## _cr06238 ## Source details **Canonical URL:** [_cr06238](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06238.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06238.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06238.pdf.json) --- ### Key issues and context - 2005: record high oil prices buoyed exports and government revenues; non-oil growth accelerated and inflation remained moderate, producing the first increase in per-capita GDP since 1999. - Elimination of external and domestic arrears and lowering of external debt improved confidence; structural reforms initiated since 2004 progressed but late-2005 elections were accompanied by large fiscal slippages and delays in structural reforms. - Anticipated depletion of oil reserves requires decisive action to place economic policies on a sustainable basis. - Policy trade-offs highlighted: - Choice between saving or spending part of the oil windfall. - Staff view: anticipated depletion of oil reserves over the next 30 years requires a sharp fiscal adjustment, i.e., a substantial increase in public savings. - Staff view: to reestablish credibility after end-2005 slippages and reduce vulnerability to oil price swings the bulk of fiscal adjustment should be front-loaded. - Importance of debt and reserve management to optimize use of government savings. - Managing transition from oil-dependence to a more diversified economic structure requires strengthened public financial management (including oil revenue management) and significant structural reforms to improve the business climate and foster private sector-led growth. - Need for more transparency to bolster accountability and good governance; scope remains to increase oil revenue transparency, including under the EITI. ### Recent economic developments (2005) — key indicators and outcomes - Growth and inflation - Real GDP grew by 3 percent in 2005. - Non-oil growth was 4½ percent in 2005. - Oil production was slightly lower at 13¼ million tons in 2005. - Consumer price inflation was close to zero in 2005. - Per-capita GDP rose for the first time in five years in 2005. - The real effective exchange rate depreciated by about 5¼ percent (primarily due to euro weakening). - External and fiscal balances - Average export price of Gabonese crude oil rose by 41 percent in 2005 to US$49 per barrel. - Overall balance of payments surplus rose by 5½ percentage points to 16 percent of GDP in 2005. - External debt was reduced to 39 percent of GDP at end-2005. - Government saved about half of oil revenue windfalls; overall fiscal surplus reached 9¾ percent of GDP in 2005. - Election-related fiscal slippages (late 2005) - Non-oil primary deficit reached 12 percent of non-oil GDP versus target of 8½ percent in the supplementary budget. - Additional non-interest current expenditure exceeded the indicative target by 4 percent of non-oil GDP. - Non-oil revenue shortfall about 1½ percentage points of non-oil GDP. - Structural reform setbacks - Delays in restructuring/privatization of Air Gabon and Gabon Télécom; Air Gabon liquidation announced in February 2006 and creation of Air Gabon International (Royal Air Maroc majority stake); tender for 51 percent of Gabon Télécom launched in early December (sale aimed by mid-2006). - Forestry sector reform stalled despite prior measures; collection of the area tax reached only 22 percent of the target in 2005; total forestry tax arrears nearly CFAF 15 billion at end-2005. ### Use of additional oil resources (Box 1) — decomposition and savings - Average oil GDP in 2003–05 increased by 14½ percentage points of non-oil GDP relative to 2002. - Gabon’s use of additional oil GDP (in percent of additional oil GDP): - Net exports: 161.9 - Public: 23.5 - Private: 1.1 - Changes in investment: 1.1 - Public consumption: -1.0 - Private consumption: -1.8 - Inventories: -8.4 - Comparison: MCD oil exporters (in percent of additional oil GDP) - Net exports: 85.5 - Public: 20.6 - Private: 17.6 - Changes in investment: 1.3 - Public consumption: 4.4 - Private consumption: 0.3 - Inventories: -0.6 - Government saved about one-half of additional oil revenues in 2005: - Oil revenue (billions of CFA francs): 2004 = 628.2; 2005 = 907.2; Difference = 279.0 (add'l oil revenue = 100.0) - Total spending: 2004 = 870.5; 2005 = 1,010.8; Difference = 140.2 = 50.3 percent of add'l oil revenue - Total, budgetary spending: 2004 = 855.3; 2005 = 1,002.7; Difference = 147.4 = 52.8 percent - Primary spending: 2004 = 704.5; 2005 = 873.5; Difference = 169.0 = 60.6 percent - Transfers and subsidies: 2004 = 125.6; 2005 = 207.2; Difference = 81.7 = 29.3 percent - Interest: 2004 = 150.8; 2005 = 129.2; Difference = -21.6 = -7.8 percent - Below-the-line spending (privatization-related restructuring costs): 2004 = 15.2; 2005 = 8.1; Difference = -7.1 = -2.5 percent - Total saving (difference): 138.7 (billions of CFA francs) = 49.7 percent of add'l oil revenue ### Oil revenue transparency (Box 2) - Gabon joined the Extractive Industries Transparency Initiative (EITI) and published its first EITI report for 2004 in December 2005. - 2004 EITI report findings: - Discrepancy of CFAF 17 billion (US$33 million) for covered oil revenue streams (roughly 5 percent of the total); independent administrator finds no evidence of serious anomalies. - Coverage incomplete: profit oil (about half of government oil-sector revenue) was excluded from the 2004 EITI report because the government could not provide a detailed 2004 breakdown to the IA; authorities declared the next EITI report will include profit oil. - Follow-up limited: no attempt to date to explain the discrepancy and planned publicity campaign not yet undertaken. - The 2004 oil revenue reported to the IA by the government exceeds earlier staff estimates by CFAF 22 billion (US$42 million); authorities have not yet explained these differences. ### Regional context and social indicators — selected figures - Proven oil reserves about 2 billion barrels. - Production in 2005: 268,000 barrels per day. - In 2005 oil accounted for more than 50 percent of GDP, 63 percent of government revenue, and over 80 percent of total exports. - Population estimated about 1.4 million. - Poverty: poverty line at about 14 percent of average income; about one-third of population below the line. - Estimated Gini coefficient: 0.437. ### Medium-term fiscal sustainability and debt projections (Section II) - Anchor for fiscal policy recommended: the permanently sustainable non-oil primary deficit, estimated at about 5 percent of non-oil GDP (note: at current prices the medium-term sustainable non-oil primary deficit would be about 5½ percent of non-oil GDP). - Debt sustainability projections (assuming continued high oil prices and resumption of fiscal restraint): - Total public debt: 44 percent of GDP at end-2005 → 23 percent by 2008 → 10 percent by 2011. - Key Box 3 findings: - (i) Permanently sustainable non-oil primary deficit estimated at 5 percent of non-oil GDP, well below 2005 level of 12 percent. - (ii) Habit formation and adjustment costs imply spreading the bulk of fiscal adjustment over three to five years. - (iii) Precautionary motives suggest front-loading adjustment and targeting a smaller long-run deficit; example: a decline in real oil prices to 30 US dollars per barrel would reduce the permanently sustainable primary deficit to 3¾ percent of non-oil GDP. ### Macroeconomic framework (selected projections, 2005–08) - Real GDP growth (percent): 2005 Prel. 2.9; 2006 3.0; 2007 1.8; 2008 3.3 - Oil: 2005 -1.1; 2006 1.2; 2007 -4.8; 2008 0.1 - Non-oil: 2005 4.4; 2006 3.6; 2007 4.1; 2008 4.3 - CPI (annual average): 2005 0.0; 2006 1.0; 2007 1.2; 2008 1.4 - External current account balance (percent of GDP): 2005 15.9; 2006 19.6; 2007 19.1; 2008 18.3 - Non-oil primary balance (percent of non-oil GDP): 2005 -12.1; 2006 -8.9; 2007 -7.7; 2008 -6.6 - Overall balance, commitment basis (percent of GDP): 2005 9.3; 2006 11.1; 2007 11.6; 2008 10.7 - Total public debt (percent of GDP): 2005 44.2; 2006 33.5; 2007 28.5; 2008 22.9 ### Fiscal policy and public expenditure management — priorities and recommendations - Need for adjustment - Large slippages in 2005 warranted substantial fiscal adjustment despite current growing fiscal surpluses. - Oil reserves estimated to be exhausted within about 30 years; need for permanently-sustainable public finances and additional fiscal prudence. - Pace of adjustment: mission vs. authorities - Mission recommendation: reduce non-oil primary deficit from 12 percent of non-oil GDP in 2005 to 7¼ percent in 2006. - Authorities preferred more gradual pace: proposed non-oil primary deficit ~9 percent in 2006 and 6½ percent by 2008. - Expenditure-side priorities and recommendations - Regain control of current expenditure by reining in transfers and subsidies. - Successor airline to Air Gabon should be managed on a fully commercial basis, without further budgetary support. - Keep spending from the security and sovereignty fund to a strict minimum. - Reassess pensions spending after 50 percent overshoot in 2005 budget allocation. - Increase productive public investment but improve quality and project selection. - Debt and reserve management recommendations - Accelerate reduction in public debt, including pre-paying external debt owed to Paris Club creditors. - Immediate priority: eliminate bons d’équipement (government paying 7½ percent interest). - Replace Fonds pour les générations futures (FFG) with a more effective institutional framework for long-term financial assets. - Reduce outstanding advances from the BEAC (interest rate 5½ percent); discuss replacing advances by tradable Treasury Bills at CEMAC level. - Petroleum price subsidies: scale and policy options - Implicit subsidies reached 3¼ percent of non-oil GDP in 2005; at current oil prices cost could rise to 4½ percent of non-oil GDP. - PSIA indicates bulk of subsidies accrues to the rich rather than the poor. - Mission proposed: - (i) reflect foregone revenue and implicit subsidies transparently in the budget; - (ii) gradually raise ex-refinery prices to import-parity levels to eliminate subsidy over three years; - (iii) offset impact by raising targeted subsidies to the poor and GPRSP spending. - ROSC and public expenditure management weaknesses - Current expenditure: close to half devoted to public sector wage bill and interest payments; insufficient provision for goods, services, and maintenance. - Public investment averaged 5 percent of GDP over past five years but returns estimated very low or negative. - Fêtes tournantes-related public investment found unproductive; audit revealed serious weaknesses in procurement, execution, quality, and prices. - Key ROSC recommendations - Establish hierarchy of priorities for investment projects in Public Investment Program. - Finalize and implement functional expenditure classification with 2007 budget. - Subject fêtes tournantes expenditure to standard budgetary procedures and published audits. - Streamline budget execution and monitoring; publish monthly execution reports; reduce treasury payment period from 120 days to one month. - Report spending on implicit fuel-price subsidies in the budget. ### Revenue administration and tax policy — recommendations - Reverse erosion of non-oil revenue and enhance efficiency of public revenue management. - Large Taxpayers Unit (LTU) needs to become fully operational. - Revise tax code to reflect all modifications; estimate cost of tax expenditures and report them in budget documentation. - Reinforce oil revenue