## _cr05150 ## Source details **Canonical URL:** [_cr05150](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05150.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05150.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05150.pdf.json) --- ### Executive Summary — Overview and main challenges - Hydrocarbon production will continue to be the engine of growth for the foreseeable future; given that oil and gas are nonrenewable resources and have a limited impact on employment, the authorities need to develop the non-oil economy. - Equatorial Guinea should be able to make rapid progress toward achieving the Millennium Development Goals (MDGs). As yet, however, living standards of the majority of the population have not improved measurably. - The country has made important progress in increasing transparency and accountability in oil sector management and public finance; the authorities indicated their commitment to implement the recommendations of the fiscal transparency Report on Observance of Standards and Codes (ROSC) and to participate in the Extractive Industries Transparency Initiative (EITI). - The fiscal outcome for 2004 was marked by a stronger-than-expected revenue performance on account of higher oil prices and increases in hydrocarbon production, but this was offset by overruns in capital expenditure, underscoring the need for better public expenditure management (PEM). - The liquidity overhang poses a risk to macroeconomic stability and financial sector soundness; in view of the insufficient instruments available to the regional central bank to mop up excess liquidity, the burden of adjustment falls on fiscal policy. - The immediate challenge is to prepare a comprehensive development strategy that channels the country’s oil wealth into priority sectors while safeguarding macroeconomic stability and balancing short-term social needs with longer-term intergenerational equity considerations. - Institutional capacity constraints continue to hinder the authorities’ ability to formulate and monitor macroeconomic policy; priority should be placed on building capacity in the areas identified by the fiscal transparency ROSC and World Bank EITI mission, as well as on the development of a poverty profile and the carrying out of a public expenditure review (PER). ### Real economy and hydrocarbons — key facts and 2004 outcomes - Hydrocarbon sector expansion since 1995: - Production rose from 6,000 barrels of oil equivalent (boe) a day to 282,000 boe a day in 2003, and to 383,000 boe/day in 2004. - Total proven reserves are estimated at 2.5 billion boe. - Sector importance (2004): - Oil and gas account for about 90 percent of GDP, 98 percent of exports, and over 90 percent of government revenues. - Growth and inflation (2004): - Real GDP grew by about 34 percent in 2004. - Non-oil GDP increased by about 13 percent in 2004. - Inflation is reported to have decelerated to 6 percent in 2004 (down from a peak of 9 percent in 2001). - Social and income indicators: - Per capita GNP increased from US$346 (1995) to US$2,211 (2003), yet social indicators have not improved commensurately. - Non-oil economy: - Non-oil economic activity is narrow and accounts for only 10 percent of GDP; construction and infrastructure have been main non-oil growth sources, driven by government capital expenditure. ### Fiscal sector and public finance — 2004 outcomes and reforms - 2004 fiscal outcome: - Overall fiscal surplus: an estimated 13 percent of GDP. - Primary non-oil fiscal deficit: an estimated 17 percent of GDP (153 percent of non-oil GDP). - Revenues and expenditures (2004): - Total revenue: estimated at 37 percent of GDP, 44 percent higher than budgeted (primarily due to oil receipts). - Oil revenues: rose to 34 percent of GDP. - One-time tax collections from an audit of oil companies: about 4 percent of GDP. - Non-oil revenue: equivalent to 3 percent of GDP; rose by 12 percent relative to budget. - Current and capital expenditure: estimated at 19 percent of GDP; 77 percent higher than budgeted due to significant overruns in capital spending, mainly infrastructure. - Social sector spending: significantly below budget in 2004. - Other unreconciled expenditures: about 1 percent of GDP. - Tax and tax administration reform: - A new tax code became effective January 1, 2005: replaces domestic turnover tax with VAT; raises corporate income tax; strengthens progressive personal income tax; raises tax on gross income for nonresidents; reduces withholding tax for nonresidents on dividends and interest; tax authority reorganized. ### Monetary and financial sector — liquidity and banking soundness - Monetary expansion and liquidity: - Broad money grew by an estimated 45 percent in 2004, owing to large inflows of government oil revenue and transfers from international oil companies. - Excess liquidity in the banking system continued to rise; limited viable lending opportunities kept credit to the private sector in check. - Banking sector soundness and risks: - The three commercial banks were rated by COBAC as well above the average of CEMAC members. - Compliance with prudential regulations was mixed: all three met liquidity prudential ratios; only two observed all solvency ratios. - Nonperforming loans increased to 16 percent in 2004 (from 13 percent at end-2003); these loans were fully provisioned. - A fourth bank had its license approved in 2004 and was expected to commence operation shortly. - Policy implication: - The liquidity overhang poses risks to macroeconomic stability and financial sector soundness; fiscal policy must shoulder much of the adjustment given limited regional monetary instruments. ### External sector and reserves — 2004 position - Balance of payments and reserves (2004): - Overall balance of payments surplus: estimated US$713 million (more than doubled). - External current account deficit: decreased from 27 percent of GDP in 2003 to 14 percent in 2004. - Capital account: dominated by large inflows of foreign direct investment in the hydrocarbon sector. - Official international reserves: estimated at US$945 million at end-2004 (about 18 months of imports of goods related to the non-oil sector). - The government also held two offshore treasury accounts amounting to US$636 million. - External public debt: - Total external public debt declined to an estimated US$115 million at end-2004 (less than 3 percent of GDP); external debt service became insignificant. - Exchange rate and competitiveness: - As a CEMAC member the nominal exchange rate is fixed; the real effective exchange rate (REER) appreciated by about 5 percent in 2004, for an accumulated real appreciation of 32 percent since 2000. ### Transparency, accountability, and statistics — ROSC and EITI commitments - Authorities decided to participate in the EITI and requested the IMF to conduct a fiscal transparency ROSC. - FAD fiscal transparency ROSC mission visited Malabo in November 2004 and January 2005. - ROSC findings and recommended priorities: - Establish a clear fiscal policy for the management of hydrocarbon wealth and a firm budget constraint supported by strengthening the budget law. - Establish a more formalized budget priority-setting process and introduce a functional classification. - Publish reconciled data on government oil revenue flows and fiscal and monetary accounts. - Define the mandate and corporate governance structure of the national oil company (GEPetrol), with World Bank assistance. - Statistics and capacity: - Equatorial Guinea’s statistical apparatus remains very weak; lack of timely, accurate, and comprehensive macroeconomic data hampers policy formulation. - Data provided by the authorities are broadly adequate for surveillance; authorities are meeting data reporting obligations under Article VIII, Section 5(a). ### Policy implications and priorities — staff recommendations - Fiscal policy must absorb excess liquidity and safeguard macroeconomic stability in the absence of sufficient regional monetary instruments. - Strengthen public expenditure management to control overruns in capital expenditure and reorient spending toward social sectors and priority investments. - Develop a comprehensive development strategy to channel oil wealth into priority sectors, balancing immediate social needs with intergenerational equity. - Prioritize capacity building in areas identified by the fiscal transparency ROSC and the World Bank EITI mission, including development of a poverty profile and conducting a PER. - Continue reforms in tax policy and administration (VAT implementation, tax code changes) and pursue measures to improve fiscal transparency and governance of GEPetrol. --- ### Medium-term outlook (2005–2010) — hydrocarbons, growth, prices, and reserves - Hydrocarbon sector outlook: - Recent discoveries expected to increase hydrocarbons production to about 500,000 boe a day by 2008. - In the absence of significant new discoveries, oil production will start to decline in 2009. - Oil price projections: - Price for Equatoguinean oil projected to decline from an average of US$34 per barrel in 2004 to US$32 per barrel in 2005 and towards a long-run oil price equivalent to US$30 per barrel beginning in 2010. - Footnote projection (WEO revisions): US$47 per barrel in 2005 (from US$37 per barrel), US$44 per barrel in 2006 (US$36 per barrel), and US$39 per barrel for 2007-2010 (US$34 per barrel). - Growth, inflation, external balances, and reserves: - Overall GDP growth projected to average 5 percent a year between 2005 and 2010. - Inflation expected to remain in the range of 7-8 percent. - Oil revenue remaining strong implies fiscal surpluses should average 15 percent of GDP between 2005 and 2010. - The external current account should turn to a surplus in 2007, reaching about 20 percent of GDP in 2009 before declining. - Gross official assets (official BEAC foreign reserves plus offshore government deposits) should be over $8 billion (about 33 months of import of goods and services) by 2010. ### Fiscal framework — permanent income approach and staff prescription - Key decision: how much oil revenue to spend versus save for future generations. - Staff recommendation: consider adopting a permanent income approach to maintain a constant level of real per capita expenditure over the long run. - Staff recommended a three stage approach to fiscal policy: - Immediately preceding finalization of strategy: limit capital expenditures until needs and absorptive capacity constraints are assessed. - Once strategy is elaborated: greater scope to adjust level and composition of spending. - Long run: limit expenditure in line with the country’s permanent income. - Mission urged adoption of the primary non-oil fiscal balance as the key policy target. - Staff broadly supported the 2005 budget proposal and urged adherence to parameters aiming at: - a non-oil primary deficit of 11 percent of GDP (78 percent of non-oil GDP), allowing savings equivalent to 13 percent of GDP. - Long-run illustrative outcomes (staff assumptions): - Assumptions include: long-run real oil price equivalent to US$30 a barrel beginning in 2010; no new hydrocarbon discoveries; a real rate of return on financial assets of 2 percent; population of 500,000 in 2004 with 2.5 percent annual growth thereafter. - Case 1 (intergenerational equity): long-run constant real per capita government expenditure of CFAF 590,000 per year (constant 2004 CFA francs). - Case 2 (near-term higher spending for poverty reduction): long-run constant real per capita government expenditure of CFAF 533,000 a year. - If authorities incurred sustainable debt to finance additional spending, the permanent real per capita expenditure would be higher. ### Sensitivities and risks to permanent real per capita expenditure - A US$1 per barrel increase/decrease in price of oil would raise/lower the permanent real per capita expenditure by about 2 percent. - A