## _cr0968 ## Source details **Canonical URL:** [_cr0968](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0968.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0968.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0968.pdf.json) --- ### Executive Summary — Background and outlook - Oil production began in 2003; by 2008 oil accounted for 47 percent of GDP and oil revenues had risen to 41 percent of GDP. - Oil production began to decline in 2006; after strong oil-driven growth early in the decade economic activity turned sluggish. - Non-oil growth depressed in part by security problems. - Food price inflation increased sharply since end-2007; imported food accounts for one quarter of the average household consumption basket. - High oil revenues strengthened the external position but boosted expenditures—especially security and investments—resulting in large non-oil primary fiscal deficits. - Budgetary management weak; concerns over quality of public spending. - Macroeconomic outlook fragile though external vulnerabilities appear manageable. - Declining oil prices will require substantial fiscal adjustment and will lower reserves, albeit not to critical levels. - Limited global integration should contain contagion from the global crisis. ### Recent economic developments (selected) - Real GDP: increased by only ¼ percent in 2007; 2008 expected to decline by ½ percent. - Inflation: average inflation declined by 8¾ percent in 2007; inflation reached 11¾ percent on a 12-month basis at end‑November 2008; food prices rose 21 percent over the same period. - Implicit retail fuel subsidy estimated at about ½ percentage point of GDP in 2008. - Monetary policy: BEAC increased policy rates (¼ percent) and reserve requirements in July 2008; broad money grew 19 percent in the year to September 2008. - Non-oil fiscal deficits: NOPD deteriorated from 4 percent of GDP in 2004 to 22 percent (commitment basis) in 2007; expected to widen to 28 percent of GDP in 2008 mainly due to higher security spending. - Security spending: rose from 2¼ percent of GDP in 2005 to almost 14½ percent projected in 2008; security spending exceeded initial budget allocation by 6¼ percent of GDP in 2006, 5¾ percent in 2007 and 8 percent in 2008. - Aid flows declined from 10 percent of GDP in 2004 to 5 percent in 2007. - REER: appreciated by 27 percent over 2000–06; depreciated by 1¾ percent since end-2006 through November 2008. - Terms of trade improved 45 percent over 2006–08 despite declining oil production; export proceeds up 22 percent; imports grew 66 percent overall and 60 percent outside the oil sector. - Import cover expected to rise to 10½ months of imports of non-oil goods and services in 2008, from 5¼ months in 2006. - Financial system remained shallow compared with comparable low-income countries. ### Medium-Term Macroeconomic Framework (section 6.A) - Outlook described as fragile given global recession and oil price outlook. - Growth projections: - Non-oil growth expected to average 4¾ percent over 2009-11. - Oil growth reflects gradually declining production absent new reserves. - Scenarios: - "Adjustment" scenario: sustainable fiscal policy reducing non-oil deficit to 10½ percent by 2011; import cover would increase to over one year by 2012. - "WEO oil prices" scenario: less ambitious adjustment with lower WEO oil prices → fiscal financing gaps in 2009 and over medium term. - Inflation: projected to revert to historical level of 3 percent over the medium term absent shocks. - Risks: security and political instability; further declines in oil prices; failure to re-establish strong donor relations. ### Fiscal Sustainability (section 6.B) - Mission proposed a modified permanent income framework to guide fiscal policy. - Staff simulations: sustainable long-term non-oil balance ranges from a small surplus to deficits of around 3 percent of GDP depending on model and speed of adjustment. - Box 1 selected PIH framework results (non-oil primary balance, selected averages): - Bird in Hand: 2009-12 = -1.4; 2013-16 = -4.4; 2017-20 = -5.1; 2021-45 = -2.8; 2046-70 = 0.0 - Balanced Budget: 2009-12 = -10.1; 2013-16 = -8.5; 2017-20 = -3.7; 2021-45 = -0.1; 2046-70 = 0.9 - PIH (Villafuerte, Leigh and Carcillo (2007) (infinite horizon)): 2009-12 = -13.1; 2013-16 = -8.9; 2017-20 = -6.5; 2021-45 = -1.0; 2046-70 = 0.4 - PIH (Constant government consumption annuity as a share of GDP (finite horizon)): 2009-12 = -1.1; 2013-16 = -2.3; 2017-20 = -2.6; 2021-45 = -2.6; 2046-70 = -2.6 - Three-pronged strategy recommended: - (i) Improve public financial management (PFM) through strict respect of budgetary procedures and other key PFM reforms. - (ii) Enhance non-oil revenue collection via tax and customs administration reforms. - (iii) Improve efficiency and targeting of spending, increase returns to public investment and raise absorptive capacity. - PFM weaknesses: excessive budget delays, bypassing procedures, extrabudgetary spending, underdeveloped medium-term budgeting and cash management, non-competitive procurement, weak linkages to PRSP/priorities. - Authorities: agreed with analysis but stressed security shocks and unmet basic service needs; 2009 budget aimed at sizeable reduction, particularly curtailing security spending. - Staff encouraged public dissemination of budget, execution reports and procurement information; concerns over Cabinet’s request to exempt submission of draft budget review laws (Lois de Règlement) for 2004–2008. ### The 2009 Budget (section 6.C) - Staff assessment: 2009 budget envisages significant reduction in NOPD but needs to go further. - Cabinet approved a NOPD 7 percentage points lower than expected 2008 outturn, or 21¼ percent of GDP. - Staff estimate: additional spending adjustment of 4½ percent of non-oil GDP needed in 2009 to avoid financing problems. - Fiscal risks highlighted: - Authorities’ oil revenue projections overly optimistic: 2009 budget projects almost 16 percent of non-oil GDP more in oil revenue than staff’s WEO-price-based forecast. - Expenditure adjustment relying solely on lower military outlays is highly risky; wage bill consumes almost all non-oil revenues. - Investment spending growth should be contained to preserve a cushion of savings. - Authorities’ response: proceed with budget but ready for mid-course corrections; committed to stronger non-oil revenue collection, reforms of STEE and Cotontchad, moderate wage bill; issue budget amendment mid‑year if oil prices do not recover. - Food security recommendations: - Urged removal of export ban on food crops immediately; authorities committed to remove ban at earliest opportunity. - Vigilance on food prices and adequate appropriations for food security agency stock replenishment. - Better targeting of assistance rather than directing assistance to civil servants. - Selected figures from Text Table 3 (percent of non-oil GDP; adjustment vs authorities vs WEO scenarios, 2008–11): - Adjustment scenario (Using WEO oil price and staff's spending plan): - 2008: Oil revenues = 41.5; Current expenditure = 29.6; Transfers = 14.9; Domestically-financed investment = 8.7; Non-oil primary deficit = -28.1; Overall balance = 8.1; Deposits at the BEAC = 14.8 - 2009: Oil revenues = 7.1; Current expenditure = 20.1; Transfers = 6.8; Domestically-financed investment = 6.9; Non-oil primary deficit = -16.8; Overall balance = -14.0; Deposits at the BEAC = 0.5 - 2010: Oil revenues = 12.6; Current expenditure = 16.2; Transfers = 4.4; Domestically-financed investment = 5.2; Non-oil primary deficit = -10.7; Overall balance = -2.4; Deposits at the BEAC = 0.4 - 2011: Oil revenues = 14.9; Current expenditure = 15.0; Transfers = 3.6; Domestically-financed investment = 6.5; Non-oil primary deficit = -10.6; Overall balance = 0.5; Deposits at the BEAC = 1.9 - Authorities scenario (Authorities' oil price assumptions and their spending plan): - 2008: Oil revenues = 41.5; Current expenditure = 29.6; Transfers = 14.9; Domestically-financed investment = 8.7; Non-oil primary deficit = -28.1; Overall balance = 8.1; Deposits at the BEAC = 14.8 - 2009: Oil revenues = 22.8; Current expenditure = 22.0; Transfers = 7.9; Domestically-financed investment = 9.6; Non-oil primary deficit = -21.2; Overall balance = -5.6; Deposits at the BEAC = 12.0 - 2010: Oil revenues = 22.4; Current expenditure = 18.4; Transfers = 5.1; Domestically-financed investment = 8.5; Non-oil primary deficit = -15.6; Overall balance = -0.8; Deposits at the BEAC = 13.1 - 2011: Oil revenues = 21.9; Current expenditure = 17.2; Transfers = 4.6; Domestically-financed investment = 7.5; Non-oil primary deficit = -12.6; Overall balance = 2.3; Deposits at the BEAC = 17.2 - WEO oil prices scenario (Authorities' spending plans with WEO oil price assumptions): - 2008: Oil revenues = 41.5; Overall balance = 8.1; Deposits at the BEAC = 14.8; Financing gap = 0.0 - 2009: Oil revenues = 7.1; Overall balance = -21.3; Deposits at the BEAC = 0.0; Financing gap = 4.0 - 2010: Oil revenues = 12.6; Overall balance = -10.7; Deposits at the BEAC = 0.0; Financing gap = 4.6 - 2011: Oil revenues = 14.9; Overall balance = -4.7; Deposits at the BEAC = 0.0; Financing gap = 8.5 and 3.0 (table shows multiple entries for financing gap) ### Oil Revenue Management (section 6.D) - Oil revenues appear well captured in the budget but monitoring and transparency improvements desirable. - Current practices: all royalties and dividends paid into a single offshore account; income taxes and other fees go directly to the central bank. - Staff recommendations: - Strengthen monitoring: improve flows of oil sector information within government; exercise audit rights using independent auditors with international reputation. - Move on the Extractive Industries Transparency Initiative (EITI); join other CEMAC countries as an EITI candidate. - Petroleum Revenue Management Law (PRML): - 1999 PRML key features have been abolished, modified or are uncertain (Fund for Future Generations abolished; definition of priority sectors modified; future of the College and offshore account uncertain). - A new PRML should focus on fiscal sustainability, use of oil revenues to support priority sectors, unified budget management, improved transparency and reinforced accountability. - Authorities interested in a new PRML to replace interim mechanism, cover all oil revenues and extend College oversight to all investment spending; discussions on design expected in 2009. ### Structural Reform (section 6.E) - Public enterprises and parastatals: - Reform has stalled; fiscal burden mounting. - Two loss-making parastatals require transfers that increased from ¾ percent of GDP in 2005 to 1¾ percent of GDP in 2008. - Mission recommended all parastatals prepare and publish properly audited financial statements. - Cotontchad: - Production declined by one-third from 2004-06 to 2007-08; accumulated losses of 1½ percent of GDP. - Progress toward privatization slow; contracts signed for financial and technical audit. - One third of the population depend on cotton; authorities indicated continued official support through direct subsidies and government-guaranteed loans while exploring alternatives for farmers. - STEE (state water and electricity utility): - Finances deteriorated; subsidies increasing to 1¼ percent of GDP in 2008. - Authorities decided to break up the company into separate water and electricity entities and devise a reform roadmap by end-2008 including performance contracts. - New state-oil company (Société d’Hydrocarbures du Tchad, SHT): - Established in 2007; has begun to receive transfers and presents fiscal risks in terms of foregone revenue. - SHT will manage government participations including a government 40 percent share in a joint venture with a Chinese company to build and operate a refinery and power plant at an estimated cost of $1 billion with a starting date now set for 2010. ### External Stability and Debt Sustainability (section 6.F and DSA) - REER and competitiveness: - REER appreciated since 2000; assessments found no strong evidence it is inconsistent with fundamentals. - CEMAC fixed exchange rate provides nominal anchor amid shocks. - Data problems on non-tradables prices and profitability impede Dutch disease evaluation. - Balance of payments: - Oil accounts for 90 percent of exports; main external vulnerability is trade account impact of further drop in oil prices. - Oil production judged stabilized and profitable even at world oil prices of $20-25 per barrel. - Authorities assessed reserves coverage at around five months of all imports and 10 months of non-oil imports. - Pooling of reserves at BEAC provides an additional layer of comfort. - Debt outlook: - Risk of debt distress is moderate; public sector debt dynamics appear sustainable under baseline but subject to risks. - Joint WB–IMF DSA: external debt stock declined to 23 percent of GDP at end-2007. - Mission recommendations: limit debt-financed state participation in oil ventures and resist non-concessional financing that would compromise HIPC/MDRI progress. - DSA stress tests: - Historical scenario could cause PV of debt-to-exports ratio to cross thresholds. - Most extreme bound tests show breaches in some ratios, notably under “export growth” and “depreciation” tests. - "Most extreme stress test" yields highest ratio in 2018. ### Balance of payments and external vulnerability (section 21) - Capital and financial account fluctuations largely represent FDI by oil companies, offset by oil-related imports and income outflows. - Reserves and coverage: - Gross official reserves (months of imports excl. oil sector): 2006 = 5.2; 2007 = 5.9; 2008 = 10.6; 2009 (Proj.) = 7.4; 2010 (Proj.) = 8.7; 2011 (Proj.) = 10.4; 2012 (Proj.) = 12.9 - Projection highlights (selected): - Current account balance, incl. official current transfers (percent of GDP): 2006 = -9.0; 2007 = -10.5; 2008 = -9.6; 2009 (Proj.) = -17.1; 2010 (Proj.) = -7.3; 2011 (Proj.) = -7.0; 2012 (Proj.) = -6.1 - Trade balance, incl. oil sector (billions CFA francs): 2006 = 1,079.2; 2007 = 1,022.3; 2008 = 1,182.0; 2009 (Proj.) = 320.8; 2010 (Proj.) = 541.2; 2011 (Proj.) = 621.6; 2012 (Proj.) = 615.9 ### Financial system soundness and constraints (Box 3) - Financial depth: broad money to GDP was 12 percent in 2007 vs 30 percent average for African low income countries. - Access to credit limited; banking services virtually non-existent outside major urban centers. - Microfinance: new national microfinance strategy aims to boost microfinance lending from current equivalent of 3 percent of banking system lending. - Vulnerabilities: - Lack of depth, some undercapitalization, insufficient on-site supervision. - Gross NPL/Gross banking loans series (selected): 17.4 15.5 12.9 12.4 11.6 8.7 - Net NPL/Gross banking loans series (selected): 3.9 2.0 2.1 2.3 1.5 0.8 - Capital-asset ratio (unweighted) series (selected): 9.4 11.0 8.3 8.3 9.7 9.7 - Recommendation: more frequent on-site inspections of banks are required. - Banks' rating (number of banks) — Solid or Good: 3 2 2 4 6 4; Fragile: 2 3 4 2 0 1; Critical: 0 0 0 0 0 1; Number of banks: 7 7 7 7 7 7 ### Program relations, conditionality and Fund relations - 2005–08 PRGF arrangement went off track due to widening NOPD, inadequate poverty orientation and slow structural reform. - SMP negotiated in July 2008 was not approved by management due to additional expenditure overruns; authorities keen on an SMP starting early 2009. - Preconditions for an SMP in 2009: - A strong 2009 budget. - Agreement on feasible medium-term fiscal framework. - Evidence of adherence to budget controls. - Progress on composition and quality of spending. - Fund membership and holdings: - Quota: 56.00 (SDR Million) 100.00 percent of quota - Fund holdings of currency: 55.72 (SDR Million) 99.50 percent of quota - Reserve position: 0.28 (SDR Million) 0.50 percent of quota - PRGF arrangements outstanding: 26.43 (SDR Million) 47.19 percent of quota ### Key macroeconomic projections and indicators (selected, 2006–2012) - GDP at constant prices (annual % change): 2006 = 0.2; 2007 = 0.2; 2008 = -0.4; 2009 (Proj.) = 3.5; 2010 (Proj.) = 3.5; 2011 (Proj.) = 3.6; 2012 (Proj.) = 2.7 - Chadian oil price (US$/barrel): 2006 = 42.15; 2007 = 51.17; 2008 = 75.72; 2009 (Proj.) = 28.13; 2010 (Proj.) = 37.64; 2011 (Proj.) = 43.66; 2012 (Proj.) = 66.8 - WEO assumptions (US$/barrel): 2006 = 64.37; 2007 = 71.19; 2008 = 97.55; 2009 (Proj.) = 54.36; 2010 (Proj.) = 64.87; 2011 (Proj.) = 71.37; 2012 (Proj.) = 75.0 - Oil production (million barrels): 2006 = 56.7; 2007 = 52.4; 2008 = 46.5; 2009 (Proj.) = 45.6; 2010 (Proj.) = 45.6; 2011 (Proj.) = 45.6; 2012 (Proj.) = 43.3 - Broad money (annual % change): 2006 = 51.9; 2007 = 5.4; 2008 = 11.1; 2009 (Proj.) = 8.4; 2010 (Proj.) = 8.3; 2011 (Proj.) = 7.9; 2012 (Proj.) = 7.9 ### Fiscal accounts and monetary survey (selected levels and changes, 2006–2012) - Nominal GDP (billions CFA francs): 2006 = 3,294; 2007 = 3,358; 2008 = 3,744; 2009 (Proj.) = 3,239; 2010 (Proj.) = 3,610; 2011 (Proj.) = 3,909; 2012 (Proj.) = 4,102 - Revenue (billions CFA francs): 2006 = 558.0; 2007 = 764.9; 2008 = 1,040.9; 2009 (Proj.) = 716.2; 2010 (Proj.) = 369.6; 2011 (Proj.) = 544.9; 2012 (Proj.) = 654.5 - Oil revenue (billions CFA francs): 2006 = 403.4; 2007 = 563.2; 2008 = 843.1; 2009 (Proj.) = 502.4; 2010 (Proj.) = 155.7; 2011 (Proj.) = 300.6; 2012 (Proj.) = 382.9 - Non-oil primary balance (excl. grants, commitment basis) (billions CFA francs): 2006 = -262.6; 2007 = -404.4; 2008 = -570.8; 2009 (Proj.) = -467.6; 2010 (Proj.) = -369.7; 2011 (Proj.) = -255.2; 2012 (Proj.) = -272.9 - Overall balance (excl. grants, commitments) (billions CFA francs): 2006 = 15.8; 2007 = 55.5; 2008 = 185.6; 2009 (Proj.) = -108.3; 2010 (Proj.) = -294.7; 2011 (Proj.) = -45.9; 2012 (Proj.) = 13.9 - Net foreign assets (monetary survey, billions CFA francs): 2006 = 265.7; 2007 = 418.9; 2008 = 704.3; 2009 (Proj.) = 498.3; 2010 (Proj.) = 636.6; 2011 (Proj.) = 818.4; 2012 (Proj.) = 1,078.1 - Money and quasi money (broad money levels, billions CFA francs): 2006 = 377.3; 2007 = 397.8; 2008 = 441.8; 2009 (Proj.) = 478.9; 2010 (Proj.) = 518.8; 2011 (Proj.) = 559.7; 2012 (Proj.) = 604.0 ### Data and statistical needs; technical assistance - Serious data shortcomings hamper surveillance; highest priorities: national accounts and balance of payments data. - Recommendation: allocate sufficient resources to the National Statistics Institute (INSEED) and BEAC for statistical collection and analysis. - Recent technical assistance (selected): - FAD (AFRITAC): Tax and Customs Administration — November, 2008 - STA (AFRITAC): National Accounts — October 28–November 7, 2008 - STA (AFRITAC): Price Statistics — August 18–29, 2008 - FAD: Budget — September–October 2007 - FAD (AFRITAC): Treasury management — August 2007 ### Fund–Bank coordination, work program and follow-up - Key upcoming items: 2008 Article IV consultation, discussions of the 2009 budget, SMP reviews, PRGF negotiations; TA for national accounts, customs, debt management, and PFM scheduled. - Fund requests to World Bank: inputs for review of 2009 budget, assessing consistency of PRSP, PAPs, and MTEF. - Joint products agreed: Debt sustainability analysis, assessment of HIPC completion point triggers, JSAN of PRSP. ### Staff appraisal — policy recommendations (summary) - Fiscal policy must adjust urgently to follow a sustainable medium-term path through significant reductions in the non-oil primary deficit. - Immediate priorities: - Adopt lower, more realistic oil price assumption in 2009 budget. - Address non-security spending (wage bill, transfers to public enterprises). - Raise low non-oil revenue take and strengthen tax/customs administration. - Strengthen public expenditure management: re-establish budget control, curtail extrabudgetary spending, improve procurement and transparency (including military spending and public enterprise financial statements). - Continue clearing domestic arrears and avoid non-concessional borrowing. - Rapid progress toward EITI candidacy and publish EITI report. - Accelerate structural reforms: diversify the economy, reform cotton and utilities, improve business climate, develop infrastructure and financial sector. - Preconditions for SMP: strong 2009 budget, feasible medium-term fiscal framework, adherence to budget controls, improved composition and quality of spending. *Source: IMF staff report text and informational annexes, _cr0968._* ### Executive Summary ...................................................................................................... ### _cr0968 - Executive Summary ### Background and outlook - Oil production began in 2003 and by 2008 oil accounted for 47 percent of GDP and oil revenues had risen to 41 percent of GDP. - After strong oil-driven growth over the first half of the decade, economic activity turned sluggish; oil production began to decline in 2006. - Non-oil growth has been depressed, in part due to security problems. - Food price inflation increased sharply since end-2007. - High oil revenues strengthened the external position but also boosted expenditures—notably security and investments—resulting in large non-oil primary fiscal deficits. - Budgetary management is weak and concerns exist over the quality of public spending. - The macroeconomic outlook is fragile though external