administration by replacing annual projection model with detailed monthly model. - Improve forestry taxation enforcement; proceed rapidly with return to public domain of forestry permits that cannot meet tax obligations. - Mission flagged proposed law to earmark a large share of existing taxes for a National Forestry Fund as at odds with good budgetary practice and a potential governance risk. ### Structural reforms to foster diversification and improve business climate - Core message: attract private-sector investment to increase total factor productivity and non-oil growth potential. - Financial sector findings and recommendations - Credit to the private sector fell from 13.2 percent of GDP in 2002 to 9.0 percent in 2005 (or from 22.6 to 19.0 percent of non-oil GDP). - Net foreign asset position of commercial banks improved from –0.3 percent of GDP in 2002 to 4.4 percent in 2005. - Causes: administratively determined interest rate floors and ceilings; difficulties monitoring loan quality; lack of domestic lending opportunities and alternative financial instruments. - Recommendations: reduce the minimum rate on deposits (or liberalize), strengthen legal environment for commercial matters, facilitate registration and collection of collateral, reinforce creditor rights, improve corporate accounting practices, and improve access to micro-financing. - Trade policy and labor market - CET affects about 22 percent of taxable imports; lowering maximum tariff rate from 30 to 20 percent estimated to cost about ¾ percent of non-oil GDP in revenue. - Recommendations: lead regional discussions within CEMAC on liberalization; complement trade liberalization with infrastructure and governance improvements. - Privatizations and public enterprises - Urgent completion of Gabon Télécom and Air Gabon privatizations; ensure successor enterprises do not drain public resources. - Governance, anti-corruption, and transparency - 2004 Transparency International CPI score: 3.3 (74th place); 2005: 2.9 (88th place). - National Commission Against Illicit Enrichment filings: about one-third of senior officials by end-June 2005; about one-half by year’s end. - Recommendations: accelerate implementation of financial disclosure regime; publish key documents (supreme audit office reports, supplementary budget laws, audits of fêtes tournantes and FER, CNCEI annual reports); adopt new statistics law and boost resources for Statistics Directorate; continue and broaden EITI reporting to include profit oil and mining revenues; resume forestry sector reforms and address permit-holders with tax arrears. ### Data, statistics, and transparency — assessment and required improvements - Database fairly comprehensive and generally compiled in accordance with international standards, but consistency between sectors is poor. - Participation in GDDS; metadata posted October 1, 2002 but not updated since. - Key shortcomings: - No real sector statistics reported for publication in IFS; no fiscal data reported in IFS or GFS Yearbook. - Significant inconsistencies remain between national accounts and balance of payments statistics. - Monthly CPI only for Libreville and based on outdated 1975 expenditure survey. - Limited coverage of fiscal data to STA; social security operations not included in government finances. - Audited oil sector accounts not published with adequate periodicity. - Table of Common Indicators Required for Surveillance (selected exact entries — As of April 24, 2006) — dates and frequencies preserved: - Exchange rates — Date of latest observation: 4/20/06; Date received: 4/10/06; Frequency: D D D - International reserve assets and reserve liabilities of the monetary authorities — Date of latest observation: 2/28/06; Date received: 4/05/06; Frequency: M M M - Consumer price index — Date of latest observation: 1/28/06; Date received: 3/10/06; Frequency: M M M - Revenue, expenditure, balance and composition of financing – general government — Date of latest observation: 1/28/06; Date received: 4/20/06; Frequency: M M M - External current account balance — Date of latest observation: 12/31/05; Date received: 2/25/06; Frequency of Data: A; Frequency of Reporting: I; Frequency of Publication: A ### Scenarios, vulnerabilities, and stress tests - Emphasis on vulnerability to oil price swings and finite oil resources. - Key fiscal vulnerability: large reliance on oil revenue (oil revenue up to 21.8 percent of GDP in 2001–08 series) and persistent non-oil primary deficits (e.g., -16.9 percent of non-oil GDP in 2001 improving to -6.6 by 2008 projection). - Debt sustainability analysis: - Baseline: buoyant oil outlook allows amortization without new borrowing; external debt 39 percent of GDP and total public debt 44 percent of GDP at time of analysis, projected to drop to about 10 percent by 2011. - Historical-averages scenario: lower average annual GDP growth of 1.1 percent; external debt climbs slightly but remains below critical 40-60 percent range. - Stress tests: growth shock has mild effect; current account shock (much lower oil prices) keeps debt ratio constant; depreciation raises external debt ratios but public-sector-debt-to-GDP would continue to decline. ### Priority policy actions (summary) - Use current high oil revenues to lower debt levels decisively. - Raise the quality of public spending to address social and infrastructure needs. - Maintain sound macroeconomic policies and front-load fiscal adjustment to increase public savings given exhausted oil reserves over about 30 years. - Strengthen public financial management and oil revenue management (replace annual projection model with monthly model). - Accelerate structural reforms to improve business climate: deepen financial intermediation, liberalize labor markets, address legal/regulatory uncertainty, and complete privatizations. - Improve transparency: broaden EITI reporting to profit oil and mining, publish audit and budget-related documents, adopt new statistics law, and boost statistical capacity. - Report and phase out implicit petroleum subsidies while protecting the poor through targeted measures. *Source: IMF staff report content unit _cr06238 (selected sections) as provided in the supplied PDF content unit.* ### 1. Selected Economic Indicators, 2001–08......................................................................25 ### 1. Selected Economic Indicators, 2001–08......................................................................25 ### Key issues for discussion - In 2005, record high oil prices buoyed exports and government revenues; non-oil growth accelerated and inflation remained moderate, producing the first increase in per-capita GDP since 1999. - Elimination of external and domestic arrears and lowering of external debt improved confidence; structural reforms initiated since 2004 progressed but late-2005 elections were accompanied by large fiscal slippages and delays in structural reforms. - The anticipated depletion of oil reserves requires decisive action to place economic policies on a sustainable basis. - Policy trade-offs highlighted for Directors: - Choice between saving or spending part of the oil windfall. - Staff view: anticipated depletion of oil reserves over the next 30 years requires a sharp fiscal adjustment, i.e., a substantial increase in public savings. - Staff view: to reestablish credibility after end-2005 slippages and reduce vulnerability to oil price swings the bulk of fiscal adjustment should be front-loaded. - Importance of debt and reserve management to optimize use of government savings. - Managing transition from oil-dependence to a more diversified economic structure requires strengthened public financial management (including oil revenue management) and significant structural reforms to improve the business climate and foster private sector-led growth. - Need for more transparency to bolster accountability and good governance; scope remains to increase oil revenue transparency, including under the EITI. ### Background - Gabon has a history of boom-and-bust cycles driven by oil booms and political cycles, leading to ratcheting up public expenditure followed by painful adjustments. - After rapid growth in the 1960s–1970s, per-capita GDP stagnated over the past 25 years; social indicators remain poor and infrastructure underdeveloped. - The authorities’ program, supported by a 14-month Stand-By Arrangement during 2004–05, represented a break from past practices; the 2004–05 SBA met all performance criteria and completed all reviews. - Program outcomes: restored macroeconomic stability, rescheduled or eliminated most external and domestic payment arrears, introduced far-reaching structural reforms to foster non-oil growth, took first steps to revitalize the forestry sector, and strengthened governance and transparency. ### Recent economic developments (2005) - Growth and inflation - Real GDP grew by 3 percent in 2005. - Non-oil growth was 4½ percent in 2005. - Oil production was slightly lower at 13¼ million tons in 2005. - Consumer price inflation was close to zero in 2005. - Per-capita GDP rose for the first time in five years in 2005. - The real effective exchange rate depreciated by about 5¼ percent (primarily due to euro weakening). - External and fiscal balances - Average export price of Gabonese crude oil rose by 41 percent in 2005 to US$49 per barrel. - Overall balance of payments surplus rose by 5½ percentage points to 16 percent of GDP in 2005. - External debt was reduced to 39 percent of GDP at end-2005. - Government saved about half of oil revenue windfalls; overall fiscal surplus reached 9¾ percent of GDP in 2005. - Election-related fiscal slippages (late 2005) - Non-oil primary deficit reached 12 percent of non-oil GDP versus target of 8½ percent in the supplementary budget. - Additional non-interest current expenditure exceeded the indicative target by 4 percent of non-oil GDP. - Non-oil revenue shortfall about 1½ percentage points of non-oil GDP, due to lower recovery of tax arrears and larger-than-anticipated personal income tax exemptions. - Structural reform setbacks - Restructuring and privatization of Air Gabon and Gabon Télécom experienced significant delays; Air Gabon liquidation announced in February 2006 with creation of Air Gabon International (Royal Air Maroc majority stake); tender for 51 percent of Gabon Télécom launched in early December (sale aimed by mid-2006). - Reform of the forestry sector stalled despite earlier measures: simplification of forestry taxation (from over 20 taxes to 3), disclosure of holders of forestry permits, moratorium on allocation of new licenses, and elimination of SNBG export monopoly. - Sizeable tax arrears persist: collection of the area tax reached only 22 percent of the target in 2005; total forestry tax arrears nearly CFAF 15 billion at end-2005. ### Use of additional oil resources (Box 1) - Average oil GDP in 2003–05 increased by 14½ percentage points of non-oil GDP relative to 2002. - Gabon’s use of additional oil GDP (in percent of additional oil GDP): - Net exports: 161.9 - Public: 23.5 - Private: 1.1 - Changes in investment: 1.1 - Public consumption: -1.0 - Private consumption: -1.8 - Inventories: -8.4 - Comparison: MCD oil exporters (in percent of additional oil GDP) - Net exports: 85.5 - Public: 20.6 - Private: 17.6 - Changes in investment: 1.3 - Public consumption: 4.4 - Private consumption: 0.3 - Inventories: -0.6 - Despite election-related slippages, government saved about one-half of additional oil revenues in 2005: - Oil revenue: 2004 = 628.2; 