decrease/increase in the real interest rate of 1 percent per annum would reduce/increase permanent real per capita expenditure by about 5 percent. - A reduction/increase in annual non-oil GDP growth by one percent would reduce/increase permanent real per capita government expenditure by about 18 percent. ### Monetary and financial sector medium-term issues - Concern about liquidity overhang arising from balances of government contractors and households; excess liquidity reflects lack of viable lending opportunities and capital account restrictions under fixed exchange rate regime. - Authorities noted regional monetary policy constraints and limited effectiveness of regional instruments to mop up excess liquidity. - Staff cautioned that banks could inject liquidity into the economy at any time and urged fiscal prudence. - Concern about increasing non-performing loans and difficulties for some commercial banks to observe capital adequacy requirements; staff urged enforcement and stronger supervision. ### External policy and reserve management - Since early 2004, all government oil receipts have been deposited in the regional central bank (BEAC). - Authorities expressed concern about lack of remuneration on majority of deposits held at the BEAC and sought staff assistance. - Regional proposal under consideration by the BEAC would separate part of oil-related funds from monetary reserves in the form of a fund for future generations, remunerated based on returns of longer-term investments in appropriate assets. - Historical note: the Fund for Future Generations (0.5 percent of total oil revenue) earns a nominal rate of interest of 1.7 percent at the BEAC. ### Tax policy and structural reforms - Staff welcomed the new tax law for 2005 but expressed concern about short-term revenue impact and administrative capacity to implement measures (VAT implementation phased over 6-12 months intended). - Staff urged removal of remaining export tariffs that weaken competitiveness or support inefficient production; authorities agreed to revisit export taxes on cocoa and coffee. - Authorities maintained export tax on logs (not on processed wood products) to incentivize higher value-added activity; mission recommended phasing out the tariff over time. - Mission stressed improving investment climate: contract enforcement, reducing time to obtain new business licenses, minimizing clearance period for foreign exchange transactions. - Mission expressed concern about recent requirement for foreign investors to obtain local (silent) partners as a condition for investment approval; authorities stressed need to foster local entrepreneurship. --- ### Obstacles to transparency, governance, and capacity building - The most important obstacles to increased transparency are weaknesses in administrative capacity and poorly defined responsibilities and oversight mechanisms. - Oil sector transparency improvements are particularly important, but broader reforms are essential for successful and sustainable progress in fiscal management. - Enhancements in the transparency of project planning and implementation are key to a successful poverty reduction strategy. - Establishment of a strong, independent judiciary is important. - Authorities recognized lack of institutional capacity in critical areas of economic decision-making and project implementation; they agreed to implement ROSC recommendations and intend to participate in the EITI with World Bank assistance. - Statistics and capacity building (Paragraphs 43–45): - Staff urged authorities to identify priority areas for institutional capacity building within a comprehensive technical assistance plan and to seek support of development partners. - If external financial support is limited, authorities should finance these activities directly. - Priority should be placed on building capacity in areas identified by the fiscal transparency ROSC. - Urgent need for better PEM given large overruns in capital expenditure and significant extrabudgetary spending. - Authorities were urged to: routinely reconcile fiscal and monetary data and other key oil revenue data; identify and include all expenditures outside the published budget in the presentation of the executed budget. - Authorities are considering acquiring a computerized expenditure control system with assistance from the French government. ### Staff appraisal — macroeconomic outlook, policy recommendations, and institution-building - Hydrocarbon wealth and poverty reduction: - With substantial hydrocarbon wealth, Equatorial Guinea should be able to make rapid progress toward achieving the MDGs; however, measurable improvements in living conditions are not yet evident. - To improve social outcomes, authorities need a comprehensive poverty reduction strategy, strengthened institutional capacity, improved transparency and accountability, and diversification of the economy. - Staff welcomes intention to develop a poverty reduction strategy and urges an interim document as an initial step. - Budget execution and PEM: - The 2004 budget outturn would have been considerably better had it not been for substantial overruns in capital expenditure. - Staff urges authorities to keep within budget targets and to seek assistance in improving PEM. - Staff broadly supports the 2005 budget and urges adherence to parameters consistent with the long-term strategy. - Diversification and macro stability: - Oil is nonrenewable and has limited impact on employment; staff urges actions to develop the non-oil economy. - Authorities should develop an environment conducive to private sector investment and reverse the decline in competitiveness by setting fiscal expenditure in line with absorptive capacity constraints, thereby keeping inflation in check. --- ### Key macroeconomic outcomes and projections (selected indicators, 2000–05; medium-term 2003–10) - Real GDP (annual percentage change): 2000: 19.3; 2001: 40.7; 2002: 9.7; 2003: 18.7; 2004 (Prelim.): 34.2; 2005 (Est./Proj.): 4.8; Medium-term projections (2006–10): 4.6; 7.1; 14.5; -1.2; -0.4. - Non-oil GDP (annual percentage change): 2000: 10.5; 2001: 7.1; 2002: 10.3; 2003: 9.9; 2004 (Prelim.): 12.9; 2005 (Est./Proj.): 9.8; Medium-term projections (2006–10): 9.8; 11.1; 11.0; 11.1; 11.2. - Nominal GDP (in billions of CFA francs): 2000: 855.5; 2001: 1,179.8; 2002: 1,269.5; 2003: 1,513.9; 2004 (Prelim.): 2,368.2; 2005 (Est./Proj.): 2,251.1; Medium-term selected: 2006: 2,301; 2007: 2,417; 2008: 2,796; 2009: 2,771; 2010: 2,782. - Oil production (thousands of barrels per day): 2000: 119.7; 2001: 210.1; 2002: 250.6; 2003: 282.2; 2004: 383.3; 2005 (Proj.): 397.3; Medium-term (2006–10): 409; 442; 505; 481; 456. - Oil price (U.S. dollars per barrel): 2000: 26.2; 2001: 22.3; 2002: 23.0; 2003: 26.9; 2004: 33.7; 2005 (Proj.): 32.0; Medium-term projections (2006–10): 31.0; 30.0; 29.8; 29.8; 29.8. - Consumer prices (annual average): 2000: 4.8; 2001: 8.8; 2002: 7.6; 2003: 7.3; 2004: 5.9; 2005 (Proj.): 7.0; Medium-term projection (2006–10): 8.0. ### Selected fiscal and external numbers (highlights) - Total revenue and grants (in billions of CFA francs / percent of GDP where reported): 2000: 143.3 (16.7 percent of GDP); 2001: 348.0 (29.5 percent); 2002: 414.5 (32.6 percent); 2003: 471.2 (31.1 percent); 2004 (Original/Budget/Prelim.): 602.8 / 870.5 / 618.3 (35.5 / 36.8 / 27.5 percent); 2005 (Proj./Budget/Proj.): 679.2 / 679.2 / 679.2 (30.2 / 30.2 / 30.2 percent). - Oil revenue (in billions of CFA francs / percent of GDP): 2000: 114.2 (13.3 percent); 2001: 303.8 (25.7 percent); 2002: 362.5 (28.6 percent); 2003: 409.7 (27.1 percent); 2004: 539.7 (33.7 percent); 2005 (Proj.): 799.2 (35.3 percent). - Non-oil revenue (in billions of CFA francs / percent of GDP): 2000: 29.1 (3.4 percent); 2001: 44.2 (3.7 percent); 2002: 52.0 (4.1 percent); 2003: 61.5 (4.1 percent); 2004 (Prelim.): 63.0 (2.7 percent); 2005 (Proj.): 70.6 (3.3 percent). - Total expenditure and net lending (in billions of CFA francs / percent of GDP): 2000: 136.8 (16.0 percent); 2001: 214.5 (18.2 percent); 2002: 189.1 (14.9 percent); 2003: 368.2 (24.3 percent); 2004 (Prelim./Budget/Proj.): 257.1 / 542.2 / 311.6 (22.9 / 22.9 / 13.8 percent); 2005 (Proj.): 370.7 (16.5 percent). - Non-oil overall balance (percent of non-oil GDP): 2000: -73.9; 2001: -100.6; 2002: -71.4; 2003: -138.5; 2004: -153.2; 2005 (Proj.): -78.7. - Primary non-oil balance (percent of GDP): 2000: -12.2; 2001: -14.0; 2002: -10.5; 2003: -20.2; 2004: -17.1; 2005 (Proj.): -10.8. - Outstanding medium- and long-term public debt (percent of GDP): 2000: 20.5; 2001: 14.9; 2002: 14.2; 2003: 5.5; 2004: 2.6; 2005 (Proj.): 2.2. - Gross official reserves (in millions of U.S. dollars): 2000: 22; 2001: 72; 2002: 86; 2003: 232; 2004: 945; 2005 (Proj.): 1,666. - Equivalent months of imports, c.i.f.: 2000: 0.2; 2001: 0.5; 2002: 0.5; 2003: 1.4; 2004: 3.0; 2005 (Proj.): 5.1. - Equivalent months of non-oil sector imports, c.i.f.: 2000: 24.8; 2001: 4.0; 2002: 4.1; 2003: 7.5; 2004: 17.8; 2005 (Proj.): 43.2. --- ### Hydrocarbon sector — upstream and downstream summary - Upstream: - Zafiro oil field: Operator: Exxon-Mobil; Discovered: 1995; Processing capability: 10,000 barrels a day; Storage capacity: about two million barrels; Production status: production level has already peaked and is projected to decline gradually and be depleted by 2025. - Ceiba: Operator: Amerada Hess; Discovered: 1999; Estimated proven reserves: 500 million barrels; Production expectation: expected to reach 100,000 bpd in 2007. - Alba (natural gas field): Operator: Marathon Oil; Reserves: 6.9 trillion cubic feet (1.2 billion boe); Gas production: about 195 million cubic feet of gas is produced each year, about one-fifth reinvested into the reservoir; condensates are derived as a byproduct. - Downstream and byproducts: - Methanol plant: joint venture with Marathon Oil, Samedan, and the government; Became operational: 2001; Production: 25,600 boe/day in 2004; Capacity expectation: expected to reach 27,000 boe/day in 2007. - LPG (butane and propane): recent production capacity expanded to 20,000 boe/day; expected to be double in 2008. - LNG: initial facility capacity being put in place: 80,000 boe/day; plans for a second LNG facility under discussion. - Condensates: collected offshore and onshore for downstream operations. --- ### Institutional relations, technical assistance, and collaborative activities - IMF relations and status: - Membership: Joined: 12/22/69; Article VIII. - Quota: 32.60 (SDR Million; 100.00 percent of quota). - Equatorial Guinea is on the standard 12-month Article IV consultation cycle; the last Article IV consultation was concluded on November 12, 2003 (IMF Country Report No. 03/385). - Technical assistance history and plans: - FAD provided an 18-month technical assistance during 1992–94 to reorganize the tax department and personnel training; subsequent FAD and STA missions reviewed PEM, tax administration, and monetary/statistics issues. - Staff envisages providing assistance including macro-fiscal and tax administration experts, a multi-sector statistics assessment mission, and a regional seminar on sources of growth (in collaboration with the World Bank). - World Bank relation and activities: - World Bank lending: No new lending operations approved since mid-1992; World Bank activities include statistical capacity-building grants and discussions on a CWIQ-type household survey to construct a poverty profile. - Collaborative focus: design and implementation of reporting framework and institutional arrangements for EITI, petroleum sector institutional roles, and resource revenue management policy. --- ### Governance, poverty reduction, and next steps - Authorities committed to participate in EITI and implement ROSC recommendations. - Authorities to develop a full poverty reduction strategy (PRSP) drawing on lessons from the National Development Plan; an interim PRSP document to be discussed at the second national conference scheduled for end of 2005. - Priorities: strengthen PEM, reconcile and publish oil revenue flows and fiscal data, define GEPetrol governance, build statistical capacity, and phase out export taxes that undermine diversification. - The staff recommends that the next Article IV consultation with Equatorial Guinea be held on the standard 12-month cycle. *Source: Executive Summary and selected chapters (IMF staff), _cr05150_.