking health:
  - The contraction of the non-hydrocarbon sector and the widespread property damage in Bata is expected to further raise banks’ NPLs.
  - This effect could be offset by the full securitization of government arrears envisaged under the program for 2020, but now scheduled for 2021.
  - The securitization is expected to sharply reduce NPLs while helping to improve liquidity and solvency in the banking sector.
- Details on the securitization mechanics:
  - Securities would be provided to banks in exchange for overdue loans.
  - The securities would be valued in line with the prudential framework or IFRS for those banks that have adopted IFRS.
  - Improvement in solvency is expected from the reversal of provisions on NPLs that the new securities will be replacing.
  - The risk weight on the securities is expected to be lower than the ones on the NPLs.
  - An improvement in liquidity is expected from the securities that banks will receive and can be used to obtain liquidity from BEAC.
- Governance and restructuring of the largest bank:
  - Authorities are conducting an audit of the country’s largest bank and strengthening its governance.
  - In November 2020, a new board was installed at the bank.
  - Once the audit is concluded, a restructuring plan will be produced and submitted for COBAC approval.
  - These measures, together with the pending arrears securitization, will provide a more precise figure on recapitalization needs.
  - Authorities plan to recapitalize, restructure and privatize the bank, in line with COBAC’s advice.

### Near-term macroeconomic outlook and risk scenarios
- The near-term macroeconomic outlook is highly uncertain, with risks tilted to the downside.
- Baseline assumptions for the outlook:
  - Authorities can secure sufficient financing to commence rebuilding, compensate victims and purchase sufficient vaccines.
  - Macroeconomic effects of the pandemic would be temporary and global and domestic conditions will start to improve in the second half of 2021.
- Downside scenario risks:
  - If the pandemic persists or worsens (including due to new COVID-19 variants), or if rehabilitation and reconstruction work in Bata face delays, recovery could be slower and economic conditions worse than envisaged.
  - Economic growth in 2021 could be lower than currently projected, further deteriorating external and fiscal balances.
  - Disruption of business activity in Bata and the pandemic, together with capacity constraints and governance and corruption vulnerabilities, could more strongly reduce revenue and weaken fiscal accounts and tax enforcement.
  - Fiscal and external financing needs would be larger, potentially requiring greater domestic policy actions and support from development partners.
- Upside factor:
  - Higher oil prices could contribute to a faster improvement in fiscal and external balances.

### Policy responses and social measures
- Emergency and immediate measures for Bata explosions and COVID-19:
  - For the Bata explosions:
    - Initial allocation of CFAF 10 billion (0.2 percent of GDP) to support immediate emergency needs of victims.
    - Government providing support to about 5,000 vulnerable households, including via eight shelters for minors with more than 500 orphaned children and a shelter for the elderly.
    - In March, cash grants totaling CFAF 1.5 billion were provided for over 2,800 families.
    - A task force established to develop and coordinate rehabilitation and reconstruction strategy; pace depends on availability of external financing.
  - For COVID-19:
    - Government secured 820,000 doses of COVID-19 vaccines and launched inoculation campaign on March 3.
      - China donated 320,000 doses.
      - Government purchased 500,000 doses for about CFAF 5.8 billion.
    - In June, an agreement with the United Nations was signed to obtain 600,000 full doses of COVID-19 vaccines, financed by the Equatorial Guinea Multi-Partner Trust Fund to complement efforts to inoculate 70 percent of the adult population by end 2021.
    - As of July 20, 2021, authorities had administered over 289,000 doses, with about 118,000 individuals fully inoculated.
    - Early pandemic measures included a social assistance scheme for the most vulnerable, resources to facilitate continued education, limited and temporary tax relief to the private sector, and delaying domestically financed capital spending and other non-priority expenditures.
    - BEAC eased monetary conditions while COBAC is allowing banks to use capital buffers to absorb pandemic-related losses.
- Social spending and reform priorities:
  - In 2020, social spending was maintained at its 2019 level of 1.9 percent of GDP, with composition shifting toward healthcare.
  - Staff suggested strengthening the social protection framework and adopting an appropriate social protection law (currently in drafting).
  - To implement a mobile transfer system, priorities include strengthening the payment acceptance network and digital inclusion.

