## _cr06233 ## Source details **Canonical URL:** [_cr06233](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06233.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06233.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06233.pdf.json) --- ### Executive summary — macroeconomic developments and short-term prospects - Real GDP growth in 2005 was 6.5 percent; non-oil sector real growth was 10.7 percent. - A slowdown in hydrocarbon production caused overall real GDP growth to decelerate sharply in 2005. - Inflation declined to 4.8 percent at year end 2005 (still above the CEMAC regional convergence criterion of 3 percent). - The current account deficit narrowed to 13.3 percent of GDP in 2005 from 24.2 percent of GDP in 2004. - International reserves rose to US$2.9 billion at end-2005 (equivalent to about 15 months of projected non-oil sector imports). - The real effective exchange rate of the CFA franc (calculated for Equatorial Guinea) continued to appreciate in 2005. ### Fiscal developments and public finances - Overall fiscal surplus in 2005 was 23 percent of GDP (about 320 percent of non-oil GDP), compared with the budgeted 8.4 percent of GDP. - The non-oil fiscal deficit was about 200 percent of non-oil GDP in 2005, similar to recent years but substantially larger than the 90 percent budgeted. - Revenues from the oil sector accounted for 95 percent of total revenues in 2005; the government’s take from total receipts from hydrocarbon production rose from about 30 percent in 2004 to 40 percent in 2005. - Total expenditure declined by 5 percentage points of GDP to 19.6 percent in 2005. - Current expenditure was about 40 percent higher than budgeted, and capital expenditure was more than double the budget provisions. - Larger-than-budgeted revenues financed increased spending—mainly on physical infrastructure—and increased government saving (substantial rise in government deposits with BEAC and commercial banks). - Selected fiscal aggregates (percent of GDP): - Total revenue and grants: 2005: 42.9; 2006 (Proj.): 47.0. - Oil revenue: 2005: 40.5; 2006 (Proj.): 44.5. - Total expenditure and net lending: 2005: 19.6; 2006 (Proj.): 19.4. - Overall balance after grants (cash basis): 2005: 23.3; 2006 (Proj.): 27.7. - Primary non-oil balance: 2005: -14.5; 2006 (Proj.): -14.0. ### Monetary, financial sector, and external sector - Monetary developments in 2005 were dominated by budgetary operations; increase in government savings led to further substantial increases in government deposits with BEAC and commercial banks and high growth of broad money. - Bank credit to the private sector expanded, driven by buoyancy in the non-oil sector—especially services and construction. - Financial soundness indicators suggest the banking sector remained relatively sound; banks generally complied with regional prudential regulations though two prudential requirements were not observed in October 2005 by some banks and were viewed as temporary. - Deposit and lending rates declined slightly; lending rates remained relatively high. - Banks’ loan portfolios were highly concentrated in the construction sector with only a small number of borrowers. - Selected monetary and banking indicators: - Broad money (M2) (In billions of CFA francs): 2005 (Dec. est.): 215.9; 2006 (Dec. proj.): 500.4. - Gross official reserves (millions of U.S. dollars): 2005: 2,935.8; 2006 (Proj.): 4,240.8. - Reserves in months of non-oil sector imports: 2005: 15.1; 2006 (Proj.): 21.2. - Nonperforming loans to gross loans (percent): 2005: 14.9. - Regulatory capital to risk-weighted assets: 2005: 11.6. ### External competitiveness and oil-sector dynamics - Equatorial Guinea experienced the largest REER appreciation in the CEMAC region in the recent period, linked to its status as the largest oil exporter and recipient of foreign direct investment relative to GDP among CEMAC members. - The U.S. is the largest trading partner for Equatorial Guinea, unlike most other CEMAC countries where the EU is predominant. - Equatorial Guinea’s oil exports rose most rapidly among oil-producing CEMAC countries during 1999–2005, and it received the largest FDI as a share of GDP in 1999–2005 (with the exception of 2002 for Chad). ### Medium-term outlook (2006–10) and scenarios - 2006 outlook: - Real GDP projected to contract by 0.4 percent in 2006 reflecting a flattening out of oil production. - Non-oil GDP growth projected at about 10 percent in 2006. - Inflation projected to decline to less than 4 percent at year end 2006. - Current account deficit projected to narrow to 6 percent of GDP in 2006; gross international reserves projected to rise to around US$4 billion (21 months of projected non-oil imports). - Medium-term (2007–10) baseline projections (based on current policies and favorable external environment): - Overall growth would oscillate with hydrocarbon production but should average about 5 percent annually during 2007–10. - Inflation projected to reach the CEMAC target of 3 percent by 2008. - International reserves projected to about US$11 billion by end-2010 (61 months of non-oil sector imports). - Key macro time series (selected): - Real GDP growth (annual % change): 2002: 20.1; 2003: 13.6; 2004: 30.0; 2005: 6.5; 2006 (Est./Proj.): -0.4; 2007–2010 (Proj.): 9.2; 17.4; -2.3; -3.7. - Non-oil GDP growth (annual % change): 2005: 10.7; 2006: 10.2; 2007–2010 (Proj.): 10.7; 7.9; 12.9; 8.0; 7.5. - Oil production (thousands of barrels per day): 2005: 403.6; 2006: 397.8; 2007–2010 (Proj.): 430.5; 507.6; 482.4; 453.3. - Oil price (US$ per barrel): 2005: 48.4; 2006: 55.0; 2007–2010 (Proj.): 55.0; 55.8; 54.3; 53.8; 53.5. ### External debt sustainability and risks - Assessment: Equatorial Guinea’s external debt is sustainable (middle income country template). - Historical and projected debt figures: - Total government external debt declined from 36 percent of GDP in 2000 to about 6 percent at end-2004; projected to reach less than 2½ percent of GDP by 2010. - Net present value of medium- and long-term public debt projected at about 1 percent of GDP (and of exports) by 2010. - Debt service-to-exports projected at 0.1 percent by 2010. - Debt service-to-government revenue projected at 0.2 percent by 2010. - Immediate and medium-term risks: - World oil prices and level of hydrocarbon production are primary risks; a sharp decline in prices would significantly reduce oil revenues and reserves accumulation. - Upside risk: recent hydrocarbon discoveries could extend production horizons and further boost growth and hydrocarbon revenues. ### Development, poverty, and institutional capacity - Nominal GDP in 2005 was US$6.8 billion and officially estimated population was 1.14 million. - Rapid rise in measured per capita income has reached middle-income country levels, but the standard of living of the population at large has not improved commensurately. - Tentative estimates suggest a significant proportion of the population is living below the poverty line. - Social services remain underdeveloped: life expectancy about the average for sub-Saharan Africa, little change in school enrolment and literacy, and access to safe water still among the lowest in the world. - Hydrocarbon exploitation is expected to generate an estimated US$3.8 billion (44 percent of GDP) per annum in government revenue over the next five years. - Authorities established a Social Needs Fund (Presidential decree N° 120/05 on July 4, 2005) as a temporary mechanism until the NPRS is finalized. ### Poverty Reduction Strategy (NPRS) and priority social actions - Authorities plan to prepare a National Poverty Reduction Strategy in consultation with civil society, NGOs and donors. - Key elements identified and endorsed: - Institutional capacity building for design, implementation and monitoring of growth-enhancing and poverty-reducing policies. - Public investment in physical and social infrastructure per PIP and Social Fund priorities. - Removal of impediments to financial intermediation (legal uncertainties, lack of borrower information, enforcement issues). - Combination of temporary targeted support (e.g., input subsidies for cocoa and coffee) with creation of an appropriate business environment (clear legal/regulatory framework, predictable tax regime, transparency). - Interim mechanism: fast-track priority social spending with assistance from Business for Social Responsibility and U.S. government support. - World Bank assistance: establish poverty profile, assess sectoral policies to encourage private sector-led diversification, and restructure the energy sector. ### Resource management, EITI, and transparency - Authorities concerned with efficient use of oil revenues and remuneration on foreign reserves; most foreign assets held with the BEAC remunerated retroactively to 2004 at 1.6 percent. - Government considers oil funds (e.g., Fund for Future Generation, Special Reserve Fund); mission noted oil funds can be useful but cautioned on macroeconomic implications of front-loading public expenditures. - Mission recommended rapid progress on EITI: adopt the EITI decree and implementing regulations; hold a second stakeholders meeting to discuss government disclosure policy; appoint an aggregator; finalize agreed action plans. - Mission reconciled 2005 data regarding government oil production shares, oil export receipts, and revenues accruing to the government. ### Capacity constraints and technical assistance priorities - Severe institutional weaknesses and capacity constraints have hindered channeling oil wealth to priority social areas. - IMF assistance areas: - Reform of the public finance management system. - Development of an analytical and operational fiscal framework for the medium term. - Improvement of