* ### Executive Summary ...................................................................................................... ### Executive Summary ### Overview and main challenges - Hydrocarbon production will continue to be the engine of growth for the foreseeable future; given that oil and gas are nonrenewable resources and have a limited impact on employment, the authorities need to develop the non-oil economy. - Equatorial Guinea should be able to make rapid progress toward achieving the Millennium Development Goals (MDGs). As yet, however, living standards of the majority of the population have not improved measurably. - The country has made important progress in increasing transparency and accountability in oil sector management and public finance; the authorities indicated their commitment to implement the recommendations of the fiscal transparency Report on Observance of Standards and Codes (ROSC) and to participate in the Extractive Industries Transparency Initiative (EITI). - The fiscal outcome for 2004 was marked by a stronger-than-expected revenue performance on account of higher oil prices and increases in hydrocarbon production, but this was offset by overruns in capital expenditure, underscoring the need for better public expenditure management (PEM). - The liquidity overhang poses a risk to macroeconomic stability and financial sector soundness; in view of the insufficient instruments available to the regional central bank to mop up excess liquidity, the burden of adjustment falls on fiscal policy. - The immediate challenge is to prepare a comprehensive development strategy that channels the country’s oil wealth into priority sectors while safeguarding macroeconomic stability and balancing short-term social needs with longer-term intergenerational equity considerations. - Institutional capacity constraints continue to hinder the authorities’ ability to formulate and monitor macroeconomic policy; priority should be placed on building capacity in the areas identified by the fiscal transparency ROSC and World Bank EITI mission, as well as on the development of a poverty profile and the carrying out of a public expenditure review (PER). ### Real economy and hydrocarbons - Hydrocarbon sector expansion since 1995: - Production rose from 6,000 barrels of oil equivalent (boe) a day to 282,000 boe a day in 2003, and to 383,000 boe/day in 2004. - Total proven reserves are estimated at 2.5 billion boe. - Sector importance (2004): - Oil and gas account for about 90 percent of GDP, 98 percent of exports, and over 90 percent of government revenues. - Growth and inflation: - Real GDP grew by about 34 percent in 2004, driven by the sharp expansion in hydrocarbon production. - Non-oil GDP increased by about 13 percent in 2004. - Inflation is reported to have decelerated to 6 percent in 2004 (down from a peak of 9 percent in 2001). - Social indicators and income: - Per capita GNP increased from US$346 (1995) to US$2,211 (2003), yet social indicators have not improved commensurately. - Non-oil economy: - Non-oil economic activity is narrow and accounts for only 10 percent of GDP; construction and infrastructure have been main non-oil growth sources, driven by government capital expenditure. ### Fiscal sector and public finance - 2004 fiscal outcome: - Overall fiscal surplus: an estimated 13 percent of GDP. - Primary non-oil fiscal deficit: an estimated 17 percent of GDP (153 percent of non-oil GDP). - Revenues and expenditures (2004): - Total revenue: estimated at 37 percent of GDP, 44 percent higher than budgeted (primarily due to oil receipts). - Oil revenues: rose to 34 percent of GDP (higher world oil prices and increases in production). - One-time tax collections from an audit of oil companies: about 4 percent of GDP. - Non-oil revenue: equivalent to 3 percent of GDP; rose by 12 percent relative to budget. - Current and capital expenditure: estimated at 19 percent of GDP; 77 percent higher than budgeted due to significant overruns in capital spending, mainly infrastructure. - Social sector spending: significantly below budget in 2004. - Other unreconciled expenditures: about 1 percent of GDP. - Tax and tax administration reform: - A new tax code became effective January 1, 2005: replaces domestic turnover tax with VAT; raises corporate income tax; strengthens progressive personal income tax; raises tax on gross income for nonresidents; reduces withholding tax for nonresidents on dividends and interest; tax authority reorganized. ### Monetary and financial sector - Monetary expansion and liquidity: - Broad money grew by an estimated 45 percent in 2004, owing to large inflows of government oil revenue and transfers from international oil companies. - Excess liquidity in the banking system continued to rise; limited viable lending opportunities kept credit to the private sector in check. - Banking sector soundness and risks: - The three commercial banks were rated by COBAC as well above the average of CEMAC members. - Compliance with prudential regulations was mixed: all three met liquidity prudential ratios; only two observed all solvency ratios. - Nonperforming loans increased to 16 percent in 2004 (from 13 percent at end-2003); these loans were fully provisioned. - A fourth bank had its license approved in 2004 and was expected to commence operation shortly. ### External sector and reserves - Balance of payments and reserves (2004): - Overall balance of payments surplus: estimated US$713 million (more than doubled). - External current account deficit: decreased from 27 percent of GDP in 2003 to 14 percent in 2004. - Capital account: dominated by large inflows of foreign direct investment in the hydrocarbon sector. - Official international reserves: estimated at US$945 million at end-2004 (about 18 months of imports of goods related to the non-oil sector). - The government also held two offshore treasury accounts amounting to US$636 million. - External public debt: - Total external public debt declined to an estimated US$115 million at end-2004 (less than 3 percent of GDP); external debt service became insignificant. - Arrears to Spain regularized in 2004; arrears to Italy expected to be regularized shortly; backlog in payments to the Kuwait Fund continued. - Exchange rate and competitiveness: - Equatorial Guinea maintains an exchange rate system free of restrictions on current transactions; as a CEMAC member the nominal exchange rate is fixed. - The real effective exchange rate (REER) appreciated by about 5 percent in 2004, for an accumulated real appreciation of 32 percent since 2000. ### Regional convergence and trade policy - CEMAC convergence criteria (observance in 2004): - Equatorial Guinea observed three of the four criteria; missed the inflation criterion by a wide margin. - CEMAC targets and selected outcomes noted in Box 1 (annual average inflation and debt/basic balance indicators). - Trade policy: - Equatorial Guinea adopted the CEMAC common external tariff (CET); authorities have at times reclassified goods to lower tariff categories and imposed ad hoc taxes and fees on capital goods imports. - Progress made on eliminating import tariffs on goods produced within CEMAC; authorities retain discretion to set export tariffs on coffee, cocoa, and logs. ### Transparency, accountability, and statistics - Progress and initiatives: - Authorities decided to participate in the UK-sponsored EITI and requested the IMF to conduct a fiscal transparency ROSC. - An FAD fiscal transparency ROSC mission visited Malabo in November 2004 and January 2005; main findings summarized below. - Fiscal transparency ROSC findings and recommended priorities: - A sound basis is being established (2003 Public Finance Law and 2005 Tax Code), but transparency must be improved in many areas of the Code of Good Practices on Fiscal Transparency. - Recommended initial focus areas: - Establish a clear fiscal policy for the management of hydrocarbon wealth and a firm budget constraint supported by strengthening the budget law. - Establish a more formalized budget priority-setting process and introduce a functional classification to clearly identify allocations in relation to stated priorities. - Publish reconciled data on government oil revenue flows and fiscal and monetary accounts. - Define the mandate and corporate governance structure of the national oil company (GEPetrol), with World Bank assistance. - Administrative capacity weaknesses and inadequately defined responsibilities and oversight mechanisms present formidable barriers to rapid reform; technical support will be needed. - Statistics and capacity: - Equatorial Guinea’s statistical apparatus remains very weak; lack of timely, accurate, and comprehensive macroeconomic data hampers policy formulation, stemming mainly from severe institutional capacity constraints. - Data provided by the authorities are broadly adequate for surveillance (Appendix IV); authorities are meeting data reporting obligations under Article VIII, Section 5(a). ### Policy implications and priorities - Fiscal policy must shoulder much of the adjustment to absorb excess liquidity and safeguard macroeconomic stability in the absence of sufficient regional monetary instruments. - Strengthen public expenditure management to control overruns in capital expenditure and reorient spending toward social sectors and priority investments. - Develop a comprehensive development strategy to channel oil wealth into priority sectors, balancing immediate social needs with intergenerational equity. - Prioritize capacity building in areas identified by the fiscal transparency ROSC and the World Bank EITI mission, including development of a poverty profile and conducting a public expenditure review (PER). - Continue reforms in tax policy and administration (VAT implementation, tax code changes) and pursue measures to improve fiscal transparency, governance of the national oil company, and publication of reconciled oil revenue and fiscal data. *Source: Executive Summary (IMF staff), _cr05150 - Executive Summary_.