2005 = 907.2; Difference = 279.0 (In billions of CFA francs; add'l oil revenue = 100.0) - Total spending: 2004 = 870.5; 2005 = 1,010.8; Difference = 140.2 = 50.3 percent of add'l oil revenue - Total, budgetary spending: 2004 = 855.3; 2005 = 1,002.7; Difference = 147.4 = 52.8 percent - Primary spending: 2004 = 704.5; 2005 = 873.5; Difference = 169.0 = 60.6 percent - Transfers and subsidies: 2004 = 125.6; 2005 = 207.2; Difference = 81.7 = 29.3 percent - Interest: 2004 = 150.8; 2005 = 129.2; Difference = -21.6 = -7.8 percent - Below-the-line spending (privatization-related restructuring costs): 2004 = 15.2; 2005 = 8.1; Difference = -7.1 = -2.5 percent - Total saving (difference): 138.7 (in billions of CFA francs) = 49.7 percent of add'l oil revenue ### Oil revenue transparency (Box 2) - Gabon joined the Extractive Industries Transparency Initiative (EITI) and published its first EITI report for 2004 in December 2005. - The EITI report, prepared with an international accounting firm as independent administrator (IA), compares company payments with government receipts for 2004. - It notes a discrepancy of CFAF 17 billion (US$33 million) for covered oil revenue streams (roughly 5 percent of the total); IA finds no evidence of serious anomalies. - Coverage incomplete: profit oil (about half of government oil-sector revenue) was excluded from the 2004 EITI report because the government could not provide a detailed 2004 breakdown to the IA; authorities declared the next EITI report will include profit oil. - Follow-up limited: no attempt to date to explain the discrepancy and planned publicity campaign not yet undertaken. - The 2004 oil revenue reported to the IA by the government exceeds earlier staff estimates by CFAF 22 billion (US$42 million); authorities have not yet explained these differences. ### Regional context and social indicators - Oil endowment and production (2005) - Proven reserves about 2 billion barrels. - Production in 2005: 268,000 barrels per day. - In 2005 oil accounted for more than 50 percent of GDP, 63 percent of government revenue, and over 80 percent of total exports. - Population and income - Population estimated about 1.4 million. - Oil exploitation led to rapid per-capita income increases in 1960–80, but per-capita GDP has declined since 1980. - Selected social and governance indicators (as reported) - A recent comprehensive poverty survey: poverty line at about 14 percent of average income; about one-third of population below the line. - Estimated Gini coefficient: 0.437. - Human Development Index 2005 entries and other indicator table entries as presented in source (various country and regional comparisons). - Comparative position - Gabon ranked third in sub-Saharan Africa in proven reserves and production behind Nigeria and Angola. - Real, per capita GDP in 2005 and human development comparisons indicate Gabon is one of the higher-income African countries but with social development indicators not much higher than those of other SSA countries. ### Policy discussion themes (beginning of Section II) - Assessment of fiscal strategy: saving versus spending of oil windfalls; need for front-loaded fiscal adjustment to raise public savings given projected oil depletion over next 30 years. - Strengthening public financial management and oil revenue management to raise quality of public spending. - Renewed emphasis on structural reforms to improve business climate and access to credit, and on transparency and accountability measures (including EITI follow-up). *Source: IMF staff report content as provided in the supplied PDF content unit.* ### 9. The critical medium-term challenge facing Gabon is managing the transition ### 9. The critical medium-term challenge facing Gabon is managing the transition ### A. Sustainable Policies in the Context of Exhaustible Oil Reserves - Context and objective - Transition from an economy highly dependent on oil to a diversified one that harnesses private sector initiative and makes decisive progress in poverty reduction. - Next few years: likely moderate economic growth and continued large fiscal and balance of payments surpluses. - Anchor for fiscal policy recommended: the permanently sustainable non-oil primary deficit, estimated at about 5 percent of non-oil GDP (note: at current prices the medium-term sustainable non-oil primary deficit would be about 5½ percent of non-oil GDP). - Debt sustainability projections (assuming continued high oil prices and resumption of fiscal restraint) - Total public debt: 44 percent of GDP at end-2005 → 23 percent by 2008 → 10 percent by 2011. - Key findings from Box 3 (Exhaustible Oil Reserves, Habits, and Sustainable Fiscal Policy) - (i) The permanently sustainable non-oil primary deficit is estimated at 5 percent of non-oil GDP, well below the 2005 level of 12 percent of non-oil GDP. - (ii) Habit formation and adjustment costs imply spreading the bulk of the fiscal adjustment over three to five years rather than a single abrupt adjustment. - (iii) Precautionary motives suggest front-loading adjustment and targeting a smaller long-run deficit. Example: a decline in real oil prices to 30 US dollars per barrel would reduce the permanently sustainable primary deficit to 3¾ percent of non-oil GDP. An interest rate spread between sovereign debt and financial assets also creates an incentive for faster adjustment to pay off net debt. - Authorities’ stance - Authorities agreed on the need to reduce poverty and prepare for the post-oil era while noting medium-term fiscal adjustment is needed. - Authorities emphasized urgency of providing a strong basis for economic growth and employment creation; highlighted severe infrastructural bottlenecks in transportation, health, and education. - Government’s GPRSP (finalized in early 2006) rests on four pillars: raising growth as a pre-requisite for poverty reduction; improving infrastructure; improving access to essential services, including education and health; and strengthening governance. - Macroeconomic snapshot (Gabon. Macroeconomic Framework, 2005-08; preliminary/projections) - Real GDP growth (in percent changes): 2005 Prel. 2.9; 2006 3.0; 2007 1.8; 2008 3.3 - Oil: 2005 -1.1; 2006 1.2; 2007 -4.8; 2008 0.1 - Non-oil: 2005 4.4; 2006 3.6; 2007 4.1; 2008 4.3 - CPI (annual average): 2005 0.0; 2006 1.0; 2007 1.2; 2008 1.4 - External current account balance (in percent of GDP): 2005 15.9; 2006 19.6; 2007 19.1; 2008 18.3 - Non-oil primary balance (in percent of non-oil GDP): 2005 -12.1; 2006 -8.9; 2007 -7.7; 2008 -6.6 - Overall balance, commitment basis (in percent of GDP): 2005 9.3; 2006 11.1; 2007 11.6; 2008 10.7 - Total public debt (in percent of GDP): 2005 44.2; 2006 33.5; 2007 28.5; 2008 22.9 ### B. Fiscal Policy and Public Expenditure Management - Need for adjustment - Large slippages in 2005 warranted substantial fiscal adjustment despite current growing fiscal surpluses. - Oil reserves estimated to be exhausted within about 30 years; need for permanently-sustainable public finances and additional fiscal prudence given vulnerability to oil-price swings. - Pace of fiscal adjustment: mission vs. authorities - Mission recommendation: reduce non-oil primary deficit from 12 percent of non-oil GDP in 2005 to 7¼ percent of non-oil GDP in 2006, arguing much of the 2005 slippage was one-off and reversible. - Authorities preferred a more gradual pace due to parliamentary elections and transitional costs; proposed non-oil primary deficit ~9 percent of non-oil GDP in 2006 and a 2008 target of 6½ percent. - Expenditure-side priorities and recommendations - Regain control of current expenditure by reining in transfers and subsidies. - Successor airline to Air Gabon should be managed on a fully commercial basis, without further budgetary support. - Spending from the security and sovereignty fund should be kept to a strict minimum. - Spending on pensions (which overshot the 2005 budget allocation by 50 percent) requires fundamental reassessment given capacity constraints to handle wave of retirements in public sector. - Scope exists for raising productive public investment, but quality of public investment needs improvement for lasting impact on growth. - Debt and reserve management recommendations - Accelerate reduction in public debt, including pre-paying external debt owed to Paris Club creditors, to reduce annual interest bill and vulnerability to shocks. - Immediate priority: eliminate bons d’équipement (government paying 7½ percent interest on them). - Replace current Fonds pour les générations futures (FFG), on which the BEAC pays a nominal rate of 1½ percent, with a more effective institutional framework for accumulating long-term financial assets. - Continue reducing outstanding advances from the BEAC that carry an interest rate of 5½ percent; discussion at CEMAC level to replace advances by tradable Treasury Bills. - Petroleum price subsidies: scale, distribution, and policy options - Freeze in domestic retail prices since 2002 + sharp increases in international oil prices → large implicit subsidies reaching 3¼ percent of non-oil GDP in 2005; at current oil prices cost could rise to 4½ percent of non-oil GDP. - PSIA indicates bulk of subsidies accrues to the rich rather than the poor. - Mission proposed options: - (i) reflect both foregone revenue and implicit subsidies transparently in the budget; - (ii) gradually raise ex-refinery prices of petroleum products to import-parity levels with objective of eliminating the subsidy over a three-year period; - (iii) offset impact of price increases by raising targeted subsidies to the poor and GPRSP spending. - Authorities recognized rising cost and are considering options. - Box 4 highlights (Implicit Fuel Price Subsidies) - Ex-refinery prices of 7 petroleum products frozen since August 2002; SOGARA (majority-privately-owned refinery) compensated by government via crude oil deliveries for losses. - Estimated fiscal cost of subsidies: 3.2 percent of non-oil GDP in 2005; could increase to 4.5 percent in 2006. - Bulk of subsidy corresponds to diesel used mainly by heavy industry and transportation. - Comparison: total public spending on health and education in 2005 comprised 2.2 and 3.1 percent of non-oil GDP, respectively. - Reflecting implicit subsidies in the budget would have raised the non-oil primary deficit from 12 percent to 15¾ percent of non-oil GDP in 2005. - Estimated fiscal cost in 2005 could have reached 1.6 percent of overall GDP. - Distributional finding: based on 2004 EGEP household survey, top 10 percent of households receive about one-third of total subsidy; bottom 30 percent of individuals receive only 13 percent. - Projections (2005-08) assuming ex-refinery prices unchanged and international fuel prices follow WEO: - Total cost (billions of CFAF): 2005 71.9; 2006 107.4; 2007 115.0; 2008 111.2 - (percent of GDP): 2005 1.6; 2006 2.0; 2007 2.2; 2008 2.2 - (percent of non-oil GDP): 2005 3.2; 2006 4.5; 2007 4.6; 2008 4.2 - Memo items: Total public education expenditure (billions of CFAF) 70.0; Total public health expenditure (billions of CFAF) 50.3 (total appropriations in 2005 supplementary budget). - Public expenditure management weaknesses and ROSC findings - Current expenditure: close to half devoted to public sector wage bill and interest payments; insufficient provisions for goods and services and maintenance. - Public investment averaged 5 percent of GDP over past five years, but returns estimated very low or negative; large infrastructure projects often lack rigorous cost-benefit analysis. - Fêtes