### Financing, arrears, and reserve issues
- Financing strategy and contingencies:
  - Authorities are reducing non-priority expenditures to create room for rehabilitation and reconstruction and COVID-related spending.
  - Plan to cover new financing needs through RFI assistance and other emergency support, including from the African Development Bank (AfDB); discussions with other institutions are ongoing.
  - Authorities are reducing government deposit accumulation at the BEAC and cash payments on domestic arrears, compared to the December 2019 program.
  - Repatriation of government financial assets held abroad is planned between 2021 and end-2023.
  - Authorities stand ready to further reduce non-priority current and capital expenditures and revise the budget if downside risks materialize or external support is lower than expected.
- SDR allocation and external financing gap:
  - The size of the 2021-22 residual external financing gap is higher than the SDR allocation.
  - Projected external residual financing gap of about $335 million (compared to an SDR allocation of about $215 million) assuming projected RFI, EFF, and AfDB disbursements over 2021-22.
  - Authorities have not decided specific use of SDR allocation resources; possible uses to be discussed in the context of the first review under the EFF and consistent with regional policy objectives.
- Arrears clearance:
  - Authorities are working to finalize settlement of validated domestic arrears through securitization, accompanied by cash payments on small debts.
  - With legal and financial advisors, they expect to conclude the process and issue securities at market rates by the second half of 2021.
  - Timely settlement is key to reducing NPLs and strengthening banks’ liquidity and solvency to support non-hydrocarbon sector recovery.
  - Authorities are advancing talks with Spain and Belgium to clear external arrears before the first review of the extended arrangement under the EFF.
  - Authorities have external arrears to a Chinese commercial entity and are in good faith discussions to revise the repayment calendar; in 2021, they made two of three debt service payments outstanding at end-2020, and by end-2021 the outstanding payment would be made upon conclusion of negotiations.

### Structural reforms, governance, and transparency measures
- Fiscal sustainability and revenue administration reforms:
  - Authorities committed to growth-friendly fiscal adjustment to bring the non-hydrocarbon primary deficit to sustainable levels after the crisis.
  - Core measures: improved revenue administration, rationalization of capital spending, and safeguarding social spending.
  - Customs and tax administration reforms:
    - Introduction of UNCTAD’s Automated System for Customs Data — operational in Malabo since mid-July 2021 — accompanied by reform of the customs structure.
    - Tax administration reforms include (i) unification of management of large taxpayers, (ii) separation of management and operation functions, (iii) reform of the audit function, and (iv) development of the tax information system.
    - Most reforms supported by Fund technical assistance and expected to be completed by end-2022.
  - Medium-term diversification: Agenda 2035 and proposed privatization of government assets to improve resource allocation, efficiency and growth.
- Anti-corruption and transparency actions:
  - April 2021: Parliament passed the anti-corruption law in line with the 2020 decree-law and UNCAC obligations; law was signed by the President in May 2021 and published in June 2021 (prior action).
  - Authorities plan a Presidential decree requiring senior public officials to submit asset declarations for publication prior to the first review of the EFF-supported program.
  - With Fund technical assistance, authorities will prepare implementation regulation(s) related to the asset declaration regime and governance of the Anti-Corruption Commission within 60 days specified in the anti-corruption law.
- Prior actions, structural benchmarks (SBs), and other reform deliverables:
  - SBs in progress:
    (i) Securitization of domestic arrears: tax reconciliation of construction companies’ past-due tax obligations completed (to be netted out before securitization); aim to complete securitization execution during second half of 2021.
    (ii) Audit of government-owned oil and gas companies being facilitated by a local consultant for credible accounts for the gas company.
    (iii) A website for the Official Gazette set up and uploading begun; authorities committed to uploading all laws, orders and decrees applicable since 2000; Ministry of Finance website publishes a comprehensive set of laws and regulations in the interim.
    (iv) Discussions on list of assets for privatization and private management (including highly liquid assets of high market value) to finalize for submission to the Council of Ministers prior to the first review of the EFF-supported program.
    (v) Hydrocarbon data and information report close to finalization and expected to be published by mid-2021.
  - Additional reform: draft National Strategy for the Development of Statistics developed to strengthen statistics and provide timely, higher quality data.