* ### 22. The medium-term outlook is ### 22. The medium-term outlook is ### Hydrocarbon sector outlook and oil price projections - Recent discoveries of oil and gas are expected to further increase the production of hydrocarbons to about 500,000 boe a day by 2008. - In the absence of significant new discoveries, oil production will start to decline in 2009, with the non-oil sector becoming the main source of growth in subsequent years. - The price for Equatoguinean oil is projected to decline from an average of US$34 per barrel in 2004 to US$32 per barrel in 2005 and towards a long-run oil price equivalent to US$30 per barrel beginning in 2010. - Footnote projection (WEO revisions): US$47 per barrel in 2005 (from US$37 per barrel), US$44 per barrel in 2006 (US$36 per barrel), and US$39 per barrel for 2007-2010 (US$34 per barrel). ### Growth, inflation, external balances, and reserves - Overall GDP growth is projected to average 5 percent a year between 2005 and 2010. - Inflation is expected to remain in the range of 7-8 percent. - While oil production peaks in 2008, the non-oil sector should grow rapidly over the medium term, driven by government capital spending on infrastructure and social sector projects; construction, utilities, transportation and other services are expected to drive non-oil sector growth. - Oil revenue remaining strong implies fiscal surpluses should average 15 percent of GDP between 2005 and 2010. - The external current account should turn to a surplus in 2007, owing to a decline in oil sector imports of capital goods and services, reaching about 20 percent of GDP in 2009 before declining. - As a result of these surpluses, gross official assets (official BEAC foreign reserves plus offshore government deposits) should be over $8 billion (about 33 months of import of goods and services) by 2010. ### Fiscal policy framework and recommendations - Key decision: how much oil revenue to spend versus save for future generations. - Staff recommendation: consider adopting a permanent income approach to maintain a constant level of real per capita expenditure over the long run; trade-off between investing more today in education, health, infrastructure and preserving oil wealth as financial assets. - Need to strengthen PEM and assess absorptive capacity constraints when deciding annual spending and saving. - Staff recommended a three stage approach to fiscal policy: - Immediately preceding finalization of strategy: limit capital expenditures until needs and absorptive capacity constraints are assessed. - Once strategy is elaborated: greater scope to adjust level and composition of spending. - Long run: limit expenditure in line with the country’s permanent income. - Mission urged adoption of the primary non-oil fiscal balance as the key policy target. - Existing fiscal rules (limit recurrent expenditure to non-oil revenues; finance capital expenditure from oil revenues) were noted to be insufficient because they neither constrained capital spending nor considered recurrent expenditure needed to sustain capital stock. - Staff broadly supported the 2005 budget proposal and urged adherence to parameters aiming at: - a non-oil primary deficit of 11 percent of GDP (78 percent of non-oil GDP), allowing savings equivalent to 13 percent of GDP. - Staff supported ROSC recommendation to set a specific expenditure target in the supplemental budget law, with any increases requiring prior parliamentary approval. ### Long-run fiscal framework (permanent income approach) — assumptions and illustrative outcomes - Assumptions used by staff: - economic growth through 2010 in line with the medium-term outlook presented in Table 5, and a 5 percent rate of growth of the non-oil economy thereafter; - long-run real oil price equivalent to US$30 a barrel beginning in 2010; - no new hydrocarbon discoveries; - a real rate of return on financial assets of 2 percent; and - a population of 500,000 inhabitants in 2004, with a growth rate of 2.5 percent a year thereafter. - Staff estimates: - Case 1 (intergenerational equity): a long-run constant real per capita government expenditure of CFAF 590,000 per year (measured in constant 2004 CFA francs) could be maintained. - Case 2 (near-term higher spending for poverty reduction): a lower long-run constant real per capita government expenditure of CFAF533,000 a year could be maintained. - Note: If the authorities incurred a sustainable level of debt to finance additional spending, the level of permanent real per capita expenditure would be higher. ### Sensitivity and risks to permanent real per capita expenditure - A US$1 per barrel increase/decrease in price of oil would raise/lower the permanent real per capita expenditure by about 2 percent. - A decrease/increase in the real interest rate of 1 percent per annum would reduce/increase permanent real per capita expenditure by about 5 percent. - A reduction/increase in annual non-oil GDP growth by one percent would reduce/increase permanent real per capita government expenditure by about 18 percent. - These sensitivities underscore the importance of a strategy for managing oil wealth and developing the non-oil sector. ### Monetary and financial sector issues - Concern about a liquidity overhang arising from balances of government contractors and households; excess liquidity reflects lack of viable lending opportunities and capital account restrictions under fixed exchange rate regime. - Authorities noted regional monetary policy constraints and limited effectiveness of regional instruments to mop up excess liquidity; authorities perceived no urgent need to mop it up while it remained within the commercial banking system. - Staff cautioned that banks could inject liquidity into the economy at any time and urged fiscal prudence. - Concern about increasing levels of non-performing loans and difficulties for some commercial banks to observe capital adequacy requirements; staff urged enforcement and stronger supervision. - Authorities indicated non-performing loans were fully provisioned and committed to sanction noncomplying banks. ### External policy and reserve management - Since early 2004, all government oil receipts have been deposited in the regional central bank (BEAC). - Authorities expressed concern about lack of remuneration on majority of deposits held at the BEAC and sought staff assistance. - Regional discussions underway; proposal under consideration by the BEAC would separate part of oil-related funds from monetary reserves in the form of a fund for future generations, remunerated based on returns of longer-term investments in appropriate assets. - Historical note: in the past, authorities placed the country’s oil savings in dollar-denominated accounts overseas at market rates of interest, with the exception of the Fund for Future Generations (0.5 percent of total oil revenue) which earns a nominal rate of interest of 1.7 percent at the BEAC. ### Tax policy and structural reforms - Staff welcomed the new tax law for 2005 but expressed concern about short-term revenue impact and administrative capacity to implement measures (VAT implementation phased over 6-12 months intended). - Authorities expected short-term reduction in tax receipts during transition, to be offset over time by a broader tax base; staff urged steps to ensure smooth implementation. - Staff urged removal of remaining export tariffs that weaken competitiveness or support inefficient production; authorities agreed to revisit export taxes on cocoa and coffee. - Authorities maintained export tax on logs (not on processed wood products) to incentivize higher value-added activity; mission recommended phasing out the tariff over time. - Authorities affirmed commitment to comply with regional directives on CET implementation. - Mission stressed improving investment climate to attract private sector: contract enforcement, reducing time to obtain new business licenses, minimizing clearance period for foreign exchange transactions. - Mission expressed concern about recent requirement for foreign investors to obtain local (silent) partners as a condition for investment approval; authorities stressed need to foster local entrepreneurship. ### Growth diversification, competitiveness, and policy trade-offs - Authorities concurred oil will dominate medium-term growth; initially projected non-oil growth at 8 percent per year versus staff’s 10 percent; authorities accepted staff arguments that higher non-oil growth was feasible. - Development of the non-oil economy is essential because oil has limited impact on domestic employment. - Previous diversification programs failed to meet objectives due to financial and institutional capacity constraints; authorities plan to ensure financing and capacity to monitor implementation. - Real exchange rate appreciation and high inflation have reduced competitiveness; staff emphasized fiscal prudence and flexible labor markets to mitigate Dutch Disease and expand non-oil tradable sector. - Challenge: balance between higher inflation and higher poverty-reducing public spending. *Source: IMF staff report (excerpts from the referenced chapter).* ### 42. The most important obstacles to increased transparency are weaknesses in ### _cr05150 - 42. The most important obstacles to increased transparency are weaknesses in ### Obstacles to transparency and governance - Weaknesses in administrative capacity and poorly defined responsibilities and oversight mechanisms are identified as the most important obstacles to increased transparency. - Oil sector transparency improvements are particularly important, but broader reforms are essential for successful and sustainable progress in fiscal management. - Enhancements in the transparency of project planning and implementation are key to a successful poverty reduction strategy. - Establishment of a strong, independent judiciary is important. - Authorities recognized lack of institutional capacity in critical areas of economic decision-making and project implementation; they agreed to implement the recommendations of the fiscal transparency ROSC and intend to participate in the EITI with assistance from the World Bank. ### Statistics and capacity building (Paragraphs 43–45) - Lack of technical and institutional capacity hinders the authorities’ ability to formulate and implement macroeconomic policy. - Staff urged authorities to identify priority areas for institutional capacity building within the context of a comprehensive technical assistance plan and to seek the support of development partners. - If financial support for such assistance is limited because of budgetary constraints on the part of key development partners (including from the Fund), the authorities should finance these activities directly. - For the immediate period ahead, priority should be placed on building capacity in the areas identified by the fiscal transparency ROSC. - Urgent need for better PEM given large overruns in capital expenditure and existence of significant extrabudgetary spending. - Authorities were urged to: - Routinely reconcile fiscal and monetary data and other key oil revenue data. - Identify and include all expenditures outside the published budget in the presentation of the executed budget. - Authorities acknowledged severe deficiencies in PEM and are considering acquiring a computerized expenditure control system with assistance from the French government to strengthen expenditure monitoring. - Authorities agreed that all government expenditure should be captured in the fiscal accounts and requested the Fund’s assistance in putting such capacity in place. - Staff envisages providing assistance in areas within the Fund’s core competency, including: - Assisting authorities in identifying appropriate macro-fiscal and tax administration experts. - Carrying out a multi-sector statistics assessment mission. - In collaboration with the World Bank, holding a regional seminar on sources of growth. - Technical support currently provided by the African Development Bank and the World Bank in the area of national accounts and the government of France in the fiscal area. (Footnote 18) ### Staff appraisal: macroeconomic outlook, policy recommendations, and institution-building (Paragraphs 46–58) - Hydrocarbon wealth and poverty reduction: - With substantial hydrocarbon wealth, Equatorial Guinea should be able to make rapid progress toward achieving the MDGs. However, there has yet to be measurable improvements in living conditions. - To improve social outcomes, authorities need to develop a comprehensive poverty reduction strategy, strengthen institutional capacity, improve transparency and accountability, and diversify the economy. - Staff welcomes authorities’ intention to develop a poverty reduction strategy and urges them to draw on lessons learned from the previous National Development Plan; as an initial step, authorities should develop an interim document. - Budget execution and PEM: - The 2004 budget outturn would have been considerably better (in terms of the non-oil balance) had it not been for substantial overruns in capital expenditure—symptomatic of lack of expenditure control and poor budget planning. - Staff urges authorities to keep within its budget targets and to seek assistance in improving PEM. - Staff broadly supports the 2005 budget and