tournantes-related public investment found to be unproductive; audit revealed serious weaknesses in procurement, execution, quality, and prices. - Key expenditure management recommendations (from ROSC and World Bank review) - Establish hierarchy of priorities for investment projects in Public Investment Program. - Ensure functional expenditure classification finalized and implemented with 2007 budget. - Subject fêtes tournantes expenditure to standard budgetary procedures and published audits. - Streamline budget execution and monitoring procedures to avoid slippages. - Report spending on implicit fuel-price subsidies in the budget. - Revenue-side recommendations and concerns - Reverse erosion of non-oil revenue and enhance efficiency of public revenue management. - Large tax-payer unit (LTU) needs to become fully operational. - Revise tax code to reflect all modifications; estimate cost of tax expenditures and report them in budget documentation. - Reinforce oil revenue administration, replacing current annual projection model with a detailed monthly model. - Forestry taxation enforcement needs improvement; proceed rapidly with return to public domain of forestry permits that cannot meet tax obligations. - Concern about proposed law to earmark a large share of existing taxes for a National Forestry Fund—mission flagged it as at odds with good budgetary practice and a potential governance risk. - Preliminary conclusions and principal ROSC recommendations (Box 5) - Legal framework well defined but implementation falls short of best practice: two separate budgets for recurrent and investment expenditures cause coordination problems; budget execution procedures cumbersome; lack of effective financial information system; budget documentation incomplete (excludes implicit subsidies and fiscal risks); tax system subject to frequent discretionary modifications not reflected in tax code. - Principal ROSC recommendations include: - Streamline fiscal policy formulation; prepare 2007 budget in context of medium-term expenditure framework for 2007–09; establish hierarchy of priorities for investment projects. - Improve natural resource revenue transparency; replace annual projection model with detailed monthly model; extend EITI report coverage to include profit oil and mining revenue streams. - Enhance budget transparency and presentation; report excluded revenue/expenditure; finalize functional classification; include summary tables and prior outturns and two-year estimates; submit updated tax code to parliament. - Develop systematic fiscal risk-management strategy; include fiscal sustainability analysis for decline of oil revenue and evaluate social security/pension fund liabilities; estimate and report cost of tax expenditures. - Streamline budget execution and monitoring; prepare monthly limit for program appropriations; publish monthly execution reports; reduce treasury payment period from 120 days to one month; enforce public tender control office decisions and apply sanctions when appropriate. ### C. Structural Policies for Economic Diversification - Overarching need - Structural reform policies to foster economic diversification are necessary to prepare for a post-oil economy and harness private sector initiative. - Emphasis - Address severe infrastructural bottlenecks in transportation, health, and education to support growth and employment creation as a pre-requisite for poverty reduction. - Improve quality and selection of public investment projects to ensure lasting impact on economic growth. - Implement revenue and expenditure management reforms and strengthen governance to create an environment conducive to private sector-led diversification. *Source: IMF staff report excerpt (Gabon: 2006 Article IV consultation — selected sections).* ### 21. An uninviting business climate remains the country’s Achilles’ heel. To diversify ### _cr06238 - 21. An uninviting business climate remains the country’s Achilles’ heel. To diversify ### Business climate and diversification - Core message: Gabon needs to attract private-sector investment to increase total factor productivity and non-oil growth potential. - Structural reform priorities identified: financial markets, labor markets, trade regime, and governance. - Short- and medium-term objective: accelerate structural reform agenda to diversify away from oil dependence. ### Financial sector: shallow intermediation and limited private credit - Findings: - “Gabon’s financial sector remains shallow even by regional standards.” - Credit to the private sector declined from a peak of over 13 percent of GDP in 2002 to 9 percent in 2005. - Box 6 detailed figures: credit to the private sector fell from 13.2 percent of GDP in 2002 to 9.0 percent in 2005 (or from 22.6 to 19.0 percent of non-oil GDP). - Net foreign asset position of commercial banks improved from –0.3 percent of GDP in 2002 to 4.4 percent in 2005 due to excess liquidity transferred to correspondent banks outside the CEMAC zone. - Banks enforce restrictions on minimum deposits and/or depositors’ minimum income, limiting services to trusted enterprises, public-sector employees, and expatriates. - Small and medium-sized enterprises have little access to the banking system. - Causes highlighted: - Administratively determined interest rate floors and ceilings. - Difficulties for banks to effectively monitor the quality of their loan portfolios. - Lack of domestic lending opportunities and lack of alternative financial instruments. - Policy recommendations (from Box 6 and text): - Reduce the minimum rate on deposits (if not fully liberalize it). - Overcome structural obstacles preventing banks from assessing and monitoring credit risk. - Strengthen legal environment for commercial matters. - Facilitate registration of collateral and accelerate their collection. - Reinforce creditor rights. - Improve corporate accounting practices. - Improve access to micro-financing. ### Trade policy, regional integration, and labor market flexibility - Findings: - Trade liberalization, including at the regional level, is required to foster diversification and integration into the global economy. - The relatively high common external tariff (CET) affects about 22 percent of taxable imports and hampers private sector development. - Fiscal implications of lowering the CET: preliminary staff estimates suggest revenue loss from lowering the maximum tariff rate from 30 to 20 percent would be about ¾ percent of non-oil GDP. - Authorities noted trade policy is determined regionally (CEMAC) and expressed concern about CET reductions’ impact on nascent agro-industries. - Rigid labor markets with deeply entrenched protection clauses make dismissals very difficult and costly, posing an obstacle to private-sector activity. - Recommendations: - Authorities urged to lead regional discussions within the CEMAC to foster progress on liberalization. - Complement trade liberalization with trade-enabling investments in infrastructure and enhanced governance. ### Privatizations and public enterprises - Findings: - Rapid conclusion of privatizations of Gabon Télécom and Air Gabon viewed as important to strengthen productivity and reduce fiscal drain. - Mission welcomed tender for a majority share in Gabon Télécom and urged completion of a successful and transparent sale by mid-year (government timetable). - Liquidation of Air Gabon recognized as appropriate; objective to allow liquidator to complete task quickly and without undue interference. - Interim arrangements: until Air Gabon International (AGI) becomes operational (planned with Royal Air Maroc majority stake), government will continue to bear part of the financial burden of operating several routes at a cost estimated at over CFAF 2 billion. Mission noted this sends a mixed signal on commitment to withdraw from airline business. - Recommendation: - Ensure successor airline no longer represents a drain on public resources and end government financial involvement once AGI is operational. ### Governance, anti-corruption, and transparency - Findings: - Governance indicators: World Bank’s 2004 governance indicators rank Gabon in the bottom third on control of corruption. - Transparency International CPI: Gabon slipped from 74th place in 2004 (score 3.3) to 88th place in 2005 (score 2.9). - National Commission Against Illicit Enrichment: by end-June 2005 about one-third of senior officials had filed income and wealth statements; by year’s end the number had increased to about one-half. - Several audits and reports exist but many are not regularly published or are difficult to access; some publications (e.g., list of forestry permit holders) are available. - First EITI report published; authorities plan to broaden next report (scheduled for the third quarter of 2006) to include profit oil and to extend coverage to the mining sector. - Recommendations: - Accelerate implementation of financial disclosure regime and move forward on investigations. - Publish key documents on the government’s internet site: reports of the supreme audit office on budget execution for 2003 and 2004, supplementary budget laws for 2004 and 2005, audits of the fêtes tournantes and the road maintenance fund (FER), and annual reports of the National Commission Against Illicit Enrichment. - Adopt a new statistics law rapidly and boost resources for the Statistics Directorate to establish regular public reporting consistent with the GDDS framework. - Continue and broaden EITI reporting to include profit oil and mining revenues. - Resume forestry sector reforms, address forestry permit holders with tax arrears, and ensure forestry financing remains within the government budget. ### Staff appraisal: macroeconomic context and policy priorities - Recent macro developments: - 2005: record high oil prices buoyed exports and government revenues; non-oil growth accelerated and inflation remained moderate; first increase in per-capita GDP since 1999. - Elimination of external and domestic arrears and lowering of external debt supported confidence. - Presidential elections in late-2005 were accompanied by large fiscal slippages and delays in structural reforms; parliamentary elections scheduled for late 2006 pose further financial stability risks. - Short-term priorities: - Re-establish fiscal discipline and re-invigorate the structural reform program; slippages should be fully reversed in 2006. - Address fast-growing implicit subsidies on petroleum products, which under the current regime could reach 4½ of non-oil GDP in 2006; adjust retail prices toward import parity levels gradually while raising targeted subsidies to the poor; reflect foregone revenue and implicit subsidies fully in the budget to increase transparency and accountability. - Public expenditure management: - ROSC on fiscal transparency revealed shortcomings in planning, monitoring, ex-post control of public expenditure, and revenue administration. - Key measures: prioritize public investment program, strengthen budget execution and monitoring, improve fiscal transparency (notably of oil revenue), and improve tax system efficiency by broadening the non-oil revenue base. Address these by the 2007 budget at the latest. - Medium-term challenge: - Manage transition from oil-dependent economy to diversified economy that harnesses private sector initiative and reduces poverty. - Use current high oil prices to lower debt levels and address social/infrastructure needs while saving the bulk of the oil windfall to prepare for exhaustion of oil reserves. - Structural reforms required to raise growth and reduce poverty: - Make the GPRSP operational with concrete poverty-reducing programs. - Improve investment climate by addressing legal and regulatory uncertainty, developing a dynamic financial sector, liberalizing labor markets, and strengthening governance. - Ensure privatizations proceed and that successor enterprises do not drain public resources. - Reinforce transparency and accelerate work of National Commission Against Illicit Enrichment and EITI reporting. *IMF staff report content unit _cr06238 (selected sections).