vulnerabilities appear manageable. - Declining oil prices will require substantial fiscal adjustment and will lower reserves, albeit not to critical levels. - Limited global integration should contain contagion from the global crisis. ### Recent economic developments - Real GDP increased by only ¼ percent in 2007 due to weak non-oil growth and a sharp decline in oil production. - Real GDP in 2008 is expected to decline by ½ percent because of a further drop in oil production and the impact of the 2008 February rebel attack. - Inflation: average inflation declined by 8¾ percent in 2007; inflation reached 11¾ percent on a 12-month basis at end-November 2008, driven by a 21 percent increase in food prices over the same period. - Food import dependence: Imported food accounts for only one quarter of the average household consumption basket. - Policy measures on food and fuel: eliminated taxes and fees on domestic sales of cattle, temporarily suspended cattle exports (lifted in mid-September), banned food crop exports, provided a temporary lump-sum allowance to low-income civil servants, and sold cereals to civil servants through ONASA. - Implicit retail fuel subsidy estimated at about ½ percentage point of GDP in 2008. - Monetary policy: the BEAC increased policy rates (¼ percent) and reserve requirements in July 2008; broad money grew 19 percent in the year to September 2008. - Non-oil fiscal deficits widened rapidly: the non-oil primary deficit (NOPD) deteriorated from 4 percent of GDP in 2004 to 22 percent (commitment basis) in 2007; expected to widen to 28 percent of GDP in 2008 mainly due to higher security spending. - Security spending rose from 2¼ percent of GDP in 2005 to almost 14½ percent projected in 2008; in 2006 security spending exceeded the initial budget allocation by 6¼ percent of GDP, in 2007 by 5¾ percent and in 2008 by 8 percent. Over 2006–08 security spending turned out three times higher than initially budgeted (31¾ percent of GDP versus 11¼ percent). - Domestically-financed priority sector spending tripled since 2004; from 2006 to 2008 spending on health and basic education each increased by ½ percentage point of GDP. - Aid flows declined from 10 percent of GDP in 2004 to 5 percent in 2007; loans decreased while grants remained relatively stable. - Real effective exchange rate (REER): appreciated by 27 percent over 2000–06; REER depreciated by 1¾ percent since end-2006 through November 2008. - Terms of trade improved 45 percent over 2006–08 despite declining oil production; export proceeds up 22 percent; imports grew 66 percent overall and 60 percent outside the oil sector. - Import cover expected to rise to 10½ months of imports of non-oil goods and services in 2008, from 5¼ months in 2006. - Compliance with CEMAC convergence criteria improved since 2005; no negative basic fiscal balance and no accumulated arrears since that time. - The financial system remained shallow, far below the level in comparable low-income countries. ### Policy discussions - Main focus: fiscal sustainability and external stability. - Recommended medium-term fiscal adjustment path consistent with a permanent income approach hypothesis. - To reverse rapid increase in non-oil primary fiscal deficits, permanent expenditures should gradually be brought in line with permanent (non-oil) revenues and made consistent with financing constraints. - Strategy recommended: - raise non-oil revenue collection, - strengthen public financial management to restore budget control, - improve efficiency and effectiveness of spending. - Staff called for a revised 2009 budget and medium-term fiscal framework to adjust to a more negative oil price outlook. - Authorities’ current overly optimistic oil price assumptions and reliance only on lower security spending risk financing problems and costly spending adjustments later on. - Structural reforms must be accelerated to improve prospects for the non-oil sector and reduce the fiscal burden of inefficient public enterprises. - Competitiveness concerns: trade performance flat over past decade; undermined by very high transport and energy costs and a business climate among the weakest in low-income countries. - Real effective exchange rate has appreciated since 2000 but no strong evidence it is inconsistent with fundamentals. ### Fund relations - The 2005–08 Fund-supported PRGF arrangement went off track due to widening non-oil fiscal deficits, inadequate poverty orientation of spending, and slow structural reform. - A staff-monitored program (SMP) negotiated in July 2008 was not approved by management due to additional expenditure overruns. - Authorities are keen on an SMP starting in early 2009. - Progress will depend in particular on actions being taken to strengthen fiscal policy and management. *Source: Executive Summary, _cr0968.* ### 6. The policy discussions focused on ensuring fiscal sustainability and external ### 6. The policy discussions focused on ensuring fiscal sustainability and external stability and competitiveness against the backdrop of the global economic slowdown and weakening commodity prices ### A. Medium-Term Macroeconomic Framework - Outlook described as fragile given the global recession and the outlook for oil prices. - Growth projections: - Non-oil growth expected to average 4¾ percent over 2009-11, driven by the service sector, construction, and manufacturing. - Oil growth reflects gradually declining production absent discovery of new exploitable reserves. - Under the mission's "adjustment" scenario (adoption of a sustainable fiscal policy reducing the non-oil deficit to 10½ percent by 2011 in line with the permanent income framework): - Import cover would increase to over one year by 2012. - In the "WEO oil prices" scenario (less ambitious adjustment in the 2009 budget combined with lower WEO oil prices): - Fiscal financing gaps would emerge in 2009 and over the medium term. - Inflation: - Absent further domestic shocks, inflation is projected to revert to its historical level of 3 percent over the medium term. - Identified risks to macro stability: - Security and political instability. - Further declines in oil prices. - Failure to re-establish strong relations with key donors, impeding financing and policy support. ### B. Fiscal Sustainability - Framework and overall assessment: - Mission proposed a modified permanent income framework to guide fiscal policy. - Fiscal policy can become sustainable if expenditures are gradually reduced to the level of permanent (non-oil) revenues. - Staff simulations suggest the sustainable long-term non-oil balance ranges from a small surplus to deficits of around 3 percent of GDP depending on the model used and the speed of adjustment. - Box 1 (PIH frameworks) highlights: - Chad’s 2008 NOPD will be close to 28 percent. - Long-run sustainable NOPD ranges from a small surplus to low single-digit deficits across approaches. - Table of average levels of non-oil primary fiscal balances under different approaches (selected entries): - Bird in Hand: 2009-12 = -1.4; 2013-16 = -4.4; 2017-20 = -5.1; 2021-45 = -2.8; 2046-70 = 0.0 - Balanced