urges authorities to keep spending in line with the budget to return to an expenditure path consistent with the long-term strategy outlined in the report. - Diversification and macro stability: - Given that oil is a nonrenewable resource and has a limited impact on employment, staff urges actions to develop the non-oil economy. - Authorities should develop an environment conducive to private sector investment and reverse the decline in competitiveness by setting fiscal expenditure in line with absorptive capacity constraints, thereby keeping inflation in check. - More flexible labor markets would support these objectives. - Liquidity and financial sector risks: - The liquidity overhang poses potential risks to macroeconomic stability and financial sector soundness. - Regional monetary authorities lack instruments to mop up liquidity. - Staff urges authorities to contribute to reducing excess liquidity by maintaining a prudent fiscal policy. - Medium-term outlook: - Expected to be dominated by developments in the hydrocarbon sector. - National savings generated from this sector are expected to remain high. - Although beginning from a low base, the non-oil sector is expected to grow rapidly, driven by high levels of government capital spending on infrastructure and social sector projects. - Management of oil wealth and transparency: - Staff urges authorities to establish an appropriate policy to manage the country’s oil wealth. - Staff welcomes authorities’ decision to deposit all government oil receipts in the BEAC and encourages them to seek a lasting solution at the regional level for the remuneration of government deposits. - Authorities need to improve transparency and accountability, particularly in managing oil revenues and public finance. - Staff welcomes authorities’ intention to participate in the EITI and to implement the recommendations of the fiscal transparency ROSC. - Staff urges authorities to regularly reconcile and publish oil revenue data, the government’s foreign asset holdings, and GEPetrols’ audited accounts. - Trade policy: - Equatorial Guinea continues to pursue a relatively open trade policy. - As a member of the CEMAC, it has adopted the CET and has made significant progress toward eliminating tariff and nontariff protection on goods produced within the sub region. - Staff urges authorities to eliminate the remaining export taxes as soon as possible. - Statistics and data needs: - Lack of timely, accurate, and comprehensive economic and social data hampers policy formulation and monitoring; these problems are principally due to severe institutional constraints. - Staff urges authorities to develop a comprehensive framework for strengthening the country’s statistical capacity, with support from the World Bank, and to regularly provide the staff with the basic data it needs to carry out its surveillance responsibilities. - Institutional capacity building priorities: - Authorities should identify priority areas for institutional capacity building within the context of a comprehensive technical assistance plan and seek assistance from development partners, including the Fund. - Staff believes priority should be placed on building capacity in the areas identified in the fiscal transparency ROSC and the World Bank EITI mission, as well as on developing a poverty profile and carrying out a PER. *Source: _cr05150 - 42. The most important obstacles to increased transparency are weaknesses in (IMF staff report excerpt).* ### 59. The staff recommends that the next Article IV consultation with Equatorial ### 59. The staff recommends that the next Article IV consultation with Equatorial Guinea be held on the standard 12-month cycle. ### Summary recommendation - The staff recommends that the next Article IV consultation with Equatorial Guinea be held on the standard 12-month cycle. ### Key macroeconomic outcomes and projections (selected indicators, 2000–05; medium-term 2003–10) - Real GDP (annual percentage change) - 2000: 19.3 - 2001: 40.7 - 2002: 9.7 - 2003: 18.7 - 2004 (Prelim.): 34.2 - 2005 (Est./Proj.): 4.8 - Medium-term projections (2006–10): 4.6; 7.1; 14.5; -1.2; -0.4 - Non-oil GDP (annual percentage change) - 2000: 10.5 - 2001: 7.1 - 2002: 10.3 - 2003: 9.9 - 2004 (Prelim.): 12.9 - 2005 (Est./Proj.): 9.8 - Medium-term projections (2006–10): 9.8; 11.1; 11.0; 11.1; 11.2 - Nominal GDP (in billions of CFA francs) - 2000: 855.5 - 2001: 1,179.8 - 2002: 1,269.5 - 2003: 1,513.9 - 2004 (Prelim.): 2,368.2 - 2005 (Est./Proj.): 2,251.1 - Medium-term (selected): 2006: 2,301; 2007: 2,417; 2008: 2,796; 2009: 2,771; 2010: 2,782 - Oil production (thousands of barrels per day) - 2000: 119.7 - 2001: 210.1 - 2002: 250.6 - 2003: 282.2 - 2004: 383.3 - 2005 (Proj.): 397.3 - Medium-term projections (2006–10): 409; 442; 505; 481; 456 - Oil price (U.S. dollars per barrel) - 2000: 26.2 - 2001: 22.3 - 2002: 23.0 - 2003: 26.9 - 2004: 33.7 - 2005 (Proj.): 32.0 - Medium-term projections (2006–10): 31.0; 30.0; 29.8; 29.8; 29.8 - Consumer prices (annual average) - 2000: 4.8 - 2001: 8.8 - 2002: 7.6 - 2003: 7.3 - 2004: 5.9 - 2005 (Proj.): 7.0 - Medium-term projection (2006–10): 8.0 (constant across 2006–10) ### Fiscal performance and central government operations (selected) - Total revenue and grants (in billions of CFA francs / percent of GDP where reported) - 2000: 143.3 (16.7 percent of GDP) - 2001: 348.0 (29.5 percent) - 2002: 414.5 (32.6 percent) - 2003: 471.2 (31.1 percent) - 2004 (Original/Budget/Prelim. figures): 602.8 / 870.5 / 618.3 (35.5 / 36.8 / 27.5 percent) - 2005 (Proj./Budget/Proj.): 679.2 / 679.2 / 679.2 (30.2 / 30.2 / 30.2 percent) - Oil revenue (in billions of CFA francs / percent of GDP) - 2000: 114.2 (13.3 percent) - 2001: 303.8 (25.7 percent) - 2002: 362.5 (28.6 percent) - 2003: 409.7 (27.1 percent) - 2004: 539.7 (33.7 percent) - 2005 (Proj.): 799.2 (35.3 percent) — table entries include detailed oil revenue components (corporate income tax; royalties; profit sharing; etc.) with exact figures in the source. - Non-oil revenue (in billions of CFA francs / percent of GDP) - 2000: 29.1 (3.4 percent) - 2001: 44.2 (3.7 percent) - 2002: 52.0 (4.1 percent) - 2003: 61.5 (4.1 percent) - 2004 (Prelim.): 63.0 (2.7 percent) - 2005 (Proj.): 70.6 (3.3 percent) - Total expenditure and net lending (in billions of CFA francs / percent of GDP) - 2000: 136.8 (16.0 percent) - 2001: 214.5 (18.2 percent) - 2002: 189.1 (14.9 percent) - 2003: 368.2 (24.3 percent) - 2004 (Prelim./Budget/Proj.): 257.1 / 542.2 / 311.6 (22.9 / 22.9 / 13.8 percent) - 2005 (Proj.): 370.7 (16.5 percent) - Non-oil overall balance (excluding oil revenues, oil-related expenditure, interest on oil savings) — percent of non-oil GDP - 2000: -73.9 - 2001: -100.6 - 2002: -71.4 - 2003: -138.5 - 2004: -153.2 - 2005 (Proj.): -78.7 - Primary non-oil balance (percent of GDP) - 2000: -12.2 - 2001: -14.0 - 2002: -10.5 - 2003: -20.2 - 2004: -17.1 - 2005 (Proj.): -10.8 ### Public debt and debt service - Outstanding medium- and long-term public debt (percent of GDP) - 2000: 20.5 - 2001: 14.9 - 2002: 14.2 - 2003: 5.5 - 2004: 2.6 - 2005 (Proj.): 2.2 - Debt service-to-exports ratio - 2000: 0.8 - 2001: 0.7 - 2002: 0.7 - 2003: 0.3 - 2004: 0.2 - 2005 (Proj.): 0.3 - External debt service/government revenue (percent; before debt relief) - 2000: 3.9 - 2001: 2.6 - 2002: 2.4 - 2003: 1.0 - 2004: 0.2 - 2005 (Proj.): 0.4 ### External sector and balance of payments (selected, 2000–05 and 2003–10 projections) - Exports, f.o.b. (in millions of U.S. dollars) - 2000: 1,205 - 2001: 1,653 - 2002: 2,043 - 2003: 2,783 - 2004: 4,695 - 2005 (Est./Proj.): 4,620 - Medium-term projections (2006–10): 4,610; 4,755; 5,400; 5,098; 4,828 - Oil exports (subset of exports, in millions of U.S. dollars) - 2000: 1,128 - 2001: 1,587 - 2002: 1,977 - 2003: 2,703 - 2004: 4,618 - 2005: 4,541 - Medium-term (2006–10): 4,530; 4,673; 5,317; 5,013; 4,742 - Imports, c.i.f. (in millions of U.S. dollars) - 2000: -612 - 2001: -966 - 2002: -1,504 - 2003: -1,343 - 2004: -2,732 - 2005: -2,922 - Medium-term (2006–10): -3,002; -2,517; -2,321; -2,064; -2,004 - Current account balance (including official transfers; deficit -) (in millions of U.S. dollars / percent of GDP) - 2000: -297 (or -24.6 percent of GDP) - 2001: -779 (or -48.4 percent) - 2002: -1,191 (or -65.1 percent) - 2003: -710 (or -27.9 percent) - 2004: -616 (or -13.7 percent) - 2005 (Proj.): -725 (or -16.0 percent) - Medium-term projected current account (2006–10, in millions of U.S. dollars): -313; 637; 925; 1,133; 920 (table shows evolving signs and magnitudes) - Gross official reserves / official reserve equivalents - Official reserves (in millions of U.S. dollars): 2000: 22.3; 2001: 71.6; 2002: 85.5; 2003: 231.6; 2004: 944.7; 2005: 1,666.0 - Equivalent months of imports of goods and services (c.i.f.) - 2000: 0.2 - 2001: 0.5 - 2002: 0.5 - 2003: 1.4 - 2004: 3.0 - 2005: 5.1 - Equivalent months of non-oil sector imports of goods (c.i.f.) - 2000: 24.8 - 2001: 4.0 - 2002: 4.1 - 2003: 7.5 - 2004: 17.8 - 2005: 43.2 ### Monetary developments (Monetary survey highlights, 2000–05) - Money and quasi money (percent change, beginning-of-period broad money stock) - 2000: 47.9 - 2001: 63.9 - 2002: 98.3 - 2003: 154.4 - 2004: 223.6 - 2005 (Proj.): 305.1 - Net foreign assets (end-period, billions of CFA francs) - 2000: 21.7 - 2001: 65.8 - 2002: 108.9 - 2003: 157.8 - 2004: 525.9 - 2005 (Proj.): 884.5 ### Balance of payments mechanics (2000–05) - Trade balance (in millions of U.S. dollars) - 2000: 592.4 - 2001: 687.0 - 2002: 538.8 - 2003: 1,440.4 - 2004: 1,962.5 - 2005 (Prelim./Proj.): 1,697.9 - Services and income (net) - Services (net): 2000: -480.6; 2001: -635.2; 2002: -530.0; 2003: -594.8; 2004: -1,025.1; 2005: -1,027.2 - Income (net): 2000: -409.5; 2001: -829.3; 2002: -1,188.2; 2003: -1,529.3; 2004: -1,507.6; 2005: -1,344.4 - Foreign direct investment (net; in millions of U.S. dollars) - 2000: 480.2 - 2001: 835.7 - 2002: 1,782.9 - 2003: 1,265.7 - 2004: 1,117.1 - 2005: 1,507.6 - Medium-term (2006–10): 1,180.5; 613.3; 480.3; 230.3; 230.3 ### Institutional relations with the Fund (as of February 28, 2005) and exchange regime - Membership status - Joined: 12/22/69; Article VIII - Quota and SDRs - Quota: 32.60 (SDR Million; 100.00 percent of quota) - Net cumulative allocation (SDR Department): 5.81 (100.00 percent) - Holdings: 0.44 (7.58 percent) - Outstanding purchases and loans - ESAF Arrangements: 0.00 (0.00 percent quota) - Financial arrangements (historic) - ESAF: 2/03/93–2/02/96: Amount (SDR Million) 12.88; Drawn 4.60 - SAF: 12/07/88–12/06/91: Amount 12.88; Drawn 9.20 - Stand-by: 6/28/85–6/27/86: Amount 9.20; Drawn 5.40 - Projected obligations to the Fund (SDR million) - Charges/Interest: 2005: 0.10; 2006: 0.13; 2007: 0.13; 2008: 0.13; 2009: 0.13 - Principal: 0.00 for 2005–2009 - Exchange rate arrangement and central bank - The Bank of the Central African States (BEAC) is the regional central bank; Equatorial Guinea’s currency, the CFA franc, is pegged to the euro at the fixed exchange rate of CFAF 656.34 per euro. - Local currency equivalent: SDR 1 = CFAF 764.42 as of March 31, 2005. - Equatorial Guinea maintains an exchange system free of restrictions on payments and transfers for current international transactions. - Article IV consultations - Equatorial Guinea is on the standard 12-month Article IV consultation cycle. - The last Article IV consultation was concluded by the Executive Board on November 12, 2003 (IMF Country Report No. 03/385). ### Technical assistance and institutional capacity - FAD provided an 18-month technical assistance during 1992–94 to reorganize the tax department and personnel training. - FAD conducted a review of PEM and tax administration systems in 1997. - FAD conducted a diagnostic mission on key deficiencies and training needs in public finance in May 2003. - STA evaluated the collection of monetary statistics and proposed steps to adopt the methodology of the 2000 Manual of Monetary and Financial Statistics in December 2002. - Resident Representative: None. ### Relations with the World Bank and collaborative activities - World Bank lending: No new lending operations approved since mid-1992. Equatorial Guinea graduated to IBRD status after discovery of large oil reserves. - World Bank activities: - Statistical capacity-building grant: Bank-executed portion completed in February, 2005; second phase (counterpart-executed) initiated in January, 2005 and scheduled for completion in September, 2005. - Discussion of a light household survey of the Core Welfare Indicators Questionnaire (CWIQ) type to construct a poverty profile. - FIAS investment climate mission (April 2001) recommendations included: (i) prepare transparent and explicit rules for the management of oil revenues; (ii) reinforce capacity of the Ministry of Mines to manage projects; (iii) involve the private sector in local development activities. - Technical assistance in petroleum and energy sectors under discussion covering institutional roles, legal/regulatory review, capacity building, an Oil Revenue Diagnostic Model, national hydrocarbon and energy policy, and resource revenue management policy. - Assistance in design and implementation of reporting framework and institutional arrangements for the Extractive Industry Transparency Initiative (EITI) and related governance and anti-corruption policies. - IMF–World Bank collaboration: Close coordination of operational activities and policy advice; emphasis on proper management of oil revenues and strong public expenditure policies for sustained growth. *Source: IMF staff report tables and appendices for Equatorial Guinea (selected extracts, 2000–10 projections).