* ### 34. Gabon is at a crucial juncture. The current high oil prices are an opportunity to ### Gabon is at a crucial juncture. The current high oil prices are an opportunity to ### Strategic message and policy recommendations - High oil prices are an opportunity to decisively lower debt levels, thereby reducing Gabon’s historical vulnerability to oil price swings, and to address pressing social and infrastructural needs. - This will require maintaining sound economic policies and, in particular, raising the quality of public spending. - Recognize that oil resources are finite and will eventually run out; policies must be sustainable and provide an environment in which both the public and the private sectors can contribute to: - ensuring sustained, broad-based growth; and - achieving prosperity for all future generations. ### Macroeconomic performance and projections (selected indicators) - Real GDP at constant prices (annual percent change, 2001–08): 2.0, 0.0, 2.4, 1.4, 2.9, 3.0, 1.8, 3.3. - Oil sector growth (annual percent change, 2001–08): -5.7, -1.4, 6.6, -1.0, -1.1, 1.2, -4.8, 0.1. - Non-oil sector growth (annual percent change, 2001–08): 5.3, 0.6, 0.8, 2.3, 4.4, 3.6, 4.1, 4.3. - GDP at current prices (annual percent change, 2001–08): -4.7, 0.0, 2.0, 8.5, 18.9, 10.1, 0.2, 4.2. - Consumer prices (yearly average, 2001–08): 2.1, 0.2, 2.1, 0.4, 0.0, 1.0, 1.2, 1.4. - External current account balance (including official transfers, percent of GDP, 2001–08): 11.0, 6.8, 12.0, 10.5, 15.9, 19.6, 19.1, 18.3. - Gross official reserves (in billions of CFA francs, 2001–08): 9.9, 90.1, 104.9, 216.2, 375.4, 788.2, 1,255.5, 1,794.4. - Oil prices (U.S. dollars/barrel, 2001–08): 24.3, 25.0, 28.9, 37.8, 53.4, 56.0, 55.0, 55.0. - Fund for Future Generations (stock, in billions of CFA francs, 2001–08): ... , 70.4, 30.0, 55.0, 84.0, 181.4, 473.4, 724.2. ### Fiscal position and public finance (selected findings) - Total revenue and grants (percent of GDP, 2001–08): 34.0, 31.5, 29.8, 28.8, 31.2, 31.1, 31.9, 30.1. - Oil revenue (percent of GDP, 2001–08): 21.8, 17.6, 16.6, 16.3, 19.7, 19.7, 20.1, 18.2. - Non-oil revenue (percent of GDP, 2001–08): 12.2, 13.9, 13.6, 13.2, 11.4, 11.3, 11.7, 11.8. - Total expenditure (percent of GDP, 2001–08): 30.8, 28.0, 22.8, 22.1, 21.8, 19.9, 20.2, 19.2. - Primary balance, incl. grants (on a payment order basis, in billions of CFA francs, 2001–08): 415.4, 272.0, 402.8, 437.3, 560.6, 675.2, 709.7, 673.9. - Overall balance (incl. grants, payment order basis, in billions of CFA francs, 2001–08): 111.7, 120.7, 261.3, 286.5, 431.5, 565.9, 592.3, 572.5. - Non-oil primary balance (in percent of non-oil GDP, 2001–08): -16.9, -16.7, -8.2, -7.7, -12.1, -8.9, -7.7, -6.6. - Augmented non-oil primary balance (including restructuring costs and fuel subsidies, 2001–08): -17.2, -17.7, -9.3, -9.8, -15.7, -15.0, -12.3, -10.8. ### External sector and balance of payments (selected findings) - Exports, f.o.b. (in billions of CFA francs, 2001–08): 1,916.0, 1,781.2, 1,847.1, 2,244.7, 2,819.6, 3,072.4, 2,961.0, 2,996.4. - Of which oil sector exports, f.o.b. (in billions of CFA francs, 2001–08): 1,535.9, 1,435.4, 1,553.6, 1,800.9, 2,371.9, 2,575.2, 2,375.6, 2,367.8. - Imports, f.o.b. (in billions of CFA francs, 2001–08): -621.2, -651.7, -605.9, -722.5, -694.9, -738.2, -780.2, -845.1. - Trade balance (in billions of CFA francs, 2001–08): 1,294.8, 1,129.5, 1,241.2, 1,522.1, 2,124.8, 2,334.2, 2,180.8, 2,151.3. - Overall balance (in billions of CFA francs, 2001–05 shown): -197.0, -138.5, -53.7, -6.3, 99.4, 416.3, 474.7, 555.6. - Gross official reserves (in months of imports of GNFS, 2001–08): 0.1, 0.9, 1.2, 1.9, 3.7, 7.0, 11.1, 15.2. ### Monetary and financial sector (selected indicators) - Broad money (M2, in billions of CFA francs, 2001–08): 566.7, 599.0, 591.8, 660.6, 832.6, 953.7, 1,031.8, 1,171.8. - Net domestic assets (changes in percent of beginning-of-period broad money, 2001–08): 42.6, -2.1, -8.8, -23.8, -14.4, -44.2, -46.4, -40.7. - Credit to the economy (annual percent change, 2001–08): 17.4, 8.7, -9.4, -9.3, 11.6, 7.5, 5.6, 8.3. - Banking sector soundness (selected ratios, 2000–05): - Regulatory capital to risk-weighted assets: 13.2, 17.2, 17.6, 19.9, 17.8, 24.0. - NPLs to total gross loans: 6.6, 8.6, 11.4, 13.8, 15.8, 15.1. - Liquid assets to short-term liabilities: 125.4, 128.8, 134.0, 185.3, 219.5, 235.1. ### Structural and social indicators (selected) - Population, midyear (millions, 2001–02): 1.3, 1.37. - GNP per capita (U.S. dollars, selected years): 3,900.0 (1980–85), 4,470.0 (1990), 3,327.7 (2000), 3,100.0 (2001), 3,060.0 (2002). - Millennium Development Goals and social outcomes (selected): Net primary enrollment ratio (percent of relevant age group, 2001) 78.3; Under-5 mortality rate (per 1,000) 96 (1990), 91 (1995), 87 (2001), 85 (2002); Immunization, measles (percent of children under 12 months, 1990–2002): 76, 75, 55, 55. ### Scenarios and vulnerabilities highlighted - The analysis emphasizes vulnerability to oil price swings and the finite nature of oil resources. - Key fiscal vulnerability: large reliance on oil revenue (oil revenue reached up to 21.8 percent of GDP in the 2001–08 series) and persistent non-oil primary deficits (e.g., non-oil primary balance as percent of non-oil GDP: -16.9 in 2001, improving toward -6.6 by 2008 projection). - External vulnerability metrics include high total external debt to exports of goods and services (e.g., 148.6 to 111.9 percent in the indicators) and fluctuations in gross official reserves and months of imports. ### Priority policy actions (derived from the chapter) - Use current high oil revenues to lower debt levels decisively. - Raise the quality of public spending to address social and infrastructure needs. - Maintain sound macroeconomic policies to ensure sustainability when oil revenues decline. - Strengthen the environment for private-sector development alongside public-sector reforms. *Source: _cr06238 - 34. Gabon is at a crucial juncture. The current high oil prices are an opportunity to* ### 1. Gabon is a resource rich country with a small, highly urbanized population. As one of ### _cr06238 - 1. Gabon is a resource rich country with a small, highly urbanized population. As one of ### Country overview and development context - Gabon is resource rich with a small, highly urbanized population. - GNI per capita is estimated at US$4,130 in 2004. - Oil is the key economic sector and the principal driving force of economic growth. - Oil revenues are projected to decline over the next few years; the Government has started exploring economic diversification. - The Bank is working closely with the IMF team to support structural measures for the development of the private and forestry sectors and to support preparation of the Government’s Poverty Reduction Strategy. ### Bank Group strategy and lending operations - Gabon Country Assistance Strategy (CAS) approved by the Board of Directors on May 24, 2005, with two pillars: - (1) strengthening management of public resources (natural and financial) for improved social outcomes; - (2) improving the investment climate to foster sustainable, private sector led non-oil growth. - Cross-cutting themes: capacity development in Government and civil society, and improving governance and participation. - Current base-case assistance program includes three lending operations: - US$15 million Natural Resources Management Development Policy Loan approved in November 2005; - US$25 million Public Investment Program for Local Infrastructure Development Project planned for Bank Board in March 2006; - US$25 million Infrastructure Project planned in FY08. - Each operation emphasizes improving transparency and efficiency in use of public resources and improving the environment for greater private sector participation. - IFC exposure: US$32.5 million in the oil and gas sector. - FIAS completed a diagnostic study of the investment climate. - MIGA: US$61 million guarantee facility for rehabilitation and modernization of a professional training institute approved by the Board in May 2005 (MIGA’s first project in education). ### IMF—World Bank collaboration: objectives and division of labor - IMF and World Bank staff maintain close collaboration to support reforms for economic diversification and to coordinate policy advice to Gabonese authorities. - Successful implementation of medium-term structural measures hinges on complementary World Bank action in: - business climate improvements; - effective and efficient public resources management; - poverty reduction policies; - nonrenewable resource management; - identification and development of non-oil growth sources. - Bank/Fund Collaboration matrix (areas of structural reform and lead institution): - Fiscal area: - Civil service reform — IMF - Expenditure monitoring and control — IMF - Public Financial Management review — World Bank - Tax administration & Fiscal ROSC — IMF - Governance: - Anticorruption law implementation — IMF - Code of ethics for government officials — IMF - Extractive Industries Transparency Initiative (EITI) — World Bank/IMF - Private sector development: - FIAS study of the business climate — World Bank/IFC - Diversification and non-oil sector development — World Bank - Other: - Price controls — IMF - Forestry, environment, fisheries, mining/oil — World Bank/IMF - PRSP — World Bank/IMF - External trade — IMF - Transport — World Bank - Urban development — World Bank ### Areas in which the World Bank leads (no direct IMF involvement in those areas) - Poverty Assessment (PA): - Initiated late 1994, finalized March 1997; main conclusion: relative inefficiency and low quality of public expenditures, particularly in social sectors, impede poverty alleviation. - Bank supports preparation of Government’s poverty reduction strategy and strengthening statistical capacity and the NSO (National Statistical Office). - Summer 2005: Bank provided financial and technical assistance for household surveys using CWIQ to update key social indicators; CWIQ results used in finalizing the I-PRSP. - A new Poverty Assessment based on the expenditure module of the CWIQ survey was completed by the Bank in December, 2005. - The Bank plans to assist the NSO in establishing a monitoring and evaluation system for the poverty reduction strategy. - Natural resources and environment: - Bank board approved a $15 million Natural Resources Management Development Policy Loan in November 2005 covering forest, environment, fisheries, and mining/oil sectors; DPL limited in the oil sector to supporting EITI implementation. - March 2006: Board approved a $10 million grant from the Global Environment Facility for Gabon’s national parks. - DPL focus: improving transparency, law enforcement, removing policy distortions, empowering civil society and local communities in managing natural resources; expected to broaden beneficiaries and raise social and environmental standards to assist economic diversification away from