economic statistics—including national accounts, prices, and government finance. - Delivery modalities: - Two resident advisors for PFM and macro-fiscal policy (reimbursement agreement finalized and signed during the Managing Director’s visit on March 13, 2006). - Peripatetic advisors for statistics (STA contracted an advisor to visit four times during the next 18 months). - World Bank to complement Fund technical assistance in national accounts (with AFRISTAT), social statistics (poverty assessment), a public expenditure review, and support in developing the NPRS. ### Key policy recommendations and priority actions (summary) - Prepare a National Poverty Reduction Strategy to guide government policies and provide a robust framework for public expenditure. - Modify the budget process to provide more realistic estimates and include a “contingency element” to meet unanticipated needs. - Strengthen institutional capacity and public finance management; Fund to provide two resident advisors on public finance management and macro-fiscal issues. - Increase transparency in division of oil receipts between oil companies and the government; move rapidly with full participation in EITI: adopt associated decree, finalize government disclosure policy, and appoint an aggregator. - Allocate resources to enhance the statistical apparatus to address lack of timely, accurate, and comprehensive macro- and socio-economic data. - Work with CEMAC partners to gradually reduce the common external tariff and eliminate nontariff barriers and taxes on exports to improve international competitiveness. - Address low financial intermediation by alleviating judicial uncertainties, enhancing capacity to assess financial risks, and encouraging micro-credit institutions outside urban areas. ### Selected tables and indicators (high-frequency numeric highlights) - Real GDP growth (annual % change): 2002: 20.1; 2003: 13.6; 2004: 30.0; 2005: 6.5; 2006 (Proj.): -0.4. - Non-oil GDP growth (annual % change): 2005: 10.7; 2006 (Proj.): 10.2. - Oil production (thousands b/d): 2002: 250.6; 2003: 283.9; 2004: 382.8; 2005: 403.6; 2006: 397.8. - Oil price (US$ per barrel): 2002: 23.8; 2003: 27.7; 2004: 34.2; 2005: 48.4; 2006 (Proj.): 55.0. - Consumer prices (end of period): 2002: 6.2; 2003: 5.9; 2004: 5.1; 2005: 4.8; 2006 (Proj.): 3.7. - Current account balance (including official transfers; deficit -) (percent of GDP): 2002: -13.5; 2003: -43.8; 2004: -24.2; 2005: -13.3; 2006 (Proj.): -5.8. - Gross official reserves (millions of U.S. dollars): 2002: 567.0; 2003: 890.5; 2004: 1,566.3; 2005: 2,935.8; 2006 (Proj.): 4,240.8. - Gross official reserves (months of non-oil sector imports): 2002: 4.9; 2003: 5.7; 2004: 8.1; 2005: 15.1; 2006 (Proj.): 21.2. - Government overall balance after grants (cash basis) (percent of GDP): 2002: 11.4; 2003: -1.8; 2004: 9.9; 2005: 23.3; 2006 (Proj.): 27.7. *Source: IMF staff report content provided in the unit (Equatorial Guinea country report).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Macroeconomic developments and short-term prospects - Real GDP growth in 2005 was 6.5 percent; non-oil sector real growth was 10.7 percent. - A slowdown in hydrocarbon production caused overall real GDP growth to decelerate sharply in 2005. - Inflation declined to 4.8 percent at year end 2005 (still above the CEMAC regional convergence criterion of 3 percent). - The current account deficit narrowed to 13.3 percent of GDP in 2005 from 24.2 percent of GDP in 2004. - International reserves rose to US$2.9 billion at end-2005 (equivalent to about 15 months of projected non-oil sector imports). - Real effective exchange rate of the CFA franc (calculated for Equatorial Guinea) continued to appreciate in 2005, reflecting the appreciation of the euro vis-à-vis the U.S. dollar and a large inflation differential with major trading partners. ### Fiscal developments and public finances - Overall fiscal surplus in 2005 was 23 percent of GDP (about 320 percent of non-oil GDP), compared with the budgeted 8.4 percent of GDP. - The non-oil fiscal deficit was about 200 percent of non-oil GDP in 2005, similar to the outcome in recent years but substantially larger than the 90 percent budgeted. - Revenues from the oil sector accounted for 95 percent of total revenues in 2005; the government’s take from total receipts from hydrocarbon production rose from about 30 percent in 2004 to 40 percent in 2005. - Total expenditure declined by 5 percentage points of GDP to 19.6 percent in 2005. - Current expenditure was about 40 percent higher than budgeted, and capital expenditure was more than double the budget provisions. - Larger-than-budgeted revenues financed increased spending—mainly on physical infrastructure—and increased government saving (substantial rise in government deposits with BEAC and commercial banks). ### Monetary, financial sector, and external sector - Monetary developments in 2005 were dominated by budgetary operations; increase in government savings led to further substantial increases in government deposits with BEAC and commercial banks and high growth of broad money. - Bank credit to the private sector expanded, driven by buoyancy in the non-oil sector—especially services and construction. - Financial soundness indicators suggest the banking sector remained relatively sound; banks generally complied with regional prudential regulations. - Deposit and lending rates declined slightly; lending rates remained relatively high due to perceived high risk of domestic borrowers. - Banks’ loan portfolios were highly concentrated in the construction sector with only a small number of borrowers. ### External competitiveness and oil-sector dynamics (Box 1 highlights) - Equatorial Guinea experienced the largest REER appreciation in the CEMAC region in the recent period, linked to its status as the largest oil exporter and recipient of foreign direct investment relative to GDP among CEMAC members. - The U.S. is the largest trading partner for Equatorial Guinea, unlike most other CEMAC countries where the EU is predominant. - Equatorial Guinea’s oil exports rose most rapidly among oil-producing CEMAC countries during 1999–2005, and it received the largest FDI as a share of GDP in 1999–2005 (with the exception of 2002 for Chad). ### Medium-term outlook (2006–10) - Economic prospects for 2006 are slightly less favorable than in 2005: real GDP growth is projected to contract sharply in 2006 reflecting a flattening out of oil production, while non-oil GDP growth is projected to remain robust. - Inflation is projected to decline to less than 4 percent at year end 2006. - Based on current policies and projected favorable external environment, medium-term prospects are positive: overall growth would oscillate with hydrocarbon production but should average about 5 percent annually during 2007–10. - Inflation is projected to reach the CEMAC target of 3 percent by 2008. - The external position is projected to generate surpluses that would raise international reserves to about US$11 billion by end-2010 (61 months of non-oil sector imports). ### Development, poverty, and institutional capacity - The Equatoguinean economy in 2005 had nominal GDP of US$6.8 billion and an officially estimated population of 1.14 million; the economy is now 20 times larger than in the mid-1990s. - Rapid rise in measured per capita income has reached middle-income country levels, but the standard of living of the population at large has not improved commensurately. - Tentative estimates suggest a significant proportion of the population is living below the poverty line. - Social services remain underdeveloped: life expectancy remains about the average for sub-Saharan Africa, school enrolment and literacy have not changed noticeably, and access to safe water is still among the lowest in the world. - Hydrocarbon exploitation is expected to generate an estimated US$3.8 billion (44 percent of GDP) per annum in government revenue over the next five years. ### Policy recommendations and priority actions - Prepare a Poverty Reduction Strategy to guide government policies and provide a robust framework for public expenditure. - Modify the budget process to provide more realistic estimates and include a “contingency element” to meet unanticipated needs. - Strengthen institutional capacity and public finance management; the Fund will provide two resident advisors on public finance management and macro-fiscal issues. - Increase transparency in the division of oil receipts between oil companies and the government; move rapidly with full participation in the Extractive Industry Transparency Initiative (EITI) steps, including adopting the associated decree, finalizing the government’s disclosure policy, and appointing an aggregator. - Allocate resources to enhance the statistical apparatus to address the lack of timely, accurate, and comprehensive macro- and socio-economic data. *Source: Executive Summary (Equatorial Guinea country report).