### Audits, safeguards, procurement, and transparency of emergency spending
- Safeguards and audits:
  - Authorities requested a fiscal-safeguards review (FSR) in February 2020; timing deferred due to pandemic-related travel restrictions.
  - Authorities committed to ensure financial assistance for Bata and COVID-19 response is used for intended purposes and emergency spending is appropriately accounted for.
  - An independent international firm hired to audit all COVID-related spending; first batch of documents sent to the audit firm (prior action).
  - An independent international firm hired to audit Bata emergency and rehabilitation spending (prior action); terms of reference prepared in consultation with IMF staff.
  - Authorities committed to finishing the COVID and Bata audits and publishing results on the Ministry of Finance’s website by end-September 2021 and end-April 2022, respectively.
- Financial controls for emergency funds:
  - Two escrow accounts opened at the BEAC (prior action)—one for COVID and one for Bata emergency spending—to be replenished by the existing BEAC IMF account where the RFI purchase will be made; drawings subject to BEAC rules, including transparency and anti-money laundering.
  - Authorities will issue regulations by end-August 2021 requiring beneficial ownership information of awarded companies in all procurement contracts for the Bata emergency and pandemic.
  - All procurement contracts (for government spending for the Bata emergency and pandemic, awarded subsequent to issuance of beneficial ownership regulations) to be published on a government website by end-September 2021 and regularly thereafter.
  - Fund technical assistance to be provided as needed to support these commitments.

*Source: 1gnqea2021001 - 8. The banking system remains weak. The sector has been weighed down by high non- (PDF chapter/section).*

### 16.      The authorities are requesting support equivalent to 30 percent of quota (SDR

### 16. The authorities are requesting support equivalent to 30 percent of quota (SDR 47.25 million) under the RFI

### Request, intended use, and immediate financing implications
- The authorities request support equivalent to 30 percent of quota (SDR 47.25 million) under the RFI.
- They request that the resources be made available fully as budget support.
- The RFI purchase would allow the authorities to cover about 13 percent of the identified external financing gap for 2021.
- Including expected disbursements under the EFF—including the two EFF reviews that were not completed in 2020 and the two EFF reviews scheduled for 2021—the RFI purchase could cover up to 45 percent of the 2021 external financing gap.
- Remaining 2021 needs are expected to be filled by AfDB and other multilateral support, and by lower NFA/deposit accumulation compared to the December 2019 EFF program.
- The authorities have not decided the potential specific use of the SDR allocation.
- Equatorial Guinea meets the eligibility requirements for support under the RFI, as it has an urgent balance of payments need which, if not addressed, will result in an immediate and severe economic disruption.

### Capacity to repay the Fund and financing outlook
- Total obligations (existing and prospective credit) to the Fund remain manageable, peaking at 0.5 percent of GDP in 2026.
- Outstanding Fund credit peaks at 3.0 percent in 2023.
- Equatorial Guinea maintains access to the regional CEMAC reserve pool, which was recently boosted by the new SDR allocation to a projected 3.9 months of extra-regional imports in 2021.
- Country deposits at the BEAC are projected to remain adequate, guaranteeing continued access to the reserve pool.
- Risks to repayment capacity have increased due to deterioration of the outlook, including from reduced deposit accumulation at the BEAC and higher Fund exposure after the RFI purchase.
- External debt is projected to increase from a low base of 14 percent of GDP in 2019, peaking at 27.7 percent of GDP in 2028.
- Overall public debt would decrease to about 43 percent of GDP in 2021 and would gradually decline just below 42 percent by 2026.
- Both public and external debt are assessed to remain sustainable but are subject to risks mainly related to oil price volatility and elevated gross financing needs.

### Safeguards and operational arrangements
- The BEAC has implemented the priority recommendations from the 2017 safeguards assessment, including alignment of its secondary legal instruments with the BEAC Charter and issuance of FY2019 audited financial statements in full compliance with IFRS.
- The RFI support will be channeled to the Treasury by the BEAC.
- The RFI purchase will be made into the existing BEAC IMF account; the authorities established escrow accounts at the BEAC for COVID and Bata emergency and recovery spending, to be replenished by the BEAC IMF account where the RFI purchase will be made.
- Drawings from these accounts are subject to the BEAC’s rules, including on transparency and anti-money laundering.