oil. - Urban and community infrastructure: - June 2004: US$7 million Pilot Community Infrastructure Development Project (Learning and Innovation Loan) completed to test community-based infrastructure methods and support local contractors. - March 14, 2006: Bank approved a US$25 million loan to: - (i) increase access of population living in low-income settlements to basic services; - (ii) sustain access of local SMEs to civil works and construction contracts with the public sector. - Expected outcomes: increased access of the poor to infrastructure and services, strengthened role of SMEs, improved quality of public works via increased transparency and efficient procurement and contract management. - Public financial management diagnostics: - A combined Public Expenditure Review/Country Financial Accountability Assessment/Country Procurement and Audit Review under preparation, planned for completion in FY06, aiming to improve public expenditure management and control systems. - Investment climate and infrastructure diagnostics: - FIAS provided advisory services; diagnostic completed in September 2004; authorities held validation workshop in February, 2005 to establish an action plan. - Two further studies envisaged to identify constraints to private investment: (i) administrative barriers review; (ii) in-depth review of tax and incentive regime — each to be confirmed based on prior action. - Bank preparing an Infrastructure Framework Report (IFR) covering transport (railways, air, maritime), telecommunications, water, and power; IFR will present opportunities for private participation and an action plan for laws, policies, and institutions. ### Areas of shared responsibility and IMF lead areas - Shared focus: private-sector environment reforms — Bank leads structural reforms; IMF focuses on macroeconomic perspectives, good governance (particularly fiscal), and transparency. - Financial sector: - Joint FSAP in 2002: financial sector overall profitable and stable, but with structural weaknesses and risks including lack of bank portfolio diversification and underdevelopment of non-bank financial institutions. - IMF leads (and provides inputs to World Bank programs) in: - fiscal dialogue setting overall envelope for public expenditures; - technical assistance in governance and anticorruption; - policies to contain public sector expenditures (wage bill, ceilings for public investment expenditures) — Bank aligns its policy advice accordingly. - IMF monitors implementation of OHADA Uniform Acts and CEMAC-level trade liberalization measures to improve business climate and complement Bank/IFC investment facilitation work. - Areas where IMF leads with no direct World Bank involvement: - monetary policy, interest rates, exchange rate, balance of payments, and related statistical and measurement issues. ### The Growth and Poverty-Reduction Strategy Paper (GPRSP): objectives and process - Government publicly presented the GPRSP in early 2006 (Document de stratégie de croissance et de réduction de la pauvreté). - Process highlights: - January 2002: process to develop national development plan started. - 2004 interim PRSP served as preliminary strategy; between July 2004 and June 2005, regional multi-day consultations with employers’ organizations, civil society, NGOs, Economic and Social Council, and Parliament were organized. - Sectoral working groups established on poverty analysis; growth promotion; infrastructure development; access to social services; improvement of governance and business climate; macroeconomic framework; monitoring and evaluation. - GPRSP objectives: - develop policy program and structural reforms to improve employment opportunities by fostering non-oil growth; - combine public and private efforts to provide: - (i) an educational system adapted to sector needs; - (ii) adequate public infrastructure in transport, energy, telecommunications; - (iii) efficient health system prepared to treat malaria and HIV/AIDS; - (iv) transparent and efficient public administration and judicial system. - Four central pillars: - (i) create growth-promoting environment: improve business climate, accelerate regional integration, increase competitiveness, diversify economy; - (ii) strengthen public infrastructure to reduce private sector production costs and increase competitiveness; - (iii) broaden access to basic public services to improve well-being and human capital; - (iv) improve governance: reinforce rule of law, open political system, increase accountability and transparency, and citizen participation. - Sectoral priorities are generally specific and well-developed, though shortcomings remain to be addressed. ### Development challenges: poverty profile and social indicators - GPRSP rests on an in-depth poverty diagnostic using recent surveys: CWIQ, National Participatory Poverty Assessment, Health and Demographic Survey. - Key poverty statistics and findings: - Gabon is highly urbanized: 80 percent of the population living in cities. - National average poverty line: income less than CFAF 429,336 (US$818), about 13 percent of per capita GDP in 2005. - About one-third of Gabonese are considered poor. - Large income inequalities documented: Gini coefficient of 0.437. - Note: the poverty section does not include a gender analysis. ### Assessment — Macroeconomic framework and fiscal sustainability - Key findings: - Macroeconomic framework does not adequately account for fiscal challenges from anticipated decline in oil production. - Oil revenues currently comprise 60 percent of government revenue. - Oil reserves are expected to be exhausted within three decades. - Implications and recommendations: - Ensuring fiscal policy on a sustainable path is a high priority to avoid rapid adjustment pressures when oil production declines. - The macroeconomic framework should include long-term fiscal sustainability discussion given exhaustible resources and volatile international prices. - A full-fledged, medium-term expenditure framework (MTEF) is needed: - GPRSP presents three macro scenarios, but two scenarios derive growth from given policy outcomes with public investments closing the model, leading to very rapid public investment growth rates. - Document contains inconsistencies relative to envisaged investment path (e.g., projected continuous decline in current expenditure suggests insufficient costing of required future maintenance expenditures). - Authorities should present costing of individual projects and their recurrent budgetary implications within a full-fledged (three-year) MTEF to prioritize projects and define financing needs and resource availability. ### Assessment — Creation of a growth-promoting environment - Key findings: - GPRSP underplays importance of a business climate conducive to attracting FDI at scale needed to raise factor productivity. - While objectives address reforms for a better business environment, long-term planning horizon, protection of contracts and property rights, and reduction of microeconomic costs, the strategy is vague on concrete measures. - GPRSP mentions insufficient supply of bank credit to private sector but does not propose strategies to overcome principal structural obstacles blocking private sector dynamism. - Potential for closer public-private cooperation is mentioned but not fully explored. - GPRSP largely de-emphasizes important tertiary sectors, notably banking and telecommunications. *Source: IMF/World Bank content unit _cr06238 (text as provided).* ### 10. The forestry and environmental strategy is well-developed. However, several ### _cr06238 - 10. The forestry and environmental strategy is well-developed. However, several ### Forestry and environmental strategy - The forestry and environmental strategy is described as "well-developed." - Shortcomings identified: - Several issues are missing from this section, including law enforcement, state disengagement, and rural livelihoods. - Reform measures contained in the Letter of Sector Policy and supported by the recently-approved World Bank Natural Resources Development Policy Loan are not fully reflected in the GPRSP. ### The Government’s Role in Socio-Economic Development: transport and public investment - Transport sector assessment and projects: - The GPRSP includes very ambitious road development projects, including the construction of 1,500 kilometers of new roads. - Cost of these road projects is stated as more than CFAF 460 billion (the equivalent of about 10 percent of GDP in 2005). - Associated maintenance costs for these roads are estimated at CFAF 20 billion a year. - Similar investment projects (deep-sea harbors and airports) contain very high investment and subsequent maintenance costs. - The document does not fully explore alternative options, including public-private partnerships, which could pose challenges in terms of transparency and fiscal risk. - Prioritization and expected externalities: - The GPRSP does not clearly define criteria for prioritizing public investment projects. - Implicitly, public investments are expected to crowd in private investments, but mechanisms by which proposed capital expenditures will create positive externalities in production are not comprehensively discussed. - Institutional issues and transparency: - The GPRSP highlights challenges in strengthening public institutions and enhancing transparency as critical for improved policy outcomes and for attracting foreign investment. - The GPRSP identified cross-cutting issues critical for poverty reduction, including governance, but does not fully reflect steps already taken: - (i) The creation of the National Commission Against Illicit Enrichment (CNCEI). - (ii) The establishment of the Department of Public Procurement (DGMP), which started its operation with an audit of the Road Maintenance Fund (FER). - (iii) The first publication of a report under the principles of the Extractive Industries Transparency Initiative (EITI), including recruitment of an independent auditor to identify oil-related payment streams based on information provided by the government and the oil companies. - Follow-up documents could reinforce related sections by including discussion on key issues and recommendations of the Public Expenditure Management and Financial Accountability (PEMFAR) and the Report on Standards and Codes (ROSC) reviews. ### Implementation risks and follow-up - Principal risks to successful implementation: - High oil prices and the highly decentralized government are identified as the principal risks. - Weak coordination was revealed between the responsible Technical Secretariat in the Planning Ministry and the newly created Ministry for Poverty Reduction. - The government structure currently includes 49 ministries, producing divergence in interests and non-uniform ownership of GPRSP objectives. - The favorable fiscal environment increases the probability of additional pressures for unbudgeted, non-GPRSP spending, which could jeopardize implementation of a longer-term GPRSP investment strategy. - Mitigating factors and recommendations for implementation: - General ownership of the socio-economic development strategy has been reinforced through the consultative process during its conception. - With sufficient emphasis on ensuring adequate capacity and participation of line ministries in priority sectors (including health, education, and infrastructure), paired with increased public awareness and participation and closer cooperation among the government, civil society, and development partners, Gabon should