* ### 1. Fiscal area ### _cr05150 - 1. Fiscal area ### 1. Fiscal area — IMF/World Bank activities and planned work - Expenditure monitoring and control IMF - Public expenditure review World Bank - Tax administration IMF - Fiscal ROSC IMF ### 2. Governance and private sector development - Anticorruption law implementation IMF - Extractive Industries Transparency Initiative (EITI) World Bank/IMF - FIAS study of the business climate World Bank/IFC ### 3. Other sectoral engagement - Petroleum Sector Management and Capacity Building World Bank - PRSP World Bank/IMF - External trade IMF - Education World Bank - Statistical capacity building World Bank ### Past portfolio (World Bank) - Previous portfolios comprised projects in primary education, agriculture and health sectors, which were all closed by 1999. - The last project funded by IDA was the Health Improvement Project (PROMESSA) that closed in August 1999. ### Future areas where World Bank analysis could inform IMF work - Starting in 2005 the Bank is in discussion with the authorities on the possibility of conducting a public expenditure review to: - analyze the public financial management system in the country; - assess expenditure effectiveness, particularly in the social sectors; - provide a basic analysis of budget preparation and budget execution in the country; - help assess the relationship between voted allocations and PRSP objectives. - Purpose: complement IMF work on macroeconomic monitoring and fiscal policy analysis. ### Selected social and demographic indicators (1998–2003, and comparative values) - Human development index: - 1998: 0.555 - 1999: 0.610 - 2000: 0.679 - 2001: 0.664 - 2002: 0.703 - 2003: ... - Least developed: 0.446 - Low income: 0.557 - Sub-Saharan Africa: 0.465 - Human development index rank: - 1998: 131 - 1999: 110 - 2000: 111 - 2001: 116 - 2002: 109 - 2003: ... - The number of countries ranked: - 1998: 174 - 1999: 162 - 2000: 173 - 2001: 175 - 2002: 177 - Population (thousands): - 1998: 435.0 - 1999: 446.0 - 2000: 458.0 - 2001: 470.0 - 2002: 482.0 - 2003: 494.0 - Least developed: 688,221.8 - Low income: 2,269,705.0 - Sub-Saharan Africa: 688,387.5 - Population growth (percent): - 1998: 2.8 - 1999: 2.5 - 2000: 2.7 - 2001: 2.6 - 2002: 2.5 - 2003: 2.5 - Least developed: 2.2 - Low income: 1.9 - Sub-Saharan Africa: 2.3 - Population ages 0-14 (percent of total): - 1998: 43.2 - 1999: 43.3 - 2000: 43.4 - 2001: 43.2 - 2002: 43.4 - 2003: 43.5 - Least developed: 42.3 - Low income: 37.2 - Sub-Saharan Africa: 43.8 - Population ages 15-64 (percent of total): - 1998: 52.4 - 1999: 52.4 - 2000: 52.4 - 2001: 52.3 - 2002: 52.7 - 2003: 52.6 - Least developed: 54.6 - Low income: 58.7 - Sub-Saharan Africa: 53.3 - Population ages 65 and above (percent of total): - 1998: 3.9 - 1999: 3.8 - 2000: 3.7 - 2001: 3.6 - 2002: 3.5 - 2003: 3.8 - Least developed: 3.1 - Low income: 4.1 - Sub-Saharan Africa: 3.0 - Population density (people per sq km): - 1998: 15.5 - 1999: 15.9 - 2000: 16.3 - 2001: 16.8 - 2002: 17.2 - 2003: 17.6 - Least developed: 34.1 - Low income: 74.5 - Sub-Saharan Africa: 29.2 - Urban population (percent of total): - 1998: 43.1 - 1999: 44.1 - 2000: 45.2 - 2001: 46.1 - 2002: 47.1 - 2003: 48.1 - Least developed: 26.2 - Low income: 30.0 - Sub-Saharan Africa: 35.5 Key health and income indicators: - Fertility rate, total (births per woman): 2000: 5.7; 2002: 5.5; Least developed: 4.8; Low income: 3.7; Sub-Saharan Africa: 5.1 - Immunization, DPT (percent of children ages 12-23 months): - 1998: 81.0 - 1999–2002: 33.0 - Least developed: 62.4 - Low income: 63.8 - Sub-Saharan Africa: 53.7 - Immunization, measles (percent of children ages 12-23 months): - 1998: 82.0 - 1999–2002: 51.0 - Least developed: 62.2 - Low income: 63.8 - Sub-Saharan Africa: 57.6 - Health expenditure per capita (current US$): - 1998: 44.0 - 1999: 42.0 - 2000: 56.0 - 2001: 76.0 - 2002: .. - Mortality rate, under-5 (per 1,000): - 2000: 156.0 - 2002: 152.0 - Least developed: 158.7 - Low income: 125.9 - Sub-Saharan Africa: 173.9 - Mortality rate, infant (per 1,000 live births): - 2000: 103.0 - 2002: 101.0 - Least developed: 100.2 - Low income: 81.6 - Sub-Saharan Africa: 103.1 - Life expectancy at birth, total (years): - 2000: 51.0 - 2002: 51.7 - Least developed: 50.7 - Low income: 58.1 - Sub-Saharan Africa: 45.8 - Aid per capita (current US$): - 1998: 50.7 - 1999: 45.2 - 2000: 46.5 - 2001: 26.7 - 2002: 42.0 - Least developed: 25.4 - Low income: 12.2 - Sub-Saharan Africa: 28.2 - GNI per capita, Atlas method (current US$): - 1998: 1,060 - 1999: 820 - 2000: 700 - 2001: 930 - Least developed: 290 - Low income: 400 - Sub-Saharan Africa: 450 - School enrollment, primary (percent of gross enrollment): - 1998: 131.3 - 1999: 124.8 - 2000: 129.9 - 2001: 126.2 - School enrollment, secondary (percent of gross enrollment): - 1998: 31.0 - 1999: 30.9 - 2000: 28.7 - 2001: 29.7 - School enrollment, tertiary (percent of gross enrollment): - 1999: 2.6 - Literacy rate, youth total (percent of people ages 15-24): - 1998: 65.6 - 2001: 80.2 - Literacy rate, adult total (percent of people ages 15 and above): - 1998: 53.8 - 2001: 64.9 - Technology and infrastructure: - Personal computers (per 1,000 people): - 1998: 2.3 - 1999: 2.3 - 2000: 4.4 - 2001: 5.3 - 2002: 6.9 - Least developed: 4.2 - Low income: 6.9 - Sub-Saharan Africa: 11.9 - Roads, total network (km): 1998: 2,880; 1999: 2,880 - Telephone average cost of local call (US$ per three minutes): 1998: 0.1; Least developed: 0.1; Low income: 0.1; Sub-Saharan Africa: 0.1 - Telephone mainlines (per 1,000 people): - 1998: 12.9 - 1999: 13.1 - 2000: 13.5 - 2001: 14.7 - 2002: 17.4 - Least developed: 7.1 - Low income: 26.4 - Sub-Saharan Africa: 15.0 - Improved water source (percent of population with access): - 2000: 44.0 ### Millennium Development Goals highlights (1990–2002) - Selected MDG indicators: - Net primary enrollment ratio (percent of relevant age group): - 2001: 84.6 - Percentage of cohort reaching grade 5: - 2001: 32.6 - Ratio of girls to boys in primary and secondary education: - 1990: 81.8 - 1995: 86.3 - 2001: 82.5 - Ratio of young literate females to males (ages 15-24): - 1990: 91.9 - 1995: 95.9 - 2001: 97.1 - 2002: 97.3 - Under 5 mortality rate (per 1,000): - 1990: 206 - 1995: 175 - 2001: 156 - 2002: 152 - Infant mortality rate (per 1,000 live births): - 1990: 122 - 1995: 113 - 2001: 103 - 2002: 101 - Immunization, measles (percent of children under 12 months): - 1990: 88 - 1995: 81 - 2001–2002: 51 - Total fertility rate (births per woman): - 1990: 5.9 - 1995: 5.9 - 2001: 5.7 - 2002: 5.5 - Life expectancy at birth (years): - 1990: 47.2 - 1995: 49.2 - 2001: 51 - 2002: 51.7 - General indicators: - Population (in thousands): 1990: 352; 1995: 401; 2001: 470; 2002: 482 - Gross national income (millions of U.S. dollars): 1990: 123.7; 1995: 157.2; 2001: 436.9 - GNI per capita (U.S. dollars): 1990: 350; 1995: 390; 2001: 930 ### Statistical issues — summary of deficiencies and needs - General assessment: - Economic and financial statistics remain very weak. - Deficiencies in quality, timing, and coverage of most macroeconomic data are related to extremely poor administrative and technical capacity of the government. - Technical assistance has led to some progress, but consolidation of gains remains elusive. - Urgent attention needed to make lasting improvements in quality and availability of statistics. - Real sector and prices: - Significant weaknesses compounded by poor centralization of information from the island and continental regions. - National accounts statistics are supplied at current and constant prices but often contain significant inconsistencies. - Sectoral deflators and GDP by category of expenditure must be estimated by missions. - Official consumer price index (CPI) compilation benefited from French technical assistance, but weights and composition of the basket are outdated. - Lags in CPI production largely arise because of delays in receiving data from the mainland, though lags are shortening. - Detailed CPI breakdowns are not available in a timely fashion. - Real sector statistics reported to STA (IFS) are limited to GDP (without breakdown by sector or expenditure category), and exports and imports. - The January 2005 issue of IFS includes data for GDP through 2003 and exports and imports through 2000. Export and import data are available to AFR through 2000. - Government finance: - French technicians’ assistance improved fiscal accounting (e.g., availability of monthly data), but data continue to be provided on a cash basis only. - Needed improvements: - (i) eliminate extra budgetary accounts, such as oil-related revenue held abroad and operations of the state oil company, GEPETROL; - (ii) incorporate all revenue and expenditure within a single budget; - (iii) record foreign-financed capital outlays. - Equatorial Guinea does not report fiscal data to STA; authorities made available to AFR budget execution data through August-2004. - Monetary accounts: - Coverage of monetary statistics is adequate, but delays in production at the BEAC’s National Directorate in Malabo still occur occasionally. - The February March 2005 issue of IFS includes data for the central bank and other depository corporations through November 2004. - Monetary statistics reported directly to STA by BEAC headquarters for publication in IFS. - A monetary and financial statistics mission visited Malabo in December 2002 to review structure and compilation procedures, provide technical assistance, and brief on the MFSM methodology. - An action plan was designed to implement mission recommendations. - A “Progress Report on Technical Assistance” questionnaire sent in November 2003 was returned to STA in December 2004 after reminders. - Important achievement: completion in 2003 of proper sectorization of monetary data along MFSM methodology and their monthly updating by BEAC-DN in cooperation with commercial banks. - Measurement of currency in circulation is impaired by cross-border movements of banknotes among CEMAC countries: - 47 percent of banknotes issued in Equatorial Guinea remains in the country; - 39 percent circulates in Cameroon; - 7 percent in Gabon. - About 80 percent of the currency circulating in Equatorial Guinea