Budget: 2009-12 = -10.1; 2013-16 = -8.5; 2017-20 = -3.7; 2021-45 = -0.1; 2046-70 = 0.9 - PIH (Villafuerte, Leigh and Carcillo (2007) (infinite horizon)): 2009-12 = -13.1; 2013-16 = -8.9; 2017-20 = -6.5; 2021-45 = -1.0; 2046-70 = 0.4 - PIH (Constant government consumption annuity as a share of GDP (finite horizon)): 2009-12 = -1.1; 2013-16 = -2.3; 2017-20 = -2.6; 2021-45 = -2.6; 2046-70 = -2.6 - Results robust to sensitivity analysis on model parameters including oil revenues. - Recommended three-pronged strategy to reduce the non-oil primary balance while strengthening poverty reduction: - (i) Improve public financial management (PFM) through strict respect of budgetary procedures and other key PFM reforms. - (ii) Enhance non-oil revenue collection through reforms in tax and customs administration. - (iii) Improve the efficiency and targeting of spending, increase returns to public investment and raise absorptive capacity. - Authorities' stance: - Agreed with analysis and proposed adjustment strategy but stressed challenges from security shocks and unmet basic service needs. - 2009 budget aimed for a sizeable reduction, particularly to curtail security spending. - Authorities acknowledged wage bill and transfers to inefficient public entities were placing excessive claims on resources and must be addressed. - Progress and weaknesses noted: - PFM remains weak: excessive budget delays, bypassing normal budget procedures, extrabudgetary spending, underdeveloped medium-term budgeting and cash management, and non-competitive procurement. - Weak linkages between annual budgets and PRSP/priority actions programs; ad-hoc budget additions undermine priorities. - Line ministries have limited role in budget formulation and weak capacity for execution and monitoring. - Authorities introduced a visa de crédit system and established an investment database. - Authorities started to clear domestic arrears: CFAF 14 billion or ¾ percent of GDP in 2008; comprehensive arrears clearance plan to be finalized in 2009 (under preparation since 2005). - Staff encouraged public dissemination of the budget, budget execution reports and procurement information; concerns over Cabinet’s request to exempt the government from submission of draft budget review laws (Lois de Règlement) for 2004 through 2008. - Non-oil revenues are well below other African oil exporters; tax reforms are proceeding slowly. - Authorities intend a comprehensive review of tax policy including the fiscal regime for the oil sector; need to make the large taxpayers unit operational and develop a medium-term action plan for customs leakages (IMF TA requested). - Development partners raised concerns on composition, cost and quality of public spending; authorities agreed the wage bill could be rationalized (employee census, payroll computerization, possible demobilization if security permits). - Staff stressed completing existing projects before launching new ones and restraining investment in sectors with absorptive capacity constraints (e.g., health and education). ### C. The 2009 Budget - Staff assessment: - 2009 budget envisages a significant reduction in the non-oil primary deficit but needs to go further. - Cabinet approved a non-oil primary deficit 7 percentage points lower than the expected 2008 outturn, or 21¼ percent of GDP. - Staff pointed out the overall balance turns sharply negative in 2009 due primarily to lower prices. - Additional spending adjustment of 4½ percent of non-oil GDP is needed in 2009 to avoid financing problems. - Fiscal risks staff urged Parliament to address: - Oil revenue projections underpinning the budget were overly optimistic: - 2009 budget projects almost 16 percent of non-oil GDP more in oil revenue than staff’s forecast using WEO prices. - If higher prices do not materialize, financing gaps will emerge. - Authorities need to fully take into account the impact of a September 2008 agreement with the oil consortium. - Expenditure adjustment relying solely on lower military outlays is highly risky: - Non-security spending should be rationalized, notably the wage bill—which alone consumes almost all non-oil revenues—and transfers to public enterprises. - Dramatic growth in investment spending should be contained to avoid disruptions and to support a cushion of savings for possible further shocks. - Address weaknesses in tax collection vigorously in this budget. - Authorities' response: - Preferred to proceed with the budget but ready to undertake mid-course corrections. - Committed to stronger non-oil revenue collection, accelerated reforms of STEE and Cotontchad, and efforts to moderate the wage bill. - Will execute the budget in a restrained manner and issue a budget amendment in mid-year if oil prices did not recover. - Staff counseled that a revised budget would be more prudent and any windfall revenues could be used to reconstitute savings or amend the budget. - Staff recommendation on food exports and food security: - Urged removal of the export ban on food crops with immediate effect, noting the ban impedes trade and negatively affects incentives for producers; authorities committed to remove the ban at the earliest opportunity. - Recommended vigilance on food prices and adequate budgetary appropriations for the food security agency to replenish stocks. - Recommended better targeting of assistance rather than directing assistance to civil servants. - Selected figures from Text Table 3 (percent of non-oil GDP; scenarios for 2008-11): - Adjustment scenario (Using WEO oil price and staff's spending plan): - 2008: Oil revenues = 41.5; Current expenditure = 29.6; Transfers = 14.9; Domestically-financed investment = 8.7; Non-oil primary deficit = -28.1; Overall balance = 8.1; Deposits at the BEAC = 14.8 - 2009: Oil revenues = 7.1; Current expenditure = 20.1; Transfers = 6.8; Domestically-financed investment = 6.9; Non-oil primary deficit = -16.8; Overall balance = -14.0; Deposits at the BEAC = 0.5 - 2010: Oil revenues = 12.6; Current expenditure = 16.2; Transfers = 4.4; Domestically-financed investment = 5.2; Non-oil primary deficit = -10.7; Overall balance = -2.4; Deposits at the BEAC = 0.4 - 2011: Oil revenues = 14.9; Current expenditure = 15.0; Transfers = 3.6; Domestically-financed investment = 6.5; Non-oil primary deficit = -10.6; Overall balance = 0.5; Deposits at the BEAC = 1.9 - Authorities scenario (Authorities' oil price assumptions and their spending plan): - 2008: Oil revenues = 41.5; Current expenditure = 29.6; Transfers = 14.9; Domestically-financed investment = 8.7; Non-oil primary deficit = -28.1; Overall balance = 8.1; Deposits at the BEAC = 14.8 - 2009: Oil revenues = 22.8; Current expenditure = 22.0; Transfers = 7.9; Domestically-financed investment = 9.6; Non-oil primary deficit = -21.2; Overall balance = -5.6; Deposits at the BEAC = 12.0 - 2010: Oil revenues = 22.4; Current expenditure = 18.4; Transfers = 5.1; Domestically-financed investment = 8.5; Non-oil primary deficit = -15.6; Overall balance = -0.8; Deposits at the BEAC = 13.1 - 2011: Oil revenues = 21.9; Current expenditure = 17.2; Transfers = 