* ### 13. Traditional exports (particularly coffee and cocoa) stagnated in the last few ### 13. Traditional exports (particularly coffee and cocoa) stagnated in the last few ### Export performance and underlying factors - Traditional exports (particularly coffee and cocoa) stagnated in the last few years. - Contributing factors: - Producers’ profits were adversely affected by the nominal appreciation of the CFA franc vis-à-vis the U.S. dollar. - Loss of immigrant farm labor, exacerbated by abandonment of farms in search of more lucrative employment in the oil (and related) sectors. - “Ageing” of the plantations. - Nearly all traditional exports are priced and invoiced in U.S. dollars. ### Economic prospects for 2006 (projections and macro outlook) - Real GDP is projected to contract by 0.4 percent in 2006, reflecting an overall flattening out of oil production. - Non-oil GDP growth would remain robust at about 10 percent as the implementation of the public investment program (PIP) continues, with direct positive impact on construction activity and spillovers to the tertiary sector. - Inflation is projected to decline further to less than 4 percent at year-end, supported by: - ongoing public sector wage restraint; - expansion in feeder roads to improve conditions for domestic supply of foodstuffs; - greater vigilance in the execution of the budget. - With favorable terms of trade developments, a marked increase in the trade surplus is expected, leading to a further narrowing of the current account deficit to 6 percent of GDP. - Gross international reserves are projected to rise sharply to around US$4 billion (21 months of projected non-oil imports). ### Tackling poverty (objectives and strategic elements) - Authorities recognize need to tackle poverty in the short term (priority social programs) and long term (establish growth trajectory that generates employment within a stable macroeconomic framework). - Preparation of a National Poverty Reduction Strategy (NPRS) is planned, to be prepared in consultation with civil society, non-governmental organizations and donors. - Key elements of the NPRS identified by authorities and endorsed by the mission: - Institutional capacity building to support design, implementation and monitoring of growth-enhancing and poverty-reducing policies. - Public investment in physical (roads, utilities, etc.) and social (health, education, etc.) infrastructure—according to priorities identified in the PIP and the Social Fund—to foster accumulation of physical and human capital. - Removal of impediments to financial intermediation—uncertainties over legal rights and obligations of borrowers and creditors, including information about borrowers’ credit worthiness, particularly for small- and medium-enterprises. - Combination of temporary targeted support for specific economic activities (such as subsidies for inputs in cocoa and coffee production) with creation of an appropriate business environment and a level playing field for all private sector agents, including: - establishing a clear legal and stable regulatory framework; - a predictable tax regime; - transparency in policy design and implementation. - Interim measures: mechanism established (with assistance from Business for Social Responsibility and supported by the U.S. government) to fast-track priority social spending as a temporary response to glaring poverty in certain parts of the country. - World Bank assistance: establish poverty profile, assess sectoral policies to encourage private sector-led diversification, and restructure the energy sector (including petroleum). ### Capacity constraints and technical assistance - Severe weaknesses in institutional environment and crippling capacity constraints have hindered channeling oil wealth to priority social areas. - Authorities seek assistance from the Fund, World Bank, UNDP, and other donors. - IMF assistance areas: - reform of the public finance management system; - development of an analytical and operational fiscal framework for the medium term; - improvement of economic statistics—including national accounts, prices, and government finance. - Delivery modalities: - resident advisors for PFM and macro fiscal policy; - peripatetic advisors for statistics. - Box 2 — Status of Technical Assistance (summary): - Fiscal issues: two resident advisors identified (PFM advisor and macro fiscal policy advisor); financed through a reimbursement agreement with the Fund. - Statistics Department: STA contracted a peripatetic advisor to assist in compilation of national accounts and price statistics; advisor will visit the country four times during the next 18 months, with the first mission coinciding with the 2006 Article IV consultation discussions. An STA expert conducted a diagnostic mission on government finance statistics in January 2006. - World Bank: complement Fund technical assistance in national accounts (with AFRISTAT), social statistics (poverty assessment), a public expenditure review, and support in developing the NPRS. - The reimbursement agreement with the Fund for the associated technical assistance was finalized during the mission and signed during the Managing Director’s visit on March 13, 2006. - Next steps: STA and World Bank work programs proceeding; experts identified for fiscal issues and work of advisors envisaged to start in the second quarter of 2006; World Bank assistance awaiting signing of a separate service agreement. ### Resource management (oil revenues and reserves) - Main authorities’ concerns: - efficient use of oil revenues; - remuneration on the country’s foreign reserves. - Usage: mission supported adoption of the NPRS to provide framework for public expenditure and monitoring mechanisms to ensure transparency. - Oil funds: - Government considers usefulness of oil funds (e.g., Fund for Future Generation, Special Reserve Fund) in deciding distribution of budget savings. - Mission noted oil funds can provide a useful buffer but emphasized careful consideration of macroeconomic implications of front-loading public expenditures (risk of instability, high inflation imposing disproportionate burden on the poor). - Foreign asset remuneration: - Most foreign assets are held with the BEAC; BEAC remunerated (retroactive to 2004) these assets at the ongoing interest rate of 1.6 percent. - Tripartite discussions held in January 2006 between the authorities, the BEAC, and the French Treasury; further discussions by the BEAC Council of Ministers in February 2006. - Mission reconfirmed IMF readiness to assist in evaluating proposals and, if necessary, with further discussions involving the BEAC, the French authorities, and the Fund on principles of reserve management. ### Fiscal policy (objectives, problems, and recommendations) - Authorities’ fiscal objectives: - enhancing implementation of the 2005 tax law; - optimizing non-oil revenue collection; - maintaining fiscal discipline to restrain inflation and strengthen the external position; - adhering to a “fiscal rule” that limits recurrent expenditure to non-oil revenue and finances capital expenditure from oil revenue. - Fiscal performance issues: characterized by large unplanned expenditures, particularly in capital outlays. Four contributing factors: - ad hoc augmentations to existing projects; - expenses for urgent needs; - underestimation of project costs; - re-phasing of projects. - Mission recommendations: - Budget should make realistic initial estimates—particularly for expenditures—and adequate contingency provision for unanticipated urgent expenses to facilitate budget execution within clear parameters and enhance commitment control, transparency, and predictability. - Develop a robust fiscal framework to guide policy; given front-loaded, uncertain and exhaustible hydrocarbon income, guidelines often suggest saving a significant proportion of related revenues. - Consider capacity to use additional resources effectively to avoid waste, contain inflationary pressures, and maintain international competitiveness; save all resources that cannot be utilized efficiently within a stable macroeconomic framework. - Transparency and EITI: - Mission welcomed intention to participate in the Extractive Industries Transparency Initiative (EITI) and progress made in establishing necessary infrastructure, but noted momentum has waned and encouraged reinvigoration. - Suggested next steps for EITI process: - adopting the EITI decree and related implementing regulations; - holding a second stakeholders meeting to discuss government disclosure policy; - appointing an aggregator to compile, reconcile and oversee data quality and reliability; - finalizing agreed action plans. - Mission reconciled 2005 data regarding government oil production shares, oil export receipts, and revenues accruing to the government (including royalties). ### Monetary and external policies (liquidity management, banking sector, exchange rate) - Monetary policy: - Domestic liquidity needs monitoring in case measures required to temper inflationary pressures. - Monetary policy is carried out at a regional level; fiscal policy must assume main role in liquidity management. - BEAC instruments to mop up excess liquidity: adjustments to primary reserve requirement and undertaking demand deposit auctions. - No action was taken explicitly by BEAC to sterilize liquidity recently due to reluctance to utilize instruments because of associated cost. - Use of differentiated reserve requirements has been effective in sterilizing liquidity where problem was acute but may have hindered emergence of a regional money market. - Banking system: - Authorities expressed satisfaction with soundness of banking system and regulatory environment, but concerns noted: - Two prudential requirements were not observed in October 2005 by some commercial banks—maximum individual risk and capital adequacy. Deviations viewed as temporary and reversed by early 2006. - Growth in non-performing loans raises concern about health of the banking system. - Low level of financial intermediation: total loans amounted to only 41 percent of total deposits at end-2005. - High unrequired reserves may signal lack of “effective” private lending opportunities due to structural rigidities, including limited capacity to assess risks, judicial uncertainties, high costs of enforcing contracts and collecting collateral, lack of a “banking culture” emphasizing loan repayment, and absence of micro-credit institutions outside urban areas. - Exchange rate and competitiveness: - Pegged exchange rate regime provided anchor to hold down inflation and positively impacted investor confidence. - Recent appreciation of the real effective exchange rate reflected mainly changes in fundamentals; effect on competitiveness and absence of nominal exchange rate adjustments to buffer shocks point to need for focus on macroeconomic and structural policy options to improve resilience and productivity. - Authorities’ efforts to encourage diversification into fishery, tourism, and regional financial services; focus on functional education and health to improve labor productivity and adoption of appropriate technology to enhance agricultural productivity, alongside measures to improve business climate—particularly governance—for both foreign and domestic investors. *IMF staff report excerpts from the 2006 Article IV consultation discussions.