is issued nationally; - almost 12 percent is issued by Gabon; - about 7 percent by Cameroon. - External debt: - Data on outstanding stock and debt-service projections are hampered by serious inconsistencies. - Debt service paid, reported by the Debt-Service Unit, often differs significantly from that reported by the budget and the Paris Club. - Details regarding scheduled debt-service obligations are not incorporated into the budget systematically and timely. - Debt-service projections beyond the following year are provided only in a highly aggregated form. - Some debt service takes place outside the Debt-Service Unit. - Authorities have started a major inventory of their debt and are beginning to address capacity constraints in the Debt-Service Unit through training and new staffing. - Balance of payments: - Customs data have improved since implementation of UDEAC reform and deployment of customs brigades, but analysis hampered by lack of computerization. - BEAC produces balance of payments data for Equatorial Guinea, but delays are long and data suffer significant inconsistencies with other sources. - Progress made in compiling current and financial account items, but lack of availability of source data is a key concern. - Equatorial Guinea’s balance of payments data are published in the International Financial Statistics Yearbook through 1996 only. ### Table of Common Indicators Required for Surveillance (as of March 7, 2005) — data status highlights - Exchange Rates: - Date of latest observation: Jan. 2005 - Date received: Feb. 2005 - Frequency of Data: M - Frequency of Reporting: M - Frequency of publication: M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: - Date of latest observation: Nov. 2004 - Date received: Jan. 2005 - Frequency: M / Reporting: M / Publication: M - Reserve/Base Money: - Date of latest observation: Nov. 2004 - Date received: Jan. 2005 - Frequency: M / Reporting: M / Publication: M - Broad Money: - Date of latest observation: Nov. 2004 - Date received: Jan. 2005 - Frequency: M / Reporting: M / Publication: M - Central Bank Balance Sheet: - Date of latest observation: Nov. 2004 - Date received: Jan. 2005 - Frequency: M / Reporting: M / Publication: M - Consolidated Balance Sheet of the Banking System: - Date of latest observation: Nov. 2004 - Date received: Jan. 2005 - Frequency: M / Reporting: M / Publication: M - Interest Rates: - Date of latest observation: Nov. 2004 - Date received: Feb. 2005 - Frequency: M / Reporting: M / Publication: I - Consumer Price Index: - Date of latest observation: Sept. 2004 - Date received: Jan. 2005 - Frequency: M / Reporting: I / Publication: I - Revenue, Expenditure, Balance and Composition of Financing — Central Government: - Date of latest observation: Nov. 2004 - Date received: Jan. 2005 - Frequency: M / Reporting: I / Publication: I - External Current Account Balance: - Date of latest observation: Dec. 2004 - Date received: Jan. 2005 - Frequency: A / Reporting: I / Publication: I - Exports and Imports of Goods and Services: - Date of latest observation: Dec. 2004 - Date received: Jan. 2005 - Frequency: A / Reporting: I / Publication: I - GDP/GNP: - Date of latest observation: Dec. 2004 - Date received: Jan. 2005 - Frequency: A / Reporting: I / Publication: I - Gross External Debt: - Date of latest observation: Dec. 2003 - Date received: Nov. 2004 - Frequency: A / Reporting: I / Publication: A (Note: Frequency codes — Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).) ### Hydrocarbon sector — Summary of upstream and downstream production - Upstream oil and gas production - Zafiro oil field: - Operator: Exxon-Mobil - Location: northwest of Bioko Island and south of Nigeria - Discovered: 1995 - Processing capability: 10,000 barrels a day - Storage capacity: about two million barrels - Production status: production level has already peaked and is projected to decline gradually and be depleted by 2025. - Ceiba: - Location: offshore of Rio Muni - Operator: Amerada Hess - Discovered: 1999 - Estimated proven reserves: 500 million barrels - Production expectation: expected to reach 100,000 bpd in 2007. - Alba (natural gas field): - Location: offshore of Bioko Island - Operator: Marathon Oil - Reserves: 6.9 trillion cubic feet (1.2 billion boe) - Gas production: about 195 million cubic feet of gas is produced each year, about one-fifth of which is reinvested into the reservoir, with the remainder being fed into the production of downstream products. - Byproduct: condensates are derived as a byproduct. - Downstream operations and byproducts - Methanol: - Feedstock: natural gas - Plant: joint venture with Marathon Oil, Samedan, and the government of Equatorial Guinea - Became operational: 2001 - Production: 25,600 boe/day in 2004 (3-4 percent of the world market) - Capacity expectation: expected to reach 27,000 boe/day in 2007. - Liquid petroleum gas (LPG) — principally butane and propane: - Facility built: second half of the 1990s - Recent production capacity: expanded to 20,000 boe/day - Capacity expectation: expected to be double in 2008. - Liquefied natural gas (LNG): - Initial facility capacity being put in place: 80,000 boe/day - Implementation: through a joint venture between Marathon Oil and the national oil company (GEPetrol) - Plans: under discussion to build a second LNG facility to pipe natural gas currently being flared throughout the region to Bioko Island for processing into LNG and then exported. - Condensates: - Description: heavy oil sludge byproduct of natural gas production - Collection: both offshore where the natural gas is lifted, and onshore where it is piped for use in downstream operations. *Statement by Damian Ondo Mañe, Executive Director for the Republic of Equatorial Guinea, April 25, 2005* ### Introduction ### Introduction ### Acknowledgements and overarching objectives - Authorities welcome the staff papers for providing a thorough analysis of Equatorial Guinea’s economic and financial situation and the challenges facing the country. - Authorities appreciate the Fund’s and management’s commitment to assist in developing policies to: - diversify the economy, - manage national resources, - build capacity to reduce poverty and meet the MDGs. - Authorities reaffirmed commitment to implement policies toward these objectives during the Deputy Managing Director’s visit to Malabo in late January. - Authorities requested a seminar, in collaboration with the Fund, on alternative sources of growth in the CEMAC region. ### Transparency and accountability - Equatorial Guinea is voluntarily participating in the Extractive Industries’ Transparency Initiative (EITI) with assistance from the World Bank. - Authorities requested and received a fiscal report on Observance of Standards and Codes (ROSC); all necessary information was made available to Bank and Fund staff during visits in November 2004 and January 2005. - Actions taken and planned: - Hosted a regional seminar for CEMAC parliamentarians on management and accountability of oil resources (January 2005). - Committed to implement recommendations from the World Bank, EITI, and Fiscal transparency ROSC missions. - Established committees including government, oil companies, and civil society to implement plans of action. - Established an interministerial committee in 2004 to monitor macroeconomic developments and coordinate policies. - Requested World Bank technical assistance to review operational performance of GEPetrol and the Ministry of Mines, Hydrocarbon and Energy. - Early 2004: all government accounts with Riggs Bank were closed and balances transferred to the Banque des Etats de l’Afrique Centrale (BEAC); Riggs Bank accounts had been transitory to speed up payments from oil foreign companies to the Treasury. ### Economic and Financial Performance in 2004 — key statistics and developments - Oil and gas sector share: - about 90 percent of GDP, - 98 percent of exports, - 86 percent of government revenues. - Output and growth: - Real GDP grew by 34 percent (due mainly to expansion in hydrocarbon production). - Non-oil GDP increased by 13 percent (boosted by construction, infrastructure, and services). - Inflation and exchange rate: - Inflation decreased to 4,2 percent from 7,3 percent in 2003. - Inflation remains above CEMAC convergence criterion of 3 percent. - Real effective exchange rate appreciated by about 5 percent compared to 15 percent in 2003. - External position and reserves: - Current account deficit was reduced significantly compared to 2003. - Official international reserves increased fourfold to cover 18 months of imports of the non-oil sector. - Fiscal sector: - Total revenue estimated at 37 percent of GDP increased by 44 percent, due mainly to higher world oil prices and surge in production. - Non-oil revenue rose by 12 percent owing to economic growth and improvements in tax administration. - Capital expenditure grew more than budgeted because of higher capital spending in infrastructure; current outlays remained within budget. - Fiscal surplus stood at 14 percent of GDP. - Non-oil fiscal deficit was 17 percent of GDP. - January 2005: a new tax code replaced domestic turnover tax with a value added tax (VAT) and the tax authority was reorganized. - The law regarding the 2004 Budget execution (la ley de la Ejecucion del Presupuesto General del Estado para el Ejercicio Economico 2004) has been presented to the National Assembly as stipulated in the Constitution. - Monetary and banking developments: - Broad money grew significantly due to large inflows of oil revenue and transfers from international oil companies. - Excess liquidity has not translated into increased credit to the private sector due to lack of bankable projects. - Banking system remains sound and complies with banking supervision norms. - A new bank with license approved in 2004 is expected to operate shortly. - Regional central bank arrangements: - As a CEMAC and BEAC member, Equatorial Guinea has deposited oil revenues in the BEAC. - Authorities have started discussions with BEAC to find best scheme and modalities for appropriate remuneration of funds deposited with the Regional Central Bank and are seeking advice from the Fund. ### CEMAC convergence and trade policy - Equatorial Guinea observed three of the four CEMAC convergence criteria; only the inflation criterion was missed due to large infrastructure investments (schools, hospitals, buildings, roads). - The CEMAC common external tariff (CET) has been adopted with significant progress in eliminating import tariffs on goods produced within the CEMAC zone. - Authorities plan to phase out, over time, remaining export tariffs on cocoa, coffee and logs to provide incentives for higher value-added activities and to enhance profitability and competitiveness of traditional sectors. ### Macroeconomic policies and medium-term objectives - Growth projections and fiscal outlook: - Economy expected to grow by 5 percent a year between 2005 and 2010 in the context of increased hydrocarbon production. - Non-oil sector expected to grow rapidly over the medium term given ongoing investment, including infrastructure. - Fiscal surpluses should average 15 percent of GDP. - External current account will be in surplus due to the decline in oil sector imports of capital and goods services. - Policy priorities and commitments: - Move towards further fiscal sustainability, reduce price pressures, develop the non-oil sector, and strengthen transparency and accountability in management of natural resources and public finance. - Keep spending within budget to reduce inflationary pressures. - Adopt the primary non–oil balance as the key policy target. - Implement ROSC recommendations and the new tax law to strengthen expenditure tracking and control. - Implement a three-stage fiscal policy approach recommended by staff, including improving public expenditure management with technical assistance and