be able to implement successfully its socio-economic development strategy. - Monitoring and evaluation: - Effective monitoring and evaluation necessitates development of observable targets. - The intermediate outcome indicators defined by the Gabonese authorities mark a significant first step toward a comprehensive monitoring and evaluation system. - Identification of broad outcome indicators (measurable objectives and targets) will require additional work and improved coordination within the government. ### External and public sector debt sustainability: main findings - Framework and approach: - Staff analyzed sustainability using the agreed debt sustainability framework (DSF) for market-access countries, focusing on debt-to-GDP ratios as indicators of solvency. - Analysis compared baseline projections with an "unbiased" scenario where variables evolve in line with historical averages, and subjected baseline to stress tests. - Key conclusions: - Gabon’s debt stocks do not present sustainability problems if favorable baseline assumptions materialize. - Despite relatively high debt stocks—39 percent of GDP for external debt and 44 percent for total public sector debt—the buoyant outlook for the oil sector permits amortization of this debt without new borrowing. - Under the baseline scenario, both external debt and public sector debt ratios to GDP drop to about 10 percent by 2011. - The baseline envisages rapid accumulation of foreign reserves, to about 90 percent of GDP by 2011. - As reserves and assets accumulate, asset management should soon be more important than liability management in Gabon. - Historical-averages (conservative) scenario: - Projections under the historical averages scenario differ mainly by a lower average annual GDP growth of 1.1 percent and a lower current account surplus reflecting past oil prices rather than the much higher level attained in 2005. - Even under these more conservative (and noted as unrealistically pessimistic given WEO oil projections) assumptions, the public sector debt ratio would continue to drop, while external debt climbs slightly but remains below the critical range of 40-60 percent above which crisis probability typically mounts. - Stress-test results: - Stress tests confirm absence of sustainability problems under most shocks. - Growth shock: effect is mild and debt ratios would continue to decline. - Current account shock (much lower oil prices): debt ratio would remain constant. - Depreciation scenario: boosts external debt ratios (valuation effects). - Public-sector-debt-to-GDP stress tests show that, despite a significant upward effect from depreciation, debt ratios would continue to decline. ### Selected projection and indicator highlights - Transport investment and maintenance: - 1,500 kilometers of new roads. - More than CFAF 460 billion (about 10 percent of GDP in 2005). - CFAF 20 billion a year maintenance. - Government structure: - 49 ministries. - Footnote: Three Ministries are charged with various aspects of budgetary implementation (Economy, Finance, Budget, and Privatization; Planning; and Mining and Oil). - Debt levels and projections (baseline and outcomes emphasized in text): - External debt: 39 percent of GDP (stated current level). - Total public sector debt: 44 percent of GDP (stated current level). - Under the baseline, external and public sector debt ratios drop to about 10 percent by 2011. - Foreign reserves projected to accumulate to about 90 percent of GDP by 2011. - Historical-average scenario assumptions and outcomes: - Lower average annual GDP growth of 1.1 percent under the historical-averages scenario. - External debt under historical scenario climbs slightly but remains below the 40-60 percent critical range. - Stress test summaries: - Growth shock: mild effect; debt ratios continue to decline. - Current account shock: debt ratio remains constant. - Depreciation: raises external debt ratios through valuation effects; public-sector-debt-to-GDP would still continue to decline despite significant upward effects. *Source: _cr06238 - 10. The forestry and environmental strategy is well-developed. However, several (IMF staff report content).* ### 1. Gabon’s economic database is fairly comprehensive. While data are generally ### _cr06238 - 1. Gabon’s economic database is fairly comprehensive. While data are generally ### Data coverage and quality — summary findings - Gabon’s economic database is described as "fairly comprehensive." - Data are "generally compiled in accordance with international standards," but "consistency between sectors is poor," raising questions about data quality. - Detailed economic and financial statistics, including long historical time series, are published in the Tendances de l’Économie (semiannual) by the General Directorate of Statistics and Economic Studies (DGSEE) of the Ministry of Planning. - More recent sectoral developments are described in the Tableau de Bord de l'Économie (quarterly) by the General Directorate for the Economy (DGE) of the Ministry of Economy, Finance, Budget, and Privatization. - Gabon participates in the General Data Dissemination System (GDDS); metadata were posted to the Fund’s Dissemination Standards Bulletin Board on October 1, 2002, but have not been updated since then. - The authorities do not report any real sector statistics for publication in International Financial Statistics (IFS), nor any fiscal data for publication in the IFS or Government Finance Statistics (GFS) Yearbook. ### National accounts and related statistical issues - The base for national accounts aggregates at constant prices was changed from 1989 to 1991. - Coverage of developments in oil and other key export sectors is based on a range of indicators that "may not fully capture the profits generated by these sectors." - Despite recent improvements in collecting and processing oil sector statistics, "significant inconsistencies remain between national accounts and the balance of payments statistics." - "More frequent household surveys are required" to improve data on income distribution and consumption. - Conclusion: Efforts to establish a more consistent database need to be strengthened. ### Employment and unemployment statistics - "Data on unemployment and the total labor force are not systematically available." ### Price statistics - Monthly consumer price indices for low- and middle-income households are available only for the capital city of Libreville. - Significant parts of the population live in other urban areas such as Port Gentil, implying coverage gaps. - These indices are based on an outdated expenditure survey from 1975 and "attach a large weight to food and basic consumer goods prices." ### Government accounts and fiscal statistics — shortcomings - A key shortcoming: limited coverage of fiscal data — "no estimates of the consolidated general government are reported to STA." - This hampers full understanding of general government expenditure priorities. - Social security operations are "not yet included in government finances." - Audited accounts of oil sector operations are not published with adequate periodicity (at least quarterly), preventing adequate monitoring of key fiscal and activity indicators. - Other needed improvements include: - statistical treatment of oil companies’ tax advances; - recording in the budget accounts of government investment financed by oil companies; - recording of government domestic payment arrears. ### Public enterprises - A "fairly good database" exists on operations of public enterprises, but information is communicated to IMF staff on an ad hoc basis, notably during Fund missions. - Current data provided cover wholly owned and mixed enterprises with government equity participation of at least 25 percent. ### Monetary statistics and regional arrangements - Monthly monetary data for Gabon and other CEMAC members are reported regularly, although with some delay; data are reported electronically by BEAC and published in IFS. - Institutional coverage of monetary statistics is comprehensive, but accuracy is affected by cross-border movements of currency among CEMAC member countries. - In Gabon: - About 95 percent of notes are nationally issued; the remaining are from Cameroon, the Republic of Congo, and Equatorial Guinea. - Gabon exports about 17 percent of its notes, most of which go to Cameroon (11 percent) and to the Republic of Congo (4 percent). - A monetary and financial statistics mission visited BEAC headquarters in May 2001 to address shortcomings in coverage, methodology, compilation procedures, and timeliness. - The mission discussed an action plan for implementation of the Monetary and Financial Statistics Manual (MFSM) and for introduction of an area-wide page in IFS for CEMAC. - A regional workshop on monetary and financial statistics was organized by BEAC in Libreville in May 2002 to support MFSM implementation. - The new page for CEMAC was published in the January 2003 issue of IFS. ### External public debt - There are comprehensive data on the outstanding stock of external public debt and its composition, together with detailed projections on debt service due. - These data are provided (usually to Fund missions) by the General Directorate of Public Debt and Accounting (Direction générale de la comptabilité publique) of the Ministry of Economy, Finance, Budget, and Privatization. ### Balance of payments and trade statistics — issues and practices - Balance of payments data are usually disseminated with considerable delays, though progress was made recently with transmission of data up to 2003. - As in other CEMAC countries, balance of payments data are compiled and disseminated by the national agency of BEAC for Gabon; the process involves close cooperation with BEAC headquarters which calculates the national contribution in international reserves it holds and manages for all six countries, validates draft results, and runs consistency checks. - Since 1995, dissemination of balance of payments statistics has been in accordance with BPM5. - Source data are primarily reported through: - (i) surveys of enterprises by the central bank (main source); - (ii) reports from banks and the postal administration on foreign exchange transactions of other enterprises, retailers, and private individuals; - (iii) BEAC reports on banknotes issued by Gabon and returned by other BEAC countries. - External trade data are mostly based on estimates, which are not cross-checked with customs data. - Reliability of other current account items is poor due to low response rates to enterprise surveys, despite partial corrections through adjustments. - Foreign direct investment in the financial account is "likely to be underestimated" owing to insufficient detail of the oil sector survey. - The overall magnitude and breakdown of private capital flows, particularly short-term flows, "suffer from a lack of comprehensiveness." ### Table of Common Indicators Required for Surveillance (selected exact entries — As of April 24, 2006) - Exchange rates — Date of latest observation: 4/20/06; Date received: 4/10/06; Frequency of Data/Reporting/Publication: D D D - International reserve assets and reserve liabilities of the monetary authorities — Date of latest observation: 2/28/06; Date received: 4/05/06; Frequency: M M M - Reserve/base money — Date of latest observation: 2/28/06; Date received: 4/05/06; Frequency: M M M - Broad money — Date of latest observation: 2/28/06; Date received: 4/05/06; Frequency: M M M - Central bank balance sheet — Date of latest