* ### 34. Another source of concern is the potential adverse impact of hydrocarbon- ### Another source of concern is the potential adverse impact of hydrocarbon-related inflows on competitiveness ### Competitiveness and trade policy - Concern: potential adverse impact of hydrocarbon-related inflows on competitiveness given limited capacity; “Dutch disease” regarded as a long-term development concern. - Authorities’ past steps: - Liberalizing trade and reforming the tax system in accordance with CEMAC standards. - Adoption of the common external tariff of CEMAC: tariffs are 10 percent for capital goods and inputs, 20 percent for intermediate goods and 30 percent for consumer goods. - Import surcharges of 30 percent were imposed on imports of goods previously subject to quantitative restrictions; these surcharges are to be eliminated in 3–6 years, with the longer period applying to certain agricultural and textile products. - Remaining challenges and recommendations: - Work with other CEMAC partners to gradually reduce the current common external tariff to limit scope for harmful trade diversion (noted under a prospective EU Economic Partnership Agreement (EPA)). - Explore elimination of nontariff barriers and taxes on exports to improve international competitiveness. ### Statistical issues - Finding: Equatorial Guinea’s statistical apparatus remains weak. - Problem description: - Lack of timely, accurate, and comprehensive macroeconomic and social data hampers monitoring and policy formulation. - Data problems stem principally from severe institutional capacity constraints. - Actions and recommendations: - Authorities intend to establish a National Statistical Institute. - The Fund—in collaboration with the World Bank and other donors—stands ready to provide capacity building assistance. - Mission urged authorities to allocate required resources to enhance statistical capacity as a priority. - Mission sought cooperation for a set of data and information to be transmitted to staff on a regular basis. - Note: See Appendix III for additional statistical detail. ### Medium-term outlook (2007–10) - Authorities’ objective: maintain a high rate of growth consistent with achieving the MDGs. - Baseline projection (based on current policies and continued favorable external environment): - Overall growth is projected to oscillate with hydrocarbon production but should average about 5 percent annually during 2007–10. - Hydrocarbon sector to be boosted by liquefied natural gas production and development of the Okume oil field in 2007. - Growth in the non-oil sector projected to remain fairly robust at above 9 percent a year, reflecting large infrastructure investment and structural reform benefits. - Annual population growth rate of about 3 percent. - Real non-oil GDP per capita would increase by about 6 percent a year, compared with 9 percent during 2000–05. - Inflation projected to reach the CEMAC target of 3 percent by 2008 as domestic food supplies improve. ### External position, reserves, and risks - External position: - Favorable outlook for world oil prices and prospective hydrocarbon production increases would strengthen the external position. - Current account projected to move into surplus in 2008—and remain in surplus thereafter—mainly from large increases in the trade surplus. - Reserves: - Overall balance of payments surpluses should lead to further buildup in gross official international reserves to about US$11 billion by end-2010 (61 months of non-oil sector imports). - Immediate risks: - World oil prices and level of hydrocarbon production. A sharp decline in prices would significantly reduce oil revenues and reserves accumulation. - Short-term resilience: current strength of the fiscal position and comfortable international reserves imply the country could withstand a short-term shock while adjustment policies are designed. - Upside risk: recent discoveries that lead to commercially viable deposits could extend production horizons and further boost growth and hydrocarbon revenues. - Footnote: Recent hydrocarbon discoveries could extend production horizon well beyond the earlier projected 2020 for oil and 2030 for gas, potentially making Equatorial Guinea a regional hub for LNG trade in the Atlantic Basin. ### External debt sustainability - Assessment: Equatorial Guinea’s external debt is sustainable (middle income country template). - Historical and projected figures: - Total government external debt declined from 36 percent of GDP in 2000 to about 6 percent at end-2004. - Projected to continue declining to reach less than 2½ percent of GDP by 2010. - Net present value of medium- and long-term public debt projected at about 1 percent of GDP (and of exports) by 2010. - Debt service-to-exports projected at 0.1 percent by 2010. - Debt service-to-government revenue projected at 0.2 percent by 2010. - Caveat: Information on private external debt and government guaranteed debt to public enterprises is not available. ### MDGs and social outlook - Authorities’ view: general assessment made in 2005 with respect to achieving the MDGs remains valid. - Specific likelihood assessments: - Reducing extreme poverty: very likely. - Reducing hunger: likely. - Promotion of gender equality: very likely. - Ensuring environmental sustainability (including access to improved water and sanitation): very likely. - Note: A more reliable assessment awaits completion of various social and economic surveys in the next year or so. ### Staff appraisal and policy recommendations - Macro performance summary: - Macroeconomic performance broadly satisfactory; strong real GDP growth including non-hydrocarbon sector; per capita income now at middle-income levels. - Inflation on a downward trend toward CEMAC target of 3 percent—assisted by public sector wage restraint and infrastructure investment. - Fiscal and external positions strengthened; government savings and gross official international reserves at comfortable levels. - Key concerns: - Rapid growth and large oil revenues have not translated into perceptible rise in living standards or decline in poverty. - Major challenge: managing vast resources efficiently, transparently, and with intergenerational considerations. - Recommended actions: - Prepare a National Poverty Reduction Strategy to guide policies, provide a robust public expenditure framework, and ensure monitoring and transparency. - Modify budget process: - Implement more realistic budget estimates. - Include a “contingency provision” to meet urgent unforeseen needs. - Reinforce commitment control, transparency, and predictability of fiscal stance. - Implement the “fiscal rule” limiting current expenditure to non-oil revenue and financing capital outlays from oil revenue. - Improve transparency in division of oil receipts between oil companies and government: - Accelerate participation in EITI processes: adopt associated decree, finalize government disclosure policy, and appoint an aggregator. - Address low financial intermediation: - Alleviate structural impediments, including judicial uncertainties about borrower and creditor rights and obligations. - Enhance capacity to assess financial risks. - Strengthen economic resilience under pegged exchange rate regime by improving physical infrastructure, human capital, and governance for the business climate. - Work with CEMAC members to gradually reduce the common external tariff and eliminate nontariff barriers and taxes on exports to improve international competitiveness. - Prioritize resources to strengthen the statistical apparatus and implement the National Statistical Institute. *IMF staff report content.