developing the National Poverty Reduction Strategy. - Monetary policy and financial sector: - Containment of inflationary pressures remains an important objective of the regional central bank. - Need for BEAC to strengthen instruments to mop up excess liquidity to sustain macroeconomic stability and financial sector soundness. - Authorities will continue to contribute to reduced excess liquidity by maintaining a prudent fiscal policy. - Continue to enhance banking supervision and ensure banks comply with prudential regulations. - Commit to implement anti-money-laundering/combating the financing of terrorism (AML/CFT) measures in collaboration with Groupe Anti-blanchiment en Afrique Centrale; a coordinating unit will be established by year-end. - High priority on establishing an adequate framework for management of growing budget surpluses consistent with BEAC membership obligations. ### Poverty reduction - Authorities recognize need to scale up efforts to improve social indicators and meet the MDGs. - Plan to develop a full poverty reduction strategy (PRSP) drawing on lessons from the National Development Plan, with assistance requested from the World Bank. - PRSP will provide a framework for adjusting level and composition of public expenditure to meet social needs while balancing macroeconomic stability and intergenerational equity. - The second national conference scheduled for end of 2005 will discuss the interim PRSP document. - Interim actions: - Initiated, with U.S. Government assistance, a project to assess social needs and develop a mechanism to improve and speed execution of social outlays. - Social projects were identified at the National Conference on the Assessment of the National Development Strategy (January 2004). ### Capacity building and statistical issues - Severe institutional capacity constraints have hindered policy conduct and development program implementation. - Priority areas for capacity building: - Macro statistics, - Public expenditure management, - Macro fiscal policy advice (front under implementation of the fiscal transparency ROSC and World Bank EITI recommendations). - Authorities have submitted a formal request to Fund management for capacity building assistance and seek to develop schemes and financial modalities for this assistance. - In collaboration with AFRSTAT and other development partners, authorities will undertake actions to implement the national strategy for development of statistics (NSDS) and initiate reforms of the statistical system. *Source: _cr05150 - Introduction* ### Conclusion ### Conclusion ### Authorities' commitments and reform priorities - Authorities determined to closely work with the Fund and other development partners to implement reforms aimed at: - enhancing transparency and accountability in oil resources management; - diversifying the economy; - enhancing institutional capacities. - Authorities reiterated their commitment to the EITI Initiative at the last meeting in London, and intend to participate as a pilot in a G-8 Transparency and Accountability Compact. - Authorities are committed to improving economic performance through development of the non-oil sector and structural reforms, including the development of a strong private sector, viewed as critical for sustainable medium- to long-term growth. - Authorities recognize key challenges: - capacity building constraints; - the need to enhance social indicators. - Authorities hope development partners will provide needed technical assistance to overcome capacity constraints and use fast-growing oil revenue to meet development objectives for present and future generations. ### Macroeconomic developments (2004) - Hydrocarbons remain the engine of growth; oil production rose from 6,000 boe/day at start of production to 282,000 boe/day in 2003, supporting an average annual growth of 31 percent. - Real GDP grew by 34.2 percent in 2004, reflecting a sharp increase in oil production. - Non-oil GDP increased by 12.9 percent in 2004, fueled by growth in infrastructure and construction, driven by increasing government capital expenditure. - Primary sector remained sluggish due to labor migration and enforcement of sustainable logging program. - Inflation decelerated to 5.9 percent in 2004. - Real effective exchange rate appreciated by 4.7 percent in 2004, with an accumulated real appreciation of 32 percent since 2000, undermining external competitiveness. ### Monetary and fiscal developments - Broad money increased by 45 percent owing to large foreign exchange inflows of government oil revenue and transfers from oil companies that contributed to the buildup of net foreign assets. - Government spending failed to sterilize inflows; excess liquidity in the banking system rose while limited lending opportunities kept credit to the economy in check. - Fiscal outcome in 2004: fiscal surplus increased compared to 2003 due to stronger-than-expected revenue from higher oil prices and increased hydrocarbon production, partly offset by a substantial increase in capital expenditure. - Persistent overruns in capital expenditures underscore weak budgetary discipline and a need for better public expenditure management. ### External sector - Overall balance of payments surplus more than doubled compared to 2003, driven by oil exports and large inflows of foreign direct investment (FDI) in the hydrocarbon sector. - Official international reserves increased to about 18 months of imports of goods and services not financed by FDI. - Terms of trade improved significantly owing to higher oil prices. ### Transparency, governance, and poverty reduction - Progress made on transparency and accountability in oil-related revenues and public finance: - World Bank assistance on participation in EITI. - Fiscal transparency Report on the Observance of Standards and Codes (ROSC) completed in early 2005. - Article IV mission reconciled fiscal surplus with movements in government account at BEAC and government oil production share, exports and revenue. - Authorities committed to implement ROSC recommendations and to participate in EITI. - New tax code adopted consolidating dispersed legislation, enhancing transparency. - Oil and gas wealth has not yet led to measurable improvement in living conditions for the majority. - Authorities assessed National Development Plan for 1997-2001 and recognized poverty reduction objectives were not achieved; intend to prepare an Interim poverty reduction strategy paper (PRSP) as a roadmap for donor technical support. ### Executive Board assessment and policy recommendations - Directors welcomed strong 2004 performance: rapid growth, decelerating inflation, better-than-expected revenue, doubled balance of payments surplus, and increased official reserves. - Key concerns and recommendations: - Prudence and transparency in use of oil wealth and implementation of sound macroeconomic and structural policies to ensure broad-based growth and poverty reduction by strengthening private sector climate and diversifying the economy. - Strengthen public expenditure management and control; review public expenditure with World Bank assistance. - Remain within 2005 budget parameters; set a specific expenditure target in the supplemental budget law and require parliamentary approval for increases in aggregate spending during the year. - Phase out export taxes at an early date to support economic diversification. - Account for liquidity overhang risks to price stability and financial sector soundness when setting fiscal policy, given monetary instrument limitations and absorptive capacity constraints. - Prepare an interim PRSP to guide use of oil resources into priority sectors, strengthen capacity building, and tackle widespread poverty with a focus on health and education, while safeguarding macroeconomic stability with technical assistance. - Support regional initiatives: trade, customs liberalization, banking supervision, and participate in setting up the regional institution for anti-money laundering. - Implement ROSC recommendations, participate in EITI and the G-8 compact as soon as possible, and seek development partners’ help to build institutional capacity. - Increase the quality of macroeconomic data; staff to help build capacity and authorities to share information more frequently. ### Selected economic and financial indicators (key figures from table) - Real GDP (annual percentage change): 2000: 19.3; 2001: 40.7; 2002: 9.7; 2003: 18.7; 2004: 34.2; 2005 (Proj.): 4.8. - Non-oil GDP (annual percentage change): 2000: 10.5; 2001: 7.1; 2002: 10.3; 2003: 9.9; 2004: 12.9; 2005 (Proj.): 9.8. - Oil production (thousands of barrels per day) 1/: 2000: 119.7; 2001: 210.1; 2002: 250.6; 2003: 282.2; 2004: 383.3; 2005 (Proj.): 397.3. - Consumer prices (annual average): 2000: 4.8; 2001: 8.8; 2002: 7.6; 2003: 7.3; 2004: 5.9; 2005 (Proj.): 7.0. - Exports, f.o.b. (annual percentage change): 2000: 79.9; 2001: 37.2; 2002: 23.6; 2003: 36.2; 2004: 68.7; 2005 (Proj.): -1.6. - Imports, c.i.f. (annual percentage change): 2000: 19.6; 2001: 57.7; 2002: 55.8; 2003: -10.7; 2004: 103.4; 2005 (Proj.): 7.0. - Exchange rate (CFA Francs/U.S. dollar): 2000: 709; 2001: 732; 2002: 694; 2003: 580; 2004: 528. - Real effective exchange rate (depreciation -) 2/ (period average changes): 2000: -0.9; 2001: 6.6; 2002: 7.4; 2003: 9.9; 2004: 4.7. - Government revenue (annual percentage change): 2000: 65.6; 2001: 142.9; 2002: 19.1; 2003: 13.7; 2004: 84.6; 2005 (Proj.): -22.0. - Government expenditure and net lending (annual percentage change): 2000: 63.7; 2001: 56.8; 2002: -11.8; 2003: 94.7; 2004: 47.3; 2005 (Proj.): -31.6. - Current account balance (including official transfers; deficit -) (percent of GDP): 2000: -24.6; 2001: -48.4; 2002: -65.1; 2003: -27.2; 2004: -13.7; 2005 (Proj.): -16.0. - Outstanding medium- and long-term public debt (percent of GDP): 2000: 20.5; 2001: 14.9; 2002: 14.2; 2003: 5.5; 2004: 2.6; 2005 (Proj.): 2.2. - Debt service-to-export ratio (percent): 2000: 0.8; 2001: 0.7; 2002: 0.7; 2003: 0.3; 2004: 0.2; 2005 (Proj.): 0.3. - Gross investment (percent of GDP): 2000: 57.8; 2001: 70.3; 2002: 73.0; 2003: 50.8; 2004: 44.6; 2005 (Proj.): 54.7. - Gross national savings (percent of GDP): 2000: 27.0; 2001: 15.6; 2002: 3.5; 2003: 21.0; 2004: 29.6; 2005 (Proj.): 38.4. - Government revenue (percent of GDP) 3/: 2000: 16.7; 2001: 29.5; 2002: 32.6; 2003: 31.1; 2004: 36.7; 2005 (Proj.): 30.1. - Of which: oil revenue (percent of GDP): 2000: 13.3; 2001: 25.7; 2002: 28.6; 2003: 27.1; 2004: 33.7; 2005 (Proj.): 27.1. - Government expenditure and net lending (percent of GDP): 2000: 16.0; 2001: 18.2; 2002: 14.9; 2003: 24.3; 2004: 22.9; 2005 (Proj.): 16.4. - Overall government balance (including oil revenue; deficit -) (percent of GDP): 2000: -0.5; 2001: 10.4; 2002: 17.6; 2003: 6.7; 2004: 12.8; 2005 (Proj.): 13.0. - Exports, f.o.b. (in millions of U.S. dollars): 2000: 1,205; 2001: 1,653; 2002: 2,043; 2003: 2,783; 2004: 4,695; 2005 (Proj.): 4,620. - Imports, c.i.f. (in millions of U.S. dollars): 2000: -612; 2001: -966; 2002: -1,504; 2003: -1,343; 2004: -2,732; 2005 (Proj.): -2,922. - Current account balance (deficit -) 4/ (in millions of U.S. dollars): 2000: -297; 2001: -779; 2002: -1,191; 2003: -710; 2004: -616; 2005 (Proj.): -725. - Overall balance of payments (deficit -) (in millions of U.S. dollars): 2000: 182; 2001: 296; 2002: 297; 2003: 324; 2004: 713; 2005 (Proj.): 741. - Gross international reserves (excl. oil reserve fund) (in millions of U.S. dollars) 5/: 2000: 22; 2001: 72; 2002: 86; 2003: 232; 2004: 945; 2005 (Proj.): 1,666. - Equivalent months of imports, c.i.f.: 2000: 0.2; 2001: 0.5; 2002: 0.5; 2003: 1.4; 2004: 3.0; 2005 (Proj.): 5.1. - Equivalent months of non-oil sector imports, c.i.f.: 2000: 2; 2001: 4.8; 2002: 4.1; 2003: 7.5; 2004: 17.8; 2005 (Proj.): 43.2. *IMF Public Information Notice (PIN) No. 05/61, May 6, 2005.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05150.pdf_