### Economic impact of shocks, policy priorities, and staff support
- The Bata explosions and still unfolding second wave of the COVID-19 pandemic are having a severe impact on Equatorial Guinea, delaying recovery of real non-hydrocarbon GDP growth, widening macroeconomic imbalances, and giving rise to large external and fiscal financing needs in 2021.
- Staff supports the authorities’ immediate actions to respond to the crisis and their commitment to maintaining fiscal sustainability and continuing reforms envisaged under the extended arrangement under the EFF.
- Urgent near-term focus: fiscal accommodation and efforts to protect vulnerable groups.
- Banking sector stability measures needing timely implementation: settlement of domestic arrears and recapitalization of the largest bank.
- Authorities should prepare and publish, in consultation with staff, a list of meaningful public assets for privatization inclusive of highly liquid assets of high market value.
- Once the emergency phase passes, authorities should resume growth-friendly fiscal consolidation to bring the non-hydrocarbon primary deficit back in line with program parameters so that public debt remains sustainable.
- Staff welcomes commitments to improve governance, enhance transparency and accountability (including at the country’s largest bank), fight corruption, reform revenue administration, and strengthen the public financial management framework.
- Staff emphasizes sustained implementation of governance reforms, including issuance of implementation decree(s) related to the asset declaration regime for senior public officials and governance of the Anti-Corruption Commission, and prompt adoption of a Presidential decree requiring key high-level public officials to submit asset declarations for publication on an easily accessible official website.
- Staff welcomes financial controls and transparency arrangements to track COVID-19 and Bata emergency and recovery-related expenditures and urges completion and publication of ex post independent audits of these expenditures.
- Government committed to good procurement practices, including requesting beneficial ownership information of awarded companies in procurement contracts for Bata emergency and COVID-19 responses and publishing these contracts on a government website.

### Staff recommendation and financing implications
- Staff supports the authorities’ request for a purchase under the RFI to meet urgent funding needs arising from the Bata explosions and the growing COVID-19 shock.
- RFI resources will cover only a fraction of total needs; additional external emergency support is required and staff urges the authorities to secure such assistance.
- Resumption of the EFF-supported program would help cover financing gaps and catalyze donor support.

### Key projections and numerical highlights
- RFI request: 30 percent of quota (SDR 47.25 million).
- RFI covers about 13 percent of the identified external financing gap for 2021; up to 45 percent when combined with expected EFF disbursements.
- Fund obligations peak at 0.5 percent of GDP in 2026; outstanding Fund credit peaks at 3.0 percent in 2023.
- Regional reserve pool coverage projected at 3.9 months of extra-regional imports in 2021 after SDR allocation.
- External debt: 14 percent of GDP in 2019, peaking at 27.7 percent of GDP in 2028.
- Overall public debt: about 43 percent of GDP in 2021, gradually declining to just below 42 percent by 2026.

*Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1gnqea2021001.pdf*

### 5.      Nevertheless, Equatorial Guinea faces several debt vulnerabilities:

### 1gnqea2021001 - 5.      Nevertheless, Equatorial Guinea faces several debt vulnerabilities:

### Debt vulnerabilities
- External risks:
  - Options to issue CFA-franc denominated debt to local investors remain limited, forcing reliance on external creditors—especially the Eximbank China facility.
  - Shares of foreign-held debt, FX-denominated debt, and external financing needs are above the lower early warning thresholds.
  - A large part of external financing needs reflects external current account deficits linked to foreign direct investment.
- Secured lending:
  - Collateralization requirements limit scope for buffer accumulation and reduce resilience to shocks.
  - Risk mitigants: absence of alternative funding sources and ready availability of the Eximbank China facility, which has prevented disruptive adjustments from financing constraints.
- Short-maturity debt:
  - The share of short-term debt is above both the lower and upper warning thresholds—indicating increased debt roll-over risk.
  - Short-term debt is low: 4.4 percent of GDP, implying rollover risks are low.
  - Available government deposits at the BEAC and commercial banks cover the required amortization, mitigating rollover risk.
- Financial sector vulnerability:
  - NPLs in the banking system are about 50 percent, concentrated largely in the largest bank.
  - Government recently acquired majority in this bank and has commenced corporate governance revamp, personnel changes, and an audit in line with COBAC’s advice.
  - Pending arrears securitization and reforms will provide a more precise figure on recapitalization needs.
  - Authorities plan to privatize the bank once reforms have been implemented.

### Stress tests and baseline risks
- Uncertainty and volatility:
  - Fan charts indicate significant uncertainty around the baseline due to Equatorial Guinea being a small, commodity-based, and open economy exposed to international fuel price movements.
  - An asymmetric fan chart shows an extreme downside shock constraining growth to zero results in a slightly downward-sloping debt path; balance of risks skewed somewhat to the upside.
  - High volatility has resulted in large past forecast errors for growth, inflation, and the primary balance.
- Fiscal adjustment:
  - The fiscal adjustment committed under the EFF-supported program is described as ambitious by cross-country experience in magnitude and in the resulting cyclically adjusted primary balance.
  - Comparisons suggest risks are contained by the very large adjustment over 2016–19, indicating targets could still be within reach.