* ### 50. It is recommended that the next Article IV consultation be held on the standard ### It is recommended that the next Article IV consultation be held on the standard 12-month cycle. ### Exchange rate, real and nominal effective indices, and oil price - Figures show REER (2000=100, left axis), NEER (2000=100, left axis), and Crude Oil spot price (right axes, US$ per barrel) across 1995M1–2005M9. - CFA franc pegged to the euro at the fixed exchange rate of CFAF 656.34 per euro. - Local currency equivalent: SDR 1 = CFAF 787.51 as of December 12, 2005. ### Inflation and exchange rate developments - Inflation differential series (1999–2005) plotted against CFAF/USD exchange rate (end of period). - Definition: Inflation differential is calculated as a ratio between percentage change of average inflation in Equatorial Guinea and percentage change of average inflation of advanced economy trading partners (import-weighted). ### External debt sustainability and scenario shocks - External debt (in percent of GDP) and bound tests presented for 2000–2010. - Notes on shocks: - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2006. - Key reporting items and indicators: - Baseline and historical scenarios shown, with gross financing need under baseline (right scale). - Identified external debt-creating flows and automatic debt dynamics presented in Table 12. - Debt-stabilizing non-interest current account (long-run constant balance) illustrated. ### Key macroeconomic indicators and projections (selected, 2002–06; projections 2005–10) - Real GDP growth (annual % change): - 2002: 20.1 - 2003: 13.6 - 2004: 30.0 - 2005: 6.5 - 2006 (Est./Proj.): -0.4 - 2007–2010 (Proj.): 9.2; 17.4; -2.3; -3.7 (2007–2010 respectively, from medium-term table) - Non-oil GDP growth (annual % change): - 2002: 10.4 - 2003: 11.3 - 2004: 11.3 - 2005: 10.7 - 2006: 10.2 - 2007–2010 (Proj.): 10.7; 7.9; 12.9; 8.0; 7.5 (as listed in medium-term table) - Oil production (thousands of barrels per day): - 2002: 250.6 - 2003: 283.9 - 2004: 382.8 - 2005: 403.6 - 2006: 397.8 - 2007–2010 (Proj.): 430.5; 507.6; 482.4; 453.3 - Oil price (U.S. dollars per barrel): - 2002: 23.8 - 2003: 27.7 - 2004: 34.2 - 2005: 48.4 - 2006: 55.0 - 2007–2010 (Proj.): 55.0; 55.8; 54.3; 53.8; 53.5 - Consumer prices (annual average and end of period): - Annual average: 2002: 7.6; 2003: 7.9; 2004: 4.3; 2005: 6.2; 2006: 4.8 - End of period: 2002: 6.2; 2003: 5.9; 2004: 5.1; 2005: 4.8; 2006: 3.7 - Projected end-of-period: 2007: 3.7; 2008: 3.1; 2009: 2.8; 2010: 2.7 ### External sector and balance of payments (selected) - Exports, f.o.b. (percent of GDP): - 2002: 22.0 - 2003: 32.3 - 2004: 64.1 - 2005: 55.0 - 2006: 17.0 - Of which: oil (percent of GDP): 2002: 23.0; 2003: 32.8; 2004: 65.6; 2005: 56.1; 2006: 17.2 - Imports, f.o.b. (percent of GDP): 2002: -37.3; 2003: 154.1; 2004: 18.8; 2005: 24.6; 2006: -1.6 - Current account balance (including official transfers; deficit -) (percent of GDP): - 2002: -13.5 - 2003: -43.8 - 2004: -24.2 - 2005: -13.3 - 2006: -5.8 - 2007–2010 (Proj.): -4.8; 3.3; 3.6; 2.3 (from medium-term table) - Gross official reserves (in millions of U.S. dollars): - 2002: 567.0 - 2003: 890.5 - 2004: 1,566.3 - 2005: 2,935.8 - 2006: 4,240.8 - Imputed reserves with BEAC: 2002: 85.9; 2003: 231.3; 2004: 929.9; 2005: 2,217.6; 2006: 3,503.1 - Government offshore deposits: 2002: 481.1; 2003: 659.3; 2004: 636.4; 2005: 718.2; 2006: 737.8 - Reserves in months of imports: 2002: 3.0; 2003: 3.9; 2004: 5.5; 2005: 10.4; 2006: 15.2 - In months of non-oil sector imports: 2002: 4.9; 2003: 5.7; 2004: 8.1; 2005: 15.1; 2006: 21.2 ### Fiscal accounts and public finances (selected) - Total revenue and grants (percent of GDP): - 2002: 28.5 - 2003: 28.7 - 2004: 34.4 - 2005: 42.9 - 2006: 47.0 - Of which: oil revenue (percent of GDP): - 2002: 25.0 - 2003: 25.0 - 2004: 31.4 - 2005: 40.5 - 2006: 44.5 - Total expenditure and net lending (percent of GDP): - 2002: 17.0 - 2003: 30.5 - 2004: 24.5 - 2005: 19.6 - 2006: 19.4 - Overall balance after grants (cash basis) (percent of GDP): - 2002: 11.4 - 2003: -1.8 - 2004: 9.9 - 2005: 23.3 - 2006: 27.7 - Primary non-oil balance (excluding oil revenues, oil-related expenditure, and interest on oil savings): - 2002: -13.2 - 2003: -26.6 - 2004: -18.7 - 2005: -14.5 - 2006: -14.0 - Non-oil overall balance (percent of non-oil GDP): - 2002: 109.3 - 2003: 212.6 - 2004: 202.6 - 2005: 89.7 - 2006: 200.2 (table shows wider figures including budget and preliminary outturns) ### Central government revenue and expenditure (selected line items, 2002–06) - Total revenue and grants (In billions of CFA francs; Budget/Prel./Proj.): - 2002: 414 - 2003: 472 - 2004: 840 - 2005: 626 - 2006 Budget: 1,529; 2006 Proj.: 1,008; 2006 (alternate) 1,975 (table listings) - Oil revenue components (in billions of CFA francs, selected): - Oil revenue totals shown: 362 (2002); 410 (2003); 766 (2004); 541 (2005); 1,144 (2006 Budget); 1,924 (2006 Proj.); 1,862 (alternate) - Corporate and oil companies employees income tax (percent of GDP): 2002: 9.4; 2003: 7.5; 2004: 5.7; 2005: 5.0; 2006 (various): 7.1; 3.5; 8.1 - Royalties (percent of GDP): 2002: 11.9; 2003: 14.6; 2004: 15.6; 2005: 6.8; 2006 (various): 13.3; 7.6; 20.9 - Total expenditure and net lending (In billions of CFA francs and percent of GDP): - Total expenditure and net lending: 247 (2002); 500 (2003); 598 (2004); 317 (2005); 698 (2006 Budget); 647 (2006 Prel.); 814 (2006 Proj.) - Capital expenditure (In billions of CFA francs): 127 (2002); 170 (2003); 363 (2004); 201 (2005); 446 (2006 Budget); 427 (2006 Prel.); 530 (2006 Proj.) - Wages and salaries (In billions of CFA francs): 26 (2002); 28 (2003); 31 (2004); 30 (2005); 37 (2006 Budget); 39 (2006 Prel.); 44 (2006 Proj.) ### Monetary sector, central bank, and banking system indicators (selected) - Monetary survey (end-of-period, In billions of CFA francs): - Broad money (M2): 2001: 89.5; 2002: 149.9; 2003: 189.1; 2004: 242.6; 2005 (Dec. est.): 215.9; 2006 (Dec. proj.): 500.4 - Net foreign assets (monetary survey): 2001: 60.6; 2002: 104.6; 2003: 153.6; 2004: 499.6; 2005 Mar: 554.9; 2006 Dec projection: 2,025.3 - Currency (component of M2): 2001: 17.6; 2002: 26.0; 2003: 35.1; 2004: 45.7; 2005 Dec est.: 43.4; 2006 Dec proj.: 155.9 - Deposits: 2001: 71.9; 2002: 124.0; 2003: 154.0; 2004: 196.9; 2005 Dec est.: 172.6; 2006 Dec proj.: 344.5 - Reserve money (RM) and multipliers: - Reserve money (RM) growth series: 2001: 85.6; 2002: 4.6; 2003: 142.5; 2004: 25.1; 2005: -22.5; 2006 projections: 62.9 (Dec) - Reserve money multiplier (M2/RM): 2001: 1.9; 2002: 3.0; 2003: 1.6; 2004: 1.6; 2005 Mar: 2.0; 2006 Dec proj.: 1.0 - Central Bank (BEAC) and commercial banks (end-of-period, In billions of CFA francs): - Central Bank net foreign assets: 2001: 45.9; 2002: 50.0; 2003: 118.0; 2004: 450.3; 2005 Mar: 489.5; 2006 Dec proj.: 1,954.0 - Reserve money: 2001: 47.4; 2002: 49.6; 2003: 120.3; 2004: 150.5; 2005 Mar: 109.0; 2006 Dec proj.: 510.9 - Commercial banks total deposits: 2001: 71.1; 2002: 123.2; 2003: 153.2; 2004: 196.8; 2005 Mar: 171.7; 2006 Dec proj.: 344.5 - Financial soundness indicators (2001–05; percent at year’s end): - Regulatory capital to risk-weighted assets: 2005: 11.6 (series shows "...3.9 13.1 15.2 11.6" across earlier years) - Nonperforming loans to gross loans (percent): 2001: 9.8; 2002: 8.7; 2003: 16.6; 2004: 11.8; 2005: 14.9 - Return on assets: 2001: 1.2; 2002: 2.1; 2003: 2.0; 2005: 1.3 - Lending rate (selected): 2001–2006 series shows 18.0 (2001–2006 Mar/June) and 17.0 (Sep/Dec 2005) with deposit rate 5.0 down to 4.75. ### Medium-term projections (2005–10) — selected fiscal and external aggregates - Nominal GDP (in billions of CFA francs): 2005: 3,558; 2006: 4,188; 2007: 4,614; 2008: 5,313; 2009: 5,073; 2010: 4,792 - Gross official reserves (in millions of U.S. dollars) projected: 2005: 2,935.8; 2006: 4,240.8; 2007: 5,475.0; 2008: 7,366.4; 2009: 9,195.4; 2010: 10,825.8 - Current account balance (in millions of U.S. dollars; deficit -): 2005: -898; 2006: -437; 2007: -404; 2008: 320; 2009: 326; 2010: 196 ### Government external debt position (2005–10) and amortization - Nominal stock of debt (in millions of U.S. dollars): - 2005: 254.7 - 2006: 229.5 - 2007: 217.9 - 2008: 213.2 - 2009: 206.3 - 2010: 198.8 - Composition (2005; selected creditors, in millions of U.S. dollars): - Multilateral creditors total: 103.0 - IDA/World Bank: 50.9 - African Development Bank: 39.6 - Bilateral creditors total: 151.7 - Paris Club: 116.7 - Non-Paris Club (includes China): 35.0 (China 33.75) - Memorandum: - Debt to total GDP ratio: 2005: 3.8; 2006: 3.1; 2007: 2.6; 2008: 2.2; 2009: 2.2; 2010: 2.3 - Amortization and interest payments (percent of GDP): - Amortization total: 2005: 13.09; 2006: 12.94; 2007: 12.82; 2008: 10.23; 2009: 8.03; 2010: 8.26 - Interest payments total: 2005: 2.40; 2006: 1.67; 2007: 1.87; 2008: 0.97; 2009: 1.17; 2010: 1.11 - Note: Loans with China have zero interest. ### Millennium Development Goals (selected indicators and authorities' assessment) - Authorities' assessments (likelihood to meet MDGs by 2015): - Eradicate extreme poverty and hunger: Very Likely a/; Likely b/ - Achieve universal primary education: Likely to plausible - Promote gender equality: Very Likely - Reduce child mortality: Likely - Improve maternal health: Likely to plausible - Combat HIV/AIDS, malaria and other diseases: Likely to plausible c/ ; Very Likely d/ - Ensure environmental sustainability: Very Likely e/; Likely f/ - Develop a Global Partnership for Development: Unlikely - Selected MDG-related statistics (years indicated in table): - Population (in thousands): 1990: 362; 1995: 398; 2000: 449; 2004: 492; 2015 target references provided. - Gross national income (millions of U.S. dollars): 1990: 133; 1995: 166; 2000: 807; 2004: 1,670 - GNI per capita (U.S. dollars): 1990: 368; 1995: 418; 2000: 1,798; 2004: 3,391 - Under 5 mortality rate (per 1,000): 1990: 206; 1995: 175; 2000: 156; 2004: 146; Authorities note 50 (2001 Census) appears in table - Immunization, measles (percent of children under 12 months): 1990: 88; 1995: 80; 2000: 51; 2004: 51 - Access to an improved water source (percent of population): 2000: 44; 2004: 47.4 - Access to improved sanitation (percent of population): 2004: 53 ### Relations with the IMF, Article IV, and technical assistance - Membership status: Joined 12/22/69; Article VIII. - Quota and SDR data: - Quota: 32.60 (SDR Million) - Fund holdings of currency: 32.61 (SDR Million) - Net cumulative SDR allocation: 5.81 (SDR Million) - SDR holdings: 0.44 (SDR Million) - Outstanding Purchases and Loans: None. - Latest financial arrangements (historical): - PRGF: 2/03/93–2/02/96; Approved 12.88 (SDR Million); Drawn 4.60 - SAF: 12/07/88–12/06/91; Approved 12.88; Drawn 9.20 - Stand-by: 6/28/85–6/27/86; Approved 9.20; Drawn 5.40 - Projected obligations to the Fund (SDR million): Charges/Interest 2006–2009: 0.16 each year; Principal: 0.00 each year. - Exchange Rate Arrangement and Safeguard Assessments: - The Bank of the Central African States (BEAC) is the regional central bank; safeguards assessment completed on August 30, 2004 reported main recommendations in IMF Country Report No. 05/3. - 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 April 25, 2005 (IMF Country Report No. 05/150). - Technical assistance (selected FAD and STA missions and timing): - FAD: 18-month assistance during 1992–94 to reorganize the tax department and personnel training; review of PEM and tax administration systems in 1997; diagnostic mission on public finance deficiencies and training needs in May 2003; diagnostic mission on modernization of public expenditure management in July 2005. - STA: Evaluated collection of monetary statistics and proposed adoption of the 2000 Manual on Monetary and Financial Statistics in December 2002; diagnostic mission on real sector statistics in July 2005; initial assistance with compilation of national accounts and price indexes in January 2006; diagnostic mission on government finance statistics in January 2006. - Resident Representative: None. *Source: IMF staff report content provided in the unit (Equatorial Guinea country report data and appendices).