4.6; Domestically-financed investment = 7.5; Non-oil primary deficit = -12.6; Overall balance = 2.3; Deposits at the BEAC = 17.2 - WEO oil prices scenario (Authorities' spending plans with WEO oil price assumptions): - 2008: Oil revenues = 41.5; Overall balance = 8.1; Deposits at the BEAC = 14.8; Financing gap = 0.0 - 2009: Oil revenues = 7.1; Overall balance = -21.3; Deposits at the BEAC = 0.0; Financing gap = 4.0 - 2010: Oil revenues = 12.6; Overall balance = -10.7; Deposits at the BEAC = 0.0; Financing gap = 4.6 - 2011: Oil revenues = 14.9; Overall balance = -4.7; Deposits at the BEAC = 0.0; Financing gap = 8.5 and 3.0 (table shows multiple entries for financing gap across rows) ### D. Oil Revenue Management - Current situation and recommendations: - Oil revenues appear well captured in the budget but improvements in monitoring and transparency are desirable. - All royalties and dividends are paid into a single offshore account; income taxes and other fees go directly to the central bank. - Staff encouraged strengthened monitoring: improved flows of oil sector information within government and exercising audit rights using independent auditors with an international reputation. - Staff encouraged moving on the Extractive Industries Transparency Initiative (EITI) and join other CEMAC countries as an EITI candidate. - Petroleum Revenue Management Law (PRML): - 1999 PRML key features have been abolished, modified or are uncertain (Fund for Future Generations abolished; definition of priority sectors modified; future of the College and offshore account uncertain). - A new PRML should focus on fiscal sustainability, use of oil revenues to support priority sectors, unified budget management, improved transparency and reinforced accountability. - Authorities interested in a new PRML to replace the interim mechanism, cover all oil revenues and extend College oversight to all investment spending. - Discussions on design expected in 2009 in collaboration with key partners. ### E. Structural Reform - Public enterprises and parastatals: - Reform of large public enterprises has stalled; fiscal burden mounting. - Two loss-making parastatals require transfers that increased from ¾ percent of GDP in 2005 to 1¾ percent of GDP in 2008. - Mission recommended all parastatals prepare and publish properly audited financial statements. - Cotontchad: - Production declined by one-third from 2004-06 to 2007-08; accumulated losses of 1½ percent of GDP. - Progress toward planned privatization slow; contracts signed for financial and technical audit. - One third of the population depend on cotton; authorities indicated continued official support through direct subsidies and government-guaranteed loans while exploring alternatives for farmers. - STEE (state water and electricity utility): - Finances deteriorated due to poor management, weak bill collection, rising fuel costs, technical problems; subsidies increasing to 1¼ percent of GDP in 2008. - Authorities decided to break up the company into separate water and electricity entities and devise a reform roadmap by end-2008 including performance contracts. - Mission urged progress on initiatives such as a “topping plant” to lower fuel costs. - New state-oil company (Société d’Hydrocarbures du Tchad, SHT): - Established in 2007 to manage government participation in oil sector; has begun to receive transfers and presents fiscal risks in terms of foregone revenue. - Mission argued state-oil companies can contribute positively if they have good corporate governance, adequate political oversight and transparent relations with the budget. - Authorities confirmed the Council of Ministers will exercise political oversight over all major SHT decisions with budgetary implications. - Note: SHT will manage government participations including a government 40 percent share in a joint venture with a Chinese company to build and operate a refinery and power plant at an estimated cost of $1 billion with a starting date now set for 2010. ### F. External Stability and Debt Sustainability - Real effective exchange rate (REER) and competitiveness: - REER has appreciated since 2000 but assessments found no strong evidence it is inconsistent with fundamentals. - CEMAC’s fixed exchange rate regime provides a reliable nominal anchor amid fiscal and price shocks. - Equilibrium exchange rate assessments found no significant under- or over-valuation. - Data problems on prices of non-tradables and profitability in the non-oil sector impede evaluation of Dutch disease symptoms. - High import content of oil activity and its relatively recent start may explain limited incidence of Dutch disease to date. - Chad’s non-oil export performance over the past decade has been stagnant. - Structural constraints identified: inadequate infrastructure and public services, deficiencies in the business climate, and weak governance—consistent with the 2006 Diagnostic Trade Integration Study. - Authorities concurred with staff’s assessment of the real exchange rate and stressed efforts to lower production costs by improving infrastructure. *Source: IMF staff report text (section 6).* ### 21. Chad’s balance of payments will deteriorate in 2009 but does not appear to be ### 21. Chad’s balance of payments will deteriorate in 2009 but does not appear to be ### Balance of payments and external vulnerability - Large fluctuations in the capital and financial account mostly represent foreign direct investments by the oil companies, offset by oil-related imports and services and income outflows. - With oil accounting for ninety percent of exports, the main external vulnerability relates to the trade account impact of a further drop in oil prices. - Oil production is judged stabilized and profitable even at world oil prices of $20-25 per barrel. - Authorities assessed reserves coverage at around five months coverage of all imports (including oil-related imports) and 10 months of non-oil imports. - The pooling of reserves at the BEAC provides an additional layer of comfort. ### Real Effective Exchange Rate (Box 2) — CGER assessment - Assessment conclusion: REER has appreciated moderately in recent years; no robust evidence of inconsistency with fundamentals, but data limitations are significant. - CEMAC 2008 Article IV consultation: concluded that even though there is evidence of moderate overvaluation, the zone’s REER remains consistent with external stability. - Equilibrium Real Exchange Rate Approach: - Regressions on the fundamentals with different specifications failed to show a significant relation between the REER and fundamentals. - Macroeconomic Balance Approach: - The underlying current account is estimated at -8¾ percent of total GDP. - The current account norm (using CGER coefficients) is estimated at -5¾ percent of total GDP. - Estimations show a slight overvaluation of the REER of about 3½ percent. - External Sustainability Approach: - Estimation over 2010-28 shows the gap between the NFA stabilizing current account and the underlying current account to be 2 percent of total GDP. - This implies the REER is overvalued by about 2¼ percent. ### Debt outlook and sustainability - Chad’s risk of debt distress is moderate and overall public sector debt dynamics appear sustainable. - A preliminary Debt Sustainability Analysis (DSA) was discussed with the authorities. - The oil windfall of recent years has improved Chad’s debt ratios, with timely debt servicing and limited new borrowing. - Risks to the debt outlook include the possibility that oil revenue spending does not produce the desired non-oil growth and fails to raise non-oil revenues. - Authorities intend to continue a prudent approach to debt management. - Mission recommendations and observations: - Limit debt-financed state participation in various oil ventures. - Commended resisting offers of non-concessional financing since that would compromise progress to HIPC and MDRI debt relief. - Notes on arrears: - The problem of periodic, short-term arrears in payments to the Fund has been much reduced since the introduction of an automatic payment mechanism with the BEAC in 2007. - Chad could have an external arrear to a private creditor of around $7 million deriving from a claim dating back to 2002; this creditor prevailed in international arbitration and in a court case over its right to attach Chadian government assets in the U.K. ### Improving growth prospects and structural reforms - Key conditions for strong growth: - Resolution of the conflict. - Sound macroeconomic management. - Higher factor productivity. - Authorities and staff view: - Effective use of oil receipts to improve productive capacity is critical. - Focus should be on enhancing opportunities for non-oil private sector growth via good governance and a stable investment climate. - Priority public investments supported by staff: health, education, roads, electricity, water, telecommunications. - Investment guidance: - Choice of investments should observe sectoral absorption limitations and maximize poverty reduction. - Authorities are considering stepping up investment in infrastructure supporting agricultural and livestock growth because of poverty impact. ### Financial system soundness (Box 3) and constraints - Financial system is vulnerable and underdeveloped, constraining non-oil growth. - Financial depth: broad money to GDP was only 12 percent in 2007, compared with 30 percent on average in African low income countries. - Access to credit is problematic; banking services virtually non-existent outside major urban centers. - A new national microfinance strategy aims to boost microfinance lending from the current equivalent of 3 percent of banking system lending. - Government contemplating a housing finance scheme, funded from the budget, by donors and through a levy on salaries. - Summary vulnerabilities: - Lack of depth, some undercapitalization, and insufficient on-site supervision. - Asset quality improved; gross non-performing loans lower than the CEMAC average, though provisioning levels also lower than community average. - Some banks are capital deficient on the basis of risk-weighted assets. - Since 2004, several banks (3 of 7) have persistently exceeded the single borrower limit (15 percent of equity). - Narrow credit market (mainly government and a few large enterprises) raises portfolio risk. - Government involvement in the banking sector (25 percent ownership overall) and as a customer adds to problems. - Sector remains profitable, fairly stable and growing due to limited competition. - Supervision of microfinance institutions is virtually non-existent. - Recommendation: more frequent on-site inspections of banks are required. - Financial Soundness Indicators, 2003-September 2008 (selected series preserve exact values): - Capital-asset ratio (unweighted): 9.4 11.0 8.3 8.3 9.7 9.7 - Gross NPL/Gross banking loans: 17.4 15.5 12.9 12.4 11.6 8.7 - Net NPL/Gross banking loans: 3.9 2.0 2.1 2.3 1.5 0.8 - Asset return: 2.3 0.0 2.0 1.5 1.9 2.2 - Equity return: 24.8 0.2 24.5 18.7 13.0 16.3 - Liquid assets/total assets: 23.2 28.5 27.3 39.2 48.6 43.2 - Liquid assets/demand deposits: 65.7 74.8 76.8 79.9 112.1 89.3 - Banks' rating (number of banks) — Solid or Good: 3 2 2 4 6 4; Fragile: 2 3 4 2 0 1; Critical: 0 0 0 0 0 1; Number of banks: 7 7 7 7 7 7 - Sources: BEAC/COBAC. ### Program relations and conditionality - Authorities are keen on an SMP but staff stressed this is conditional on progress in key areas. - Preconditions for an SMP in 2009: - A strong 2009 budget. - Agreement on a feasible medium-term fiscal framework. - Evidence of adherence to budget controls. - Progress on the composition and quality of spending. - Authorities would like an SMP to start promptly to pave the way to a new PRGF, and eventually to HIPC and MDRI debt relief. ### Staff appraisal and policy recommendations - Paramount challenge: how to seize the development opportunity offered by the next decade of oil revenues. - Urgent policy directions: - Fiscal policy must start urgently to follow a sustainable medium-term path, necessitating significant reductions in the non-oil primary deficit. - Fiscal policy should be tightened in 2009 and over the medium term. - Adopt a lower more realistic oil price assumption in the 2009 budget. - Address non-security spending (e.g., the wage bill and transfers to public enterprises). - Raise the low non-oil revenue take. - These actions aim to avoid costly corrections later in the year. - Strengthen public expenditure management to improve growth and poverty impact: - Re-establish budget control and improve efficiency of public spending. - Respect largely sound budget procedures; curtail large extrabudgetary spending and use of exceptional procedures. - Ensure appropriate balance between investment spending and requisite recurrent inputs. - More competitive procurement to raise quality and development impact of public spending. - Enhance fiscal transparency—on military spending, financial statements of public enterprises, and budget execution. - Continue efforts to clear domestic arrears and eschew non-concessional borrowing. - Improve capacity for collecting oil revenue given sector complexity: - Rapid progress to becoming an EITI candidate country and publishing an EITI report is encouraged. - Accelerate long overdue structural reforms to raise growth, productivity and competitiveness: - Diversify the economy. - Reform key parastatals (electricity, water and cotton). - Improve business climate, develop basic infrastructure, deepen the financial sector, and improve governance. ### Data and statistical needs - Serious data shortcomings hamper surveillance; highest priorities are the national accounts and balance of payments data. - Recommendation: allocate sufficient resources to the National Statistics Institute (INSEED) and BEAC for statistical collection and analysis. *Source: _cr0968 - 21. Chad’s balance of payments will deteriorate in 2009 but does not appear to be* ### 32. Staff recommends that the next Article IV consultation be held on the 12-month ### _cr0968 - 32. Staff recommends that the next Article IV consultation be held on the 12-month ### Recommendation on Article IV consultations - Staff recommends