### Stress test outcomes (public debt and GFNs)
- Under macro-fiscal stress-tests (COVID-19 impact):
  - Debt levels and gross financing needs (GFNs) rise but remain below benchmark levels of 70 percent of GDP for debt and 15 percent of GDP for GFNs, except in 2021 due to planned debt securitization.
  - Under alternative stress tests, a macro-fiscal shock causes public debt ratio to reach as high as 69 percent of GDP in 2026, then gradually decline (never breaching the 70 percent threshold).
  - Gross financing needs for combination shocks breach the 15 percent of GDP threshold once in 2021 (the year with planned debt securitization), thereafter gradually falling.
  - GFNs are above the historical average over the projection horizon; limited financing sources and likely inability of the banking sector to provide financing increase financing risks.

### Policy recommendations and program priorities
- Steadfast implementation of EFF-supported program measures once the COVID-19 shock passes is critical to:
  - Maintain a sustainable debt path.
  - Reduce gross financing needs to a prudent level.
- Authorities need to resume an ambitious fiscal consolidation path based primarily on:
  - Increasing public revenues through improved revenue administration.
  - Streamlining public spending.
  - Improving public financial management.
- Particular attention required to:
  - Improving debt management.
  - Developing an appropriate debt management strategy in line with TA recommendations.

### External debt sustainability and shocks
- Projections (COVID-19 shock relative to EFF DSA):
  - 2021 external debt ratio projected to jump to 16.1 percent of GDP (14.8 percent in the EFF DSA).
  - External debt projected to peak in 2028 at 27.7 percent, then decline to 23 percent by 2031.
  - External financing requirements projected to increase in 2021 to 6.3 percent of GDP (from 5.1 percent in the EFF DSA).
  - External financing requirements increase rapidly to a peak of 19.8 percent in 2026, then decline as three large planned FDI projects in the hydrocarbon sector are implemented.
  - Absent these projects, external financing requirements are expected to be manageable, averaging about 6 percent of GDP during the 2020–2029 period, about 3.3 percentage points of GDP higher than in the EFF DSA.
- Sensitivity to shocks:
  - External debt shows greatest sensitivity to the non-interest current account shock, combined shock, and real depreciation shock.
  - The non-interest current account shock produces the largest effect: 21 percent of GDP increase in external debt, reflecting historic wide volatility.
  - Inclusion of a somewhat lesser-sized current account shock in the combined scenario and the exchange rate shock each raise external debt by about 11 percent of GDP by 2031.
  - The growth shock also produces sizeable effects on external debt.

### Key quantitative figures and dates
- Short-term debt: 4.4 percent of GDP.
- NPLs in banking system: about 50 percent.
- Benchmarks referenced:
  - Debt benchmark: 70 percent of GDP.
  - Gross financing needs (GFNs) benchmark: 15 percent of GDP.
- External debt projections:
  - 2021: 16.1 percent of GDP (vs. 14.8 percent in EFF DSA).
  - Peak 2028: 27.7 percent of GDP.
  - 2031: 23 percent of GDP.
- External financing requirements:
  - 2021: 6.3 percent of GDP (from 5.1 percent in EFF DSA).
  - Peak 2026: 19.8 percent of GDP.
  - Average 2020–2029 (absent large FDI projects): about 6 percent of GDP, about 3.3 percentage points higher than in the EFF DSA.

*IMF staff report excerpt: Republic of Equatorial Guinea — Public DSA section.*

### 8. The Government of Equatorial Guinea values its engagement with the IMF. It does not

### 1gnqea2021001 - 8. The Government of Equatorial Guinea values its engagement with the IMF. It does not

### Engagement and commitments with the IMF
- The Government of Equatorial Guinea "values its engagement with the IMF" and "reaffirms its willingness to maintain its engagement with the IMF and uphold its commitments under this instrument."
- The authorities "will cooperate with the IMF in relation to any updated safeguards assessment of BEAC to be carried out by the IMF."
- The authorities "grant our permission for the publication of this Letter of Intent, the staff report and related documents for the request for financial support under the RFI."

### Request for Rapid Financing Instrument (RFI) and financing needs
- The authorities request "a purchase under the RFI for 30 percent of the country’s quota (SDR 47.25 million)."
- The RFI request is made to address urgent external financing needs valued at "4.1 percent of GDP in 2021" resulting from dual shocks (COVID-19 and Bata explosions).
- The RFI purchase will be made to the BEAC's IMF Transactions Account and will replenish two escrow accounts established at the BEAC (one for COVID expenses and the other for Bata emergency spending).