* ### 1. The World Bank Group has not approved any new lending operations for Equatorial ### _cr06233 - 1. The World Bank Group has not approved any new lending operations for Equatorial ### IMF—World Bank collaboration and context - The World Bank Group has not approved any new lending operations for Equatorial Guinea since mid-1992. - Equatorial Guinea graduated to IBRD status based on a GNP per capita of $1,170 in 1999; concessional IDA assistance is no longer available. - In 1998 the World Bank prepared a strategy paper on the development of petroleum resources in Equatorial Guinea and discussed it with the authorities. - A World Bank mission to examine Equatorial Guinea’s participation in the Extractive Industries Transparency Initiative (EITI) coincided with a Fund fiscal ROSC mission in January, 2005. - The IMF and World Bank staffs have maintained a close collaborative relationship in coordinating operational activities and policy advice. - After years of absence, the government reengaged international financial institutions to provide technical assistance. ### World Bank activities and technical assistance - Services agreement prepared by the World Bank at authorities’ request to finance activities including: - (i) strengthening the management of the petroleum sector and associated revenues; - (ii) implementing the Extractive Industries Transparency Initiative (EITI); - (iii) preparing a poverty reduction strategy. - Support for PRS preparation and collection of household data of the CWIQ type for a poverty profile: - A Bank mission took place in July 2005 to assist Government in developing a road-map for an I-PRSP and to evaluate feasibility of a Core Welfare Indicators Questionnaire (CWIQ) survey. - Statistical capacity-building project (grant signed February 2002; closing December 2005): - Total grant US$397,000. - First phase US$108,000 (Bank-executed) prepared the NSDS (National Statistical Development Strategy). - Second phase $289,000 (recipient-executed) provides technical assistance to improve national accounts, including procurement of hardware and software. - FIAS (World Bank/IFC joint facility) mission visited April 2001 to survey the investment climate; the FIAS report identified obstacles to private investment (oil and non-oil sectors) and recommended legal/institutional reforms to improve the investment climate. - Technical assistance in petroleum and energy sectors under discussion to include: - (a) study of institutional set up to define roles of the Ministry of Mines, Industry and Energy and GEPetrol; - (b) review of petroleum sector laws and regulations, including environmental law and regulation; - (c) sector capacity building and training program design and implementation; - (d) development of an Oil Revenue Diagnostic Model that integrates upstream and midstream activities by generating forecasts of future sector revenues under different assumptions regarding costs, prices and the pace of development; - (e) formulation of a national hydrocarbon and energy policy that optimizes links between the two sectors; - (f) formulation of resource revenue management policy, including relevant institutional arrangements. - Assistance in design and implementation of the reporting framework and institutional arrangements necessary to implement EITI and related governance and anti-corruption policies. ### Bank/Fund collaboration areas (as listed) - Fiscal area: - Public Financial Management and Macrofiscal Analysis — IMF - Public expenditure review — World Bank - Tax administration — IMF - Fiscal Transparency ROSC — IMF - Governance: - Anticorruption law implementation — IMF - Extractive Industries Transparency Initiative (EITI) — World Bank/IMF - Private sector development: - FIAS study of the business climate — World Bank/IFC - Other: - Petroleum Sector Management and Capacity Building — World Bank - PRSP — World Bank/IMF - External trade — IMF - Education — World Bank - Statistical capacity building — World Bank/IMF ### Proposed World Bank inputs for IMF work - The Bank is willing to conduct a public expenditure review to assess expenditure effectiveness, particularly in the social sectors. - The public expenditure review could analyze budget preparation and execution and help assess the relationship between budgetary allocations and PRSP objectives. - Synergies exist with Fund technical assistance on public financial management and macrofiscal analysis. ### Statistical issues and data quality (summary of deficiencies and missions) - Overall assessment: - Economic and financial statistics remain very weak; shortcomings in timeliness, accuracy and comprehensiveness hamper monitoring. - Deficiencies reflect poor administrative and technical government capacity. - Real sector and prices: - National accounts supplied at current and constant prices but often contain significant inconsistencies. - Official CPI compilation benefited from French technical assistance, but basket weights and composition are outdated and geographical coverage is not comprehensive. - Recommendations included implementing the System of National Accounts, 1993, updating the reference period of national accounts (1985), and updating the CPI’s basket and weights (1986) without delay. - An STA mission visited Malabo in July 2005 to review methods and data sources for national accounts and CPI and to assess statistical legislation and resources. - Statistical legislation is recent (2001) and generally adequate, but the decree to create the National Institute of Statistics has not been passed. - Resources: only one person assigned to national accounts unit and three to the CPI unit. - An STA follow-up mission on national accounts and prices visited Malabo in January 2006. - Reporting to STA and IFS: - Real sector statistics reported to STA (IFS) are limited to GDP (without sectoral or expenditure breakdown), and exports and imports. - The December 2005 issue of IFS includes GDP through 2004 and exports and imports through 2000. - Government finance: - Some improvements in fiscal accounting after French technical assistance. - Further improvements needed in timely and accurate data from the Debt-Service Unit (Caja Autónoma de la Deuda Pública). - Authorities need to gradually incorporate some autonomous entities into the budget. - Equatorial Guinea does not report fiscal data to STA; authorities provide budget execution data to AFR. - An STA mission in early 2006 reviewed Government Finance Statistics and found weaknesses in legislation supporting GFS compilation and incomplete institutional coverage of consolidated central government; recommended including operations of the National Social Security Institute (INSESO). - GFS are compiled quarterly on a cash basis and cover only budgetary central government. - Recommended training for technicians involved in GFS compilation and provision of technical assistance. - Monetary accounts: - Coverage of monetary statistics is adequate for program monitoring but statistics are not disseminated timely. - STA supported migration to the Monetary and Financial Statistics Manual partly via regional BEAC workshops and biannual Joint Africa Institute seminars. - External debt: - Data on outstanding external debt and debt-service projections suffer serious inconsistencies. - Debt service paid reported by the Debt-Service Unit often differs significantly from budget and Paris Club reports due to lack of precise payment information. - Scheduled debt-service obligations are not systematically and timely incorporated into the budget. - Debt-service projections beyond the following year are provided only in highly aggregated form and some debt service occurs outside the Debt-Service Unit. - Authorities have begun a major inventory of their debt and are addressing capacity constraints in the Debt-Service Unit through training and new staffing. - Balance of payments: - Customs data improved after Central African Customs and Economic Union reform and deployment of customs brigades, but analysis hampered by lack of computerization. - BEAC produces balance of payments data for Equatorial Guinea, but with long delays and significant inconsistencies with other datasets. - Progress made on current and financial account items, but lack of source data availability remains a key concern. - Equatorial Guinea’s balance of payments data are published in the International Financial Statistics Yearbook through 1996 only. ### Selected data-reporting dates and frequencies (from Table of Common Indicators Required for Surveillance, as