observation: 2/28/06; Date received: 4/05/06; Frequency: M M M - Consolidated balance sheet of the banking system — Date of latest observation: 2/28/06; Date received: 4/05/06; Frequency: M M M - Interest rates — Date of latest observation: 7/30/05; Date received: 9/17/05; Frequency: M M M - Consumer price index — Date of latest observation: 1/28/06; Date received: 3/10/06; Frequency: M M M - Revenue, expenditure, balance and composition of financing – general government — Date of latest observation: 1/28/06; Date received: 4/20/06; Frequency: M M M - Revenue, expenditure, balance and composition of financing – central government — Date of latest observation: 1/28/06; Date received: 4/20/06; Frequency: M M M - Stocks of central government and central government-guaranteed debt — Date of latest observation: 6/30/05; Date received: 1/12/06; Frequency: M M M - External current account balance — Date of latest observation: 12/31/05; Date received: 2/25/06; Frequency of Data: A; Frequency of Reporting: I; Frequency of Publication: A - Exports and imports of goods and services — Date of latest observation: 12/31/05; Date received: 2/25/06; Frequency: M M I - GDP/GNP — Date of latest observation: 12/31/05; Date received: 2/25/06; Frequency: A I A - Gross external debt — Date of latest observation: 12/31/05; Date received: 2/25/06; Frequency: M M A - Note: Frequency codes — Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA). ### Statement by the IMF Staff Representative (June 5, 2006) — key points - The statement provides additional information since circulation of the staff report and "does not alter the thrust of the staff appraisal." - Preliminary data for the first quarter of 2006 suggest economic activity remained buoyant. - A slowdown in oil and manganese production, due to temporary rather than permanent factors, was more than offset by continued strong growth in commerce, services, and construction. - The authorities’ projection of "3½ percent growth in non-oil GDP in 2006" remains "well within reach." - Inflation picked up in April 2006 from very low levels, reaching "1.8 percent year-on-year"; the main source of the increase is imported food products. *Source: IMF staff report content as provided in the supplied PDF extract.* ### 4. Preliminary fiscal data for the first quarter of 2006 indicate that the fiscal ### _cr06238 - 4. Preliminary fiscal data for the first quarter of 2006 indicate that the fiscal ### Preliminary fiscal developments (Q1 2006) - The non-oil primary deficit reached 2½ percent of projected non-oil GDP by end-March 2006, reflecting continued high levels of expenditures on transfers and goods and services. - Preliminary fiscal data indicate that the fiscal slippages of 2005 have not yet been fully reversed. - Significant fiscal adjustment is needed to return to a sustainable medium-term path. ### Background and 2005 developments - Real GDP growth rate: - 2003: 2.4 - 2004: 1.4 - 2005: 2.9 - Prel. 2006: 3.0 - Real GDP growth by sector: - Oil: 2003: 6.6; 2004: -1.0; 2005: -1.1; Prel. 2006: 1.2 - Non-oil: 2003: 0.8; 2004: 2.3; 2005: 4.4; Prel. 2006: 3.6 - Consumer prices (annual average): 2003: 2.1; 2004: 0.4; 2005: 0.0; Prel. 2006: 1.0 - Fiscal and external outcomes in 2005: - Non-oil primary balance (in percent of non-oil GDP): 2003: -8.2; 2004: -7.7; 2005: -12.1; Prel. 2006: -8.9 - Overall balance (commitment basis, excluding grants): 2003: 7.4; 2004: 7.4; 2005: 9.3; Prel. 2006: 11.1 - External public debt (percent of GDP): 2003: 55.9; 2004: 49.6; 2005: 39.2; Prel. 2006: 31.8 - Total public debt: 2003: 73.0; 2004: 61.9; 2005: 44.2; Prel. 2006: 33.5 - External current account balance: 2003: 12.0; 2004: 10.5; 2005: 15.9; Prel. 2006: 19.6 - Credit to the economy (annual percentage change): 2003: -9.4; 2004: -9.3; 2005: 11.6; Prel. 2006: 7.5 - Broad money (annual percentage change): 2003: -1.2; 2004: 11.6; 2005: 26.0; Prel. 2006: 14.5 - 2005 specifics: - Non-oil primary deficit reached 12 percent of non-oil GDP, compared with a target of 8½ percent in the government’s supplementary budget. - Slippages due to additional non-interest current expenditure, lower recovery of tax arrears, larger impact of personal income tax exemptions, and unforeseen security-related spending (November 2005). - Government managed to save half of additional oil revenues in 2005. - Structural reforms and transparency: - Restructuring/privatization of Air Gabon and Gabon Télécom experienced delays; tender for 51 percent of Gabon Télécom launched in early December (2005). - Government announced liquidation of Air Gabon in February 2006 and creation of Air Gabon International with Royal Air Maroc holding majority stake. - Delays in forestry reforms persisted; large forestry tax arrears and uncertainty over allocation of forestry permits. - Publication of Gabon’s first Extractive Industries Transparency Initiative (EITI) report in December 2005. ### Executive Board Assessment and recommendations - Main assessment: - Acceleration in economic activity and restored macroeconomic stability in 2004–05 acknowledged. - Key policy challenge: balance between raising public savings for post-oil period and addressing pressures for public spending. - Fiscal policy guidance: - Fiscal discipline is critical; concern over large fiscal slippages in late-2005. - Most Directors called for a front-loaded tightening in 2006 to reverse the recent fiscal slippages and facilitate rapid progress toward a sustainable medium-term fiscal position. - Some Directors supported a more gradual approach but emphasized maintaining discipline and a declining non-oil deficit path. - Subsidies and pricing: - Costly implicit subsidies on petroleum products were noted as growing rapidly and benefiting primarily higher-income households. - Directors encouraged reflecting these subsidies fully in the government budget and embarking on a gradual adjustment of retail prices toward import parity levels with well-targeted assistance to the poor. - Public expenditure management and transparency: - Urged implementation of the recent fiscal transparency ROSC recommendations: prioritize public investment program, strengthen budget execution and monitoring, improve transparency of the budget (notably of oil revenue), and enhance tax system efficiency by broadening the non-oil revenue base. - Urgent agreement among CEMAC stakeholders on appropriate level of remuneration of international reserves recommended. - Structural reforms and governance: - Commended Growth and Poverty Reduction Strategy Paper; urged making it operational with concrete poverty-reducing programs. - Emphasized accelerating structural reforms to stimulate higher growth, improving the investment climate, addressing legal and regulatory uncertainty, rigid labor markets, and continued governance weaknesses. - Recommended deepening financial intermediation and improving access to financial services, including micro-financing. - Encouraged expeditious privatization of Air Gabon and Gabon Télécom and ensuring the successor airline does not drain public resources. - Supported continuing EITI work and improving access to information and publication of timely economic statistics. - Urged resumption of forestry sector reforms, ensuring its financing remains within the government budget and addressing holders of forestry permits with tax arrears. - Trade policy: - Directors noted that further trade liberalization would improve competitiveness and welfare and urged Gabon to lead regional discussions within CEMAC, notably on reducing the relatively high common external tariff. ### Authorities’ stance and policy intentions (Statement by Damian Ondo Mañe, Executive Director for Gabon) - Policy objectives and medium-term orientation: - Authorities have pursued fiscal adjustment and reform since mid-2002 to cope with depletion of oil reserves and poor social indicators. - High oil prices since 2004 aided implementation: elimination of external debt arrears and stabilization of oil production via exploration and development of marginal fields. - Authorities acknowledge high oil prices are temporary and plan to pursue steady fiscal adjustment while addressing social and infrastructure needs. - Adopted Growth and Poverty Reduction Strategy Paper (DSCRP) with four pillars: (i) raising growth as a prerequisite for poverty reduction, (ii) improving infrastructure, (iii) improving access to essential services, and (iv) strengthening governance. - Intention to request Fund support under a multi-year arrangement; discussions expected to start soon with staff. - Fiscal adjustment approach: - Authorities favor a more gradual fiscal adjustment than staff/Directors, envisaging a three-year span to fully reverse 2005 slippages and achieve fiscal sustainability. - For 2006, measures aim to reduce the non-oil primary deficit from 12 percent of non-oil GDP in 2005 to 9 percent in 2006. - Part of oil windfall to finance DSCRP spending, remainder to be saved; authorities open to using windfall for debt reduction but are considering all options. - Public financial management and expenditure control: - Improved expenditure control since creation of department of public procurement; several audits launched highlighting weaknesses. - Authorities will develop an action plan to strengthen public financial management, focusing short-term on improving efficiency of certain capital outlays (including Independence Day spending for 2006 and 2007) and reducing unnecessary current expenditures. - Petroleum subsidies: - Authorities acknowledge need to address implicit petroleum subsidies and consider ways to reduce them and better target the poor. - Revenue and tax administration reforms: - A thorough update of the tax code has been completed and will be circulated for comments before submission to government for approval. - LTU (Large Taxpayers Unit) expected to start operations later in 2006 as training completes. - Authorities note reforms will not translate into higher non-oil revenues in the short-term. - Financial sector and access to credit: - Authorities share staff concerns about credit access; SMEs and entrepreneurs highlighted this in DSCRP consultations. - Efforts to promote microfinance will be pursued; exploring FODEX extending operations to microfinancing after addressing past embezzlement in its management. - Decline in private sector credit attributed by banks to absence of bankable projects and asset recovery difficulties; authorities note improved domestic debt management may also limit enterprise recourse to banks. - Structural reforms and privatizations: - Confident that Gabon Telecom privatization will be completed on time during the third quarter (year implied by context: 2006). - Air Gabon International to be managed on a fully commercial basis. - Authorities will reinvigorate forestry sector reform. - Governance and transparency: - Authorities committed to strengthening governance and transparency; publication of key documents and reports including EITI is increasing. - Conclusion: - Authorities are strongly committed to adjustment and restructuring to reduce oil dependency. - Authorities view a multi-year arrangement with the Fund as the best framework to consolidate gains and maintain reform momentum and welcome upcoming negotiations. *Source: Public Information Notice (PIN) No. 06/64, June 13, 2006 — IMF Executive Board Concludes 2006 Article IV Consultation with Gabon; statement by Damian Ondo Mañe, Executive Director for Gabon.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06238.pdf_