### Socio‑economic impact of COVID-19 and the March 7 Bata explosions
- COVID-19 country facts (as presented):
  - "about 9.939 persons have been infected with COVID-19, and 129 of them have died since March 2020."
  - "As of September 6, 2021, of the 544 active cases being monitored, 3 of them have resulted in fatality and 86 recovered."
- GDP and growth:
  - Real GDP "contracted by 4.9 percent in 2020."
  - "In 2021, growth is expected to recover, reaching 2.8 percent."
- Bata explosion impact:
  - "death of 107 persons, and approximately 19,000 directly affected."
- Fiscal and external balances:
  - The combined shocks are expected to weaken the non-hydrocarbon primary fiscal balance by "3.4 percent of GDP relative to the EFF-supported program projection."
  - The overall current account deficit is expected to widen to "4.3 percent of GDP in 2021, from 3.8 percent projected previously."
  - The balance of payments financing needs created by the dual shocks are estimated at "about 4.1 percent of GDP in 2021."
  - If unaddressed, continued weakening of current and capital accounts will keep negative the country’s net foreign assets at the BEAC.

### Health response and vaccination progress
- Early measures:
  - A newly built health facility was converted to a specialized COVID-19 center; testing kits and hospitalization equipment were acquired.
- Vaccine procurement and targets:
  - "a substantial quantity of over 800,000 doses of vaccines from China" procured through donations and purchases.
  - Under a UN agreement, an additional "600,000 doses of COVID-19 vaccines" are expected, financed by the Equatorial Guinea Multi‐Partner Trust Fund.
  - Target: "to vaccinate 70% of adults by end-2021."
- Vaccination status (as of September 6, 2021):
  - "a total of 360,446 persons have been vaccinated, representing respectively a 43.27% and 53.73% of targeted population at the insular region and continental parts of the country."

### Fiscal measures, arrears, and financial-sector actions
- Fiscal priorities:
  - Near-term focus on limiting macroeconomic and social impact of the Bata explosions and the COVID-19 crisis, strengthening social safety nets, and supporting affected businesses.
  - Commitment to "growth-friendly fiscal adjustment to bring the non-hydrocarbon primary deficit to sustainable levels once the crisis abates."
- Revenue administration and capital spending reforms (expected completion by end-2022):
  - (i) "unification of the management of large taxpayers,"
  - (ii) "separation of management and operation functions,"
  - (iii) "reform of the audit function," and
  - (iv) "development of the tax information system."
- Arrears resolution and bank support:
  - Authorities "continue to clear government arrears" and expect to "conclude this process and issue securities at market rates during the second half of 2021."
  - Commitment to "full recapitalization of the country’s largest bank and ensuring its independence from a governance standpoint."
  - Authorities concur that timely settlement of obligations will reduce NPLs and strengthen banks’ liquidity and solvency positions.

### Transparency, safeguards, and reporting
- Oversight and audits:
  - An independent international firm has been hired "to work on the audit of all COVID-related spending," and the first batch of documents have been sent to the audit firm.
  - A post-crisis audit will be completed and published on the Ministry of Finance website.
- Escrow accounts and reporting:
  - Two escrow accounts opened at the BEAC (one for COVID expenses and one for Bata emergency spending); both will be replenished by the BEAC's IMF Transactions Account.
  - Drawings from these accounts "will be subject to the BEAC’s rules, including on transparency and anti-money laundering."
  - "Quarterly reports of RFI spending will be published periodically on the Ministry of Finance website," which will also host pandemic-related public procurement contracts, including names of awarded companies and their beneficial owners.
- Additional reporting:
  - Authorities "are committed to continue reporting on COVID-19 developments, including testing, cases, and deaths, regularly on the webpage of the Ministry of Health and Social Welfare."
- External arrears and SDR policy:
  - Authorities "are ensuring that all external arrears meet the Fund's guidelines."
  - Regarding the SDR allocation, authorities "will continue to comply with regional policy objectives, including rebuilding regional reserves, while considering any possible additional urgent pandemic-related needs and domestic financing constraints."

### Conclusion and outlook
- The authorities express appreciation for the Fund’s support and catalytic role and are "committed to implementing policies that foster sustainable and speedy economic recovery."
- Near-term utmost priority: "to fight off the health crisis, its adverse economic effects as well as repairing the damage on private and public properties caused by the explosions in Bata."
- The authorities remain committed to the CEMAC regional reform program and the objectives of the EFF arrangement and "look forward to Directors’ favorable consideration of their request for emergency financing under the RFI."

*Source: IMF staff.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1gnqea2021001.pdf_