of February 24, 2006) - Exchange Rates — Date of latest observation: Oct. 2005; Date received: Nov. 2005; Frequency: M; Frequency of Reporting: M; Frequency of publication: M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of latest observation: Aug. 2005; Date received: Nov. 2005; Frequency: M; Frequency of Reporting: M; Frequency of publication: M - Reserve/Base Money — Date of latest observation: Sept. 2005; Date received: Dec. 2005; Frequency: M; Frequency of Reporting: M; Frequency of publication: M - Broad Money — Date of latest observation: Sept. 2005; Date received: Dec. 2005; Frequency: M; Frequency of Reporting: M; Frequency of publication: M - Central Bank Balance Sheet — Date of latest observation: Sept. 2005; Date received: Dec. 2005; Frequency: M; Frequency of Reporting: M; Frequency of publication: M - Consolidated Balance Sheet of the Banking System — Date of latest observation: Sept. 2005; Date received: Dec. 2005; Frequency: M; Frequency of Reporting: M; Frequency of publication: M - Interest Rates — Date of latest observation: Oct. 2005; Date received: Dec. 2005; Frequency: M; Frequency of Reporting: M; Frequency of publication: I - Consumer Price Index — Date of latest observation: May 2005; Date received: Jul. 2005; Frequency: M; Frequency of Reporting: I; Frequency of publication: I - Revenue, Expenditure, Balance and Composition of Financing – Central Government — Date of latest observation: Jun. 2005; Date received: Jul. 2005; Frequency: Q; Frequency of Reporting: I; Frequency of publication: I - External Current Account Balance — Date of latest observation: Dec. 2004; Date received: Jul. 2005; Frequency: A; Frequency of Reporting: I; Frequency of publication: I - Exports and Imports of Goods and Services — Date of latest observation: Dec. 2004; Date received: Jul. 2005; Frequency: A; Frequency of Reporting: I; Frequency of publication: I - GDP/GNP — Date of latest observation: Dec. 2004; Date received: Jan. 2005; Frequency: A; Frequency of Reporting: I; Frequency of publication: I - Gross External Debt — Date of latest observation: Dec. 2004; Date received: Jul. 2005; Frequency: A; Frequency of Reporting: I; Frequency of publication: A (Note: Frequency codes — Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).) ### Public Information Notice highlights - Public Information Notice (PIN) No. 06/66, FOR IMMEDIATE RELEASE June, 14, 2006. - The IMF Executive Board concluded the Article IV consultation with Equatorial Guinea on May 10, 2006. - Background point: Economic growth since discovery of oil averaged 37 percent per year during the last decade, raising per capita income to that of middle-income countries, while the standard of living for the population at large has not improved commensurately. - In 2005 a slowdown in hydrocarbon production caused overall real GDP growth to decelerate sharply, while non-oil GDP growth remained buoyant. *Source: _cr06233 - 1. The World Bank Group has not approved any new lending operations for Equatorial* ### 5.1 percent in 2004 to 4.8 percent in 2005, despite an increase in fuel prices at the beginning ### _cr06233 - 5.1 percent in 2004 to 4.8 percent in 2005, despite an increase in fuel prices at the beginning ### Macroeconomic developments (2005) - Real GDP grew by 6.5 percent in 2005. - Non-oil GDP grew by 10.7 percent in 2005, supported by large public infrastructure investment and private housing construction. - Inflation (consumer prices, end of period) declined to 4.8 percent at end-2005 from 5.1 percent in 2004 and 5.9 percent in 2003, despite an increase in fuel prices at the beginning of the year. - Hydrocarbon sector continued to dominate the economy, contributing to more than 90 percent of GDP and government revenues. - Oil production (thousands of barrels per day) was 403.6 in 2005 (250.6 in 2002; 283.9 in 2003; 382.8 in 2004; projected 397.8 in 2006). ### Fiscal outcomes and public finance - Soaring oil prices boosted fiscal revenues in 2005, enabling higher outlays on goods and services and public investment to meet urgent social needs and accelerate infrastructure improvements. - Overall government balance (including oil revenue; deficit -) was a surplus of 23.3 percent of GDP in 2005 (11.4 in 2002; -1.8 in 2003; 9.9 in 2004; projected 27.7 in 2006). - Government revenue (percent of GDP) rose to 42.9 in 2005 (28.5 in 2002; 28.7 in 2003; 34.4 in 2004; projected 47.0 in 2006). - Of which: oil revenue was 40.5 percent of GDP in 2005 (25.0 in 2002; 25.0 in 2003; 31.4 in 2004; projected 44.5 in 2006). - Government expenditure and net lending (percent of GDP) was 19.6 in 2005 (17.0 in 2002; 30.5 in 2003; 24.5 in 2004; projected 19.4 in 2006). - Directors observed a pattern of better-than-expected revenue performance being accompanied by expenditure overruns, largely in physical infrastructure. ### External position and monetary developments - Current account deficit narrowed to 13 percent of GDP in 2005 from 24 percent of GDP in 2004. - Current account balance (including official transfers; deficit -) reported as -13.3 percent of GDP in 2005 ( -24.2 in 2004; -43.8 in 2003; -13.5 in 2002; projected -5.8 in 2006). - Balance of payments recorded an overall surplus that raised international reserves to about 15 months of projected imports of goods and services. - Gross official reserves (equivalent months of imports, c.i.f.) were 10.4 months in 2004 and 15.2 months in 2005 (3.0 in 2002; 3.9 in 2003; projected 4,241 million USD and 15.2 months in 2006). - Gross official reserves (millions of U.S. dollars) were 2,936 in 2005 (567 in 2002; 890 in 2003; 1,566 in 2004; projected 4,241 in 2006). - Exports, f.o.b. increased to 55.0 percent (annual percentage change) in 2005 (22.0 in 2002; 32.3 in 2003; 64.1 in 2004; projected 17.0 in 2006). - Exports, f.o.b. (millions of U.S. dollars) were 7,125 in 2005 (2,117 in 2002; 2,801 in 2003; 4,596 in 2004; projected 8,332 in 2006). - Real effective exchange rate (period average changes, depreciation -) was 4.4 in 2005 (7.4 in 2002; 10.0 in 2003; 4.3 in 2004). - Directors recommended monitoring domestic liquidity in case measures are required to temper inflationary pressures and noted fiscal policy must assume the main role in liquidity management given regional monetary policy. ### Poverty, social programs, and capacity building - Directors noted that improvement in the standard of living was not commensurate with rapid increase in per capita income; poverty remains the big challenge. - Authorities established a Social Needs Fund by Presidential decree N° 120/05 on July 4, 2005 as a temporary mechanism until the NPRS is finalized. - The Social Needs Fund is intended for soliciting, reviewing, adopting, funding, implementing and monitoring projects in health, education, women’s issues and sanitation, and to provide technical assistance to build capacity and foster transparency and accountability. - The authorities signed an agreement with the US government through USAID to guarantee quality, accountability and delivery of social services under the Fund. - Authorities intend to prepare a National Poverty Reduction Strategy (NPRS) to guide social spending and government policies. - Directors welcomed assignment of two Fund-provided resident advisors for capacity building in public finance management and macro-fiscal issues. ### Governance, transparency, and institutional reforms - Directors emphasized improving governance, transparency, and accountability as more resources become available. - Directors encouraged full participation in the Extractive Industries Transparency Initiative (EITI) and recommended steps including adopting the EITI decree, convening stakeholder discussion on disclosure policy, appointing an aggregator for data compilation and reconciliation, and finalizing agreed action plans. - Authorities enhanced EITI participation by adopting the EITI decree, creating an EITI National Commission with Parliament, industry and civil society participation, and allocating financial resources for the Commission. - Authorities, in collaboration with the World Bank, committed to accelerate implementation of the action plan including appointment of the aggregator and strengthening civil society participation. - Directors supported enhancing banking supervision, ensuring compliance with prudential regulations, and addressing structural rigidities (including judicial system reforms) to improve financial intermediation. - Directors encouraged Equatorial Guinea to work with other CEMAC members to gradually reduce the current common external tariff and to eliminate nontariff barriers and taxes on exports to improve international competitiveness. ### Executive Board policy recommendations and assessments - Directors welcomed broadly satisfactory macroeconomic developments in 2005 and the strengthening external position. - Directors observed inflation remains above the CEMAC regional convergence criterion. - Directors supported medium-term goals to diversify the economy into fisheries, tourism, and regional financial services and to develop the domestic private sector. - Fiscal recommendations: - Regularize fiscal and budget policy to make it a more effective planning and allocative tool. - Make realistic budget estimates and provide adequate contingency for unanticipated urgent expenses. - Enhance commitment control, transparency, and predictability of the fiscal stance. - Use resources effectively and avoid wasteful spending while medium-term fiscal framework is developed. - Institutional recommendations: - Improve governance, transparency, and accountability as government resources increase. - Allocate priority resources to enhance statistical capacity to address lack of timely, accurate, and comprehensive macroeconomic data. - Continue capacity-building assistance in public finance and macro-fiscal policy. ### Key statistics (selected) - Real GDP growth: 20.1 (2002), 13.6 (2003), 30.0 (2004), 6.5 (2005), -0.4 (2006 proj.) - Non-oil GDP growth: 10.4 (2002), 11.3 (2003), 11.3 (2004), 10.7 (2005), 10.2 (2006 proj.) - Oil production (thousands b/d): 250.6 (2002), 283.9 (2003), 382.8 (2004), 403.6 (2005), 397.8 (2006 proj.) - Consumer prices (end of period): 6.2 (2002), 5.9 (2003), 5.1 (2004), 4.8 (2005), 3.7 (2006 proj.) - Government revenue (percent of GDP): 28.5 (2002), 28.7 (2003), 34.4 (2004), 42.9 (2005), 47.0 (2006 proj.) - Government expenditure and net lending (percent of GDP): 17.0 (2002), 30.5 (2003), 24.5 (2004), 19.6 (2005), 19.4 (2006 proj.) - Overall government balance (including oil revenue; deficit -) (percent of GDP): 11.4 (2002), -1.8 (2003), 9.9 (2004), 23.3 (2005), 27.7 (2006 proj.) - Current account balance (including official transfers; deficit -) (percent of GDP): -13.5 (2002), -43.8 (2003), -24.2 (2004), -13.3 (2005), -5.8 (2006 proj.) - Gross official reserves (millions of USD): 567 (2002), 890 (2003), 1,566 (2004), 2,936 (2005), 4,241 (2006 proj.) - Gross official reserves (equivalent months of imports, c.i.f.): 3.0 (2002), 3.9 (2003), 5.5 (2004), 10.4 (2005), 15.2 (2006 proj.) *Source: IMF staff report and Executive Board assessment (Equatorial Guinea, Article IV consultation, 2005 data).* ### introduction of a value-added tax. In addition, the audit of oil companies has resulted in the ### _cr06233 - introduction of a value-added tax. In addition, the audit of oil companies has resulted in the ### Revenue developments - Central Government Revenue (in CFA Francs billions), 1990 - 2005: - 1990: 7.6 - 1995: 13.4 - 2000: 162.3 - 2001: 348.0 - 2002: 414.5 - 2003: 471.2 - 2004: 839.5 - 2005: 1527.4 - The audit of oil companies has resulted in the collection of large revenue due to the government. - Introduction of a value-added tax is noted (title context). ### Expenditure and public investment - Government increased capital outlays to meet urgent social needs and accelerated investment in key infrastructure as part of poverty reduction efforts. - Public investment outcomes: - Opening new roads, schools and health centers. - Sanitation improvement. - Rehabilitation of offices for Ministries. - Infrastructure investment in rural areas easing supply constraints for domestic foodstuffs. - Outlays on goods and services were increased. - In the 2006 public investment program, more than 92 percent of capital spending was allocated to the social sector and infrastructure. ### Monetary sector and international reserves - Rise in oil exports led to a substantial buildup of international reserves to about US$ 2.9 billion at end-2005, equivalent to 15 months of non-oil sector imports. - Credit to the economy continued to increase, mainly in favor of services and construction activities. - Appreciation of the real effective exchange rate attributed to: - Country’s position as the largest oil exporter in the region. - Recipient of foreign direct investment relative to GDP. - Recent developments in the terms of trade. - Relative large weight of the U.S. as the major trading partner. ### Policies for 2006 and medium-term objectives - Medium-term objective: maintain a high rate of growth to improve substantially the standard of living. - Growth projections: - Overall growth projected to about 5 percent annually during 2007-10, driven mainly by the hydrocarbon sector (liquefied natural gas production and new oil field production). - Non-oil sector expected to remain robust at around 10 percent a year following structural reforms and large infrastructure investment. - Inflation target: - Inflation will decline to reach the CEMAC target of 3 percent by 2008. - Balance of payments and reserves projection: - Overall balance of payments surpluses will allow for further increases in gross official international reserves covering 61 months of non-oil sector imports, by end-2010. - Transparency and accountability: - Authorities will continue efforts to strengthen transparency and accountability in management of natural resources and public finance. ### Fiscal policy, budget process, and fiscal rule - Budget process enhancements planned with Fund technical assistance to improve: - Budget formulation and execution processes. - Information reporting and oversight controls. - Objectives: - Avoid exceeding budgetary expenditures caused by underestimation of project costs, changes in projects, new additions, or pressing social needs. - Commit to more realistic budget estimates and inclusion of a contingency provision to meet urgent needs, enhancing control, transparency and ability to implement sound fiscal policy. - Fiscal rule to be pursued: - Limit recurrent expenditure to non-oil revenue. - Finance capital expenditure from oil revenue. ### Monetary policy, liquidity management, and reserve remuneration - Policies to contain inflationary pressures and further promote financial intermediation will be strengthened. - Fiscal policy expected to assume the main role in liquidity management because monetary policy is implemented by the regional central bank. - Establishment of an appropriate medium-term framework for managing oil wealth expected to help reduce excess liquidity through prudent fiscal policy. - Foreign assets’ remuneration: - Authorities’ objective is to maintain the real value over the medium-term. - Authorities welcome staff analysis in the selected issues paper and call for further analysis and alternatives. - Authorities will pursue discussions with BEAC and other stakeholders and welcome Fund assistance in evaluating proposals on reserve management and related issues. ### Banking system and financial intermediation - Banking system remains sound. - Authorities are determined to ensure all banks comply with prudential ratios. - Strengthening financial intermediation aimed at further financing the private sector through: - Enhancing capacity to assess risks. - Enforcing contracts and collecting collateral. - Encouraging establishment of micro-credit institutions notably in rural areas. ### Competitiveness and regional integration - Authorities intend to focus on macroeconomic and structural policies to improve resilience and productivity; recognizing this will take time. - Ongoing efforts in education, health, infrastructure, and measures to improve the business climate are viewed as contributing to economic diversification, increased labor productivity, and improved competitiveness. - Commitment to regional integration: - Following trade liberalization and tax reforms in accordance with CEMAC standards, authorities will pursue efforts with other CEMAC partners to gradually reduce remaining challenges in trade liberalization and improve development prospects for the regional market. ### Technical assistance, capacity building, and statistics - Capacity constraints and institutional weaknesses have impeded policy implementation; technical assistance is being sought from development partners. - Capacity-building outcomes and plans: - More than 100 students graduated from overseas universities over the last two years; this number will increase in the year to come. - Two resident advisors will be provided by the Fund under the technical assistance contract signed last March in Bata; arrangements in place to launch this assistance as of next July. - For preparation of the poverty reduction strategy and related data collection/treatment, authorities and the World Bank are finalizing the services’ agreement expected to be signed next June. - Authorities will implement measures, in collaboration with partners, to allocate adequate resources to enhance capacity building and establish the National Statistical Institute to improve frequency and scope of data reporting. ### Poverty reduction strategy (NPRS) and social objectives - Poverty reduction and achievement of the MDGs remain the main objectives. - NPRS conceived as framework to adjust level and composition of public expenditure to improve social indicators. - Planned national conference on poverty to be organized before the end of 2006 with participation of civil society, NGOs, and donors. - Four key elements identified for the NPRS: - (i) institutional capacity building; - (ii) public investment in physical infrastructure; - (iii) removal of impediments to financial intermediation; - (iv) creation of an appropriate business environment. - World Bank technical assistance expected to help prepare the NPRS, including establishment of a poverty profile, restructuring the energy sector, and assessing sectoral policies to encourage economic diversification. ### Conclusion and outlook - Authorities determined to pursue policy dialogue with the Fund and other development partners to strengthen institutional capacities and use oil resources to diversify the economy. - Under the EITI Initiative, measures are being implemented to enhance transparency and accountability in hydrocarbon resource management. - Authorities recognize the challenge of capacity constraints to implement sound policies for poverty reduction and MDG achievement. - Revenue outlook cited: the country expects from now to 2020 revenues estimated at more than US$ 30 billions. - Authorities view technical assistance from the Fund, the World Bank and USAID as temporary but intend to use it to improve macroeconomic management; they express gratitude to development partners and hope for continued assistance. *Source: _cr06233 - introduction of a value-added tax. In addition, the audit of oil companies has resulted in the* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06233.pdf_