that the next Article IV consultation be held on the 12-month cycle subject to the Board decision on consultation cycles (Decision No. 12794-(02/7) dated July 15, 2002, as amended). - Chad is on the 12-month cycle. The next Article IV consultation is expected to take place by December 2009. ### Key macroeconomic projections and indicators (2006–2012) - GDP at constant prices (annual percentage change): - 2006: 0.2 - 2007: 0.2 - 2008: -0.4 - 2009 (Proj.): 3.5 - 2010 (Proj.): 3.5 - 2011 (Proj.): 3.6 - 2012 (Proj.): 2.7 - Oil GDP (annual percentage change): - 2006: -10.5 - 2007: -7.7 - 2008: -11.7 - 2009 (Proj.): -1.7 - 2010 (Proj.): -1.1 - 2011 (Proj.): -1.0 - 2012 (Proj.): -6.1 - Non-oil GDP (annual percentage change): - 2006: 4.7 - 2007: 3.1 - 2008: 3.2 - 2009 (Proj.): 5.0 - 2010 (Proj.): 4.7 - 2011 (Proj.): 4.7 - 2012 (Proj.): 4.7 - Consumer price index (average): - 2006: 7.9 - 2007: -8.8 - 2008: 8.1 - 2009 (Proj.): 3.0 - 2010 (Proj.): 3.0 - 2011 (Proj.): 3.0 - 2012 (Proj.): 3.0 - Chadian oil price (U.S. dollars/barrel): - 2006: 42.15 - 2007: 51.17 - 2008: 75.72 - 2009 (Proj.): 28.13 - 2010 (Proj.): 37.64 - 2011 (Proj.): 43.66 - 2012 (Proj.): 66.8 - WEO assumptions (U.S. dollars/barrel): - 2006: 64.37 - 2007: 71.19 - 2008: 97.55 - 2009 (Proj.): 54.36 - 2010 (Proj.): 64.87 - 2011 (Proj.): 71.37 - 2012 (Proj.): 75.0 - Oil production (in million barrels): - 2006: 56.7 - 2007: 52.4 - 2008: 46.5 - 2009 (Proj.): 45.6 - 2010 (Proj.): 45.6 - 2011 (Proj.): 45.6 - 2012 (Proj.): 43.3 - Exchange rate FCFA per US$ average: - 2006: 522.4 - 2007: 478.6 ### Money and credit (changes as percent of broad money stock at beginning of period; levels in billions CFA francs) - Net foreign assets of the banking system (changes): - 2006: 75.2 - 2007: 40.6 - 2008: 71.7 - 2009 (Proj.): -46.6 - 2010 (Proj.): 28.9 - 2011 (Proj.): 35.0 - 2012 (Proj.): 46.4 - Net domestic assets (changes): - 2006: -23.3 - 2007: -35.2 - 2008: -60.7 - 2009 (Proj.): 55.0 - 2010 (Proj.): -20.6 - 2011 (Proj.): -27.2 - 2012 (Proj.): -38.5 - Net claims on central government (changes): - 2006: -25.2 - 2007: -33.3 - 2008: -40.1 - 2009 (Proj.): 64.5 - 2010 (Proj.): 4.3 - 2011 (Proj.): -13.8 - 2012 (Proj.): -26.2 - Credit to nongovernment sector (percent change): - 2006: 2.8 - 2007: -4.2 - 2008: 3.2 - 2009 (Proj.): 2.5 - 2010 (Proj.): 2.5 - 2011 (Proj.): 2.4 - 2012 (Proj.): 2.4 - Broad money (annual percentage change): - 2006: 51.9 - 2007: 5.4 - 2008: 11.1 - 2009 (Proj.): 8.4 - 2010 (Proj.): 8.3 - 2011 (Proj.): 7.9 - 2012 (Proj.): 7.9 - Income velocity of money (M2): - 2006–2012: 4.7, 4.6, 4.6, 4.6, 4.6, 4.6, 4.6 ### External sector (valued in CFA francs; selected levels and balances) - Exports, f.o.b. (annual percentage change): - 2006: 8.1 - 2007: -1.0 - 2008: 14.0 - 2009 (Proj.): -44.1 - 2010 (Proj.): 19.3 - 2011 (Proj.): 10.5 - 2012 (Proj.): 1.5 - Imports, f.o.b. (annual percentage change): - 2006: 12.6 - 2007: 3.3 - 2008: 4.4 - 2009 (Proj.): -10.2 - 2010 (Proj.): 3.1 - 2011 (Proj.): 6.5 - 2012 (Proj.): 0.7 - Current account balance, incl. official current transfers (percent of GDP): - 2006: -9.0 - 2007: -10.5 - 2008: -9.6 - 2009 (Proj.): -17.1 - 2010 (Proj.): -7.3 - 2011 (Proj.): -7.0 - 2012 (Proj.): -6.1 - Current account balance, excluding official current transfers (billions of CFA francs): - 2006: -389.3 - 2007: -436.3 - 2008: -431.0 - 2009 (Proj.): -646.2 - 2010 (Proj.): -362.3 - 2011 (Proj.): -374.0 - 2012 (Proj.): -373.1 - Trade balance, incl. oil sector (billions of CFA francs): - 2006: 1,079.2 - 2007: 1,022.3 - 2008: 1,182.0 - 2009 (Proj.): 320.8 - 2010 (Proj.): 541.2 - 2011 (Proj.): 621.6 - 2012 (Proj.): 615.9 - Gross official reserves (in months of imports (excl. oil sector)): - 2006: 5.2 - 2007: 5.9 - 2008: 10.6 - 2009 (Proj.): 7.4 - 2010 (Proj.): 8.7 - 2011 (Proj.): 10.4 - 2012 (Proj.): 12.9 ### Fiscal accounts and projections (selected items, 2006–2012; levels in billions CFA francs and percent of GDP) - Nominal GDP (billions CFA francs): - 2006: 3,294 - 2007: 3,358 - 2008: 3,744 - 2009 (Proj.): 3,239 - 2010 (Proj.): 3,610 - 2011 (Proj.): 3,909 - 2012 (Proj.): 4,102 - Revenue (billions CFA francs): - 2006: 558.0 - 2007: 764.9 - 2008: 1,040.9 - 2009 (Proj.): 716.2 - 2010 (Proj.): 369.6 - 2011 (Proj.): 544.9 - 2012 (Proj.): 654.5 - Oil revenue (billions CFA francs): - 2006: 403.4 - 2007: 563.2 - 2008: 843.1 - 2009 (Proj.): 502.4 - 2010 (Proj.): 155.7 - 2011 (Proj.): 300.6 - 2012 (Proj.): 382.9 - Non-oil tax revenue (billions CFA francs): - 2006: 143.7 - 2007: 188.9 - 2008: 189.7 - 2009 (Proj.): 207.1 - 2010 (Proj.): 207.1 - 2011 (Proj.): 237.0 - 2012 (Proj.): 263.6 - Expenditure (billions CFA francs): - 2006: 542.3 - 2007: 709.3 - 2008: 855.3 - 2009 (Proj.): 824.6 - 2010 (Proj.): 664.2 - 2011 (Proj.): 590.8 - 2012 (Proj.): 670.6 - Current expenditure (billions CFA francs): - 2006: 343.4 - 2007: 464.2 - 2008: 602.2 - 2009 (Proj.): 485.6 - 2010 (Proj.): 442.8 - 2011 (Proj.): 386.6 - 2012 (Proj.): 385.9 - Investment expenditure (billions CFA francs): - 2006: 198.9 - 2007: 245.1 - 2008: 253.1 - 2009 (Proj.): 339.0 - 2010 (Proj.): 221.4 - 2011 (Proj.): 204.2 - 2012 (Proj.): 254.7 - Non-oil primary balance (excl. grants, commitment basis) (billions CFA francs): - 2006: -262.6 - 2007: -404.4 - 2008: -570.8 - 2009 (Proj.): -467.6 - 2010 (Proj.): -369.7 - 2011 (Proj.): -255.2 - 2012 (Proj.): -272.9 - Overall balance (excl. grants, commitments) (billions CFA francs): - 2006: 15.8 - 2007: 55.5 - 2008: 185.6 - 2009 (Proj.): -108.3 - 2010 (Proj.): -294.7 - 2011 (Proj.): -45.9 - 2012 (Proj.): 13.9 - Financing (billions CFA francs): - 2006: 28.1 - 2007: -42.3 - 2008: -164.6 - 2009 (Proj.): 122.3 - 2010 (Proj.): 308.7 - 2011 (Proj.): 57.6 - 2012 (Proj.): -13.9 ### Monetary survey highlights (billions of CFA francs) - Net foreign assets: - 2006: 265.7 - 2007: 418.9 - 2008: 704.3 - 2009 (Proj.): 498.3 - 2010 (Proj.): 636.6 - 2011 (Proj.): 818.4 - 2012 (Proj.): 1,078.1 - Net domestic assets: - 2006: 111.6 - 2007: -21.2 - 2008: -262.5 - 2009 (Proj.): -19.3 - 2010 (Proj.): -117.8 - 2011 (Proj.): -258.7 - 2012 (Proj.): -474.1 - Money and quasi money (broad money levels): - 2006: 377.3 - 2007: 397.8 - 2008: 441.8 - 2009 (Proj.): 478.9 - 2010 (Proj.): 518.8 - 2011 (Proj.): 559.7 - 2012 (Proj.): 604.0 - Currency outside banks: - 2006: 217.2 - 2007: 240.3 - 2008: 239.7 - 2009 (Proj.): 255.0 - 2010 (Proj.): 271.1 - 2011 (Proj.): 286.8 - 2012 (Proj.): 303.5 ### Balance of payments (billions of CFA francs) - Current account, incl. official current transfers: - 2006: -294.9 - 2007: -353.6 - 2008: -360.4 - 2009 (Proj.): -553.9 - 2010 (Proj.): -264.3 - 2011 (Proj.): -275.0 - 2012 (Proj.): -248.2 - Exports, f.o.b. (levels): - 2006: 1,781.9 - 2007: 1,760.8 - 2008: 2,016.0 - 2009 (Proj.): 1,089.3 - 2010 (Proj.): 1,312.9 - 2011 (Proj.): 1,457.4 - 2012 (Proj.): 1,478.3 - Oil and oil product exports (levels): - 2006: 1,552.6 - 2007: 1,532.0 - 2008: 1,766.8 - 2009 (Proj.): 822.3 - 2010 (Proj.): 1,028.7 - 2011 (Proj.): 1,153.8 - 2012 (Proj.): 1,153.5 - Imports, f.o.b. (levels): - 2006: -702.7 - 2007: -738.5 - 2008: -833.9 - 2009 (Proj.): -768.5 - 2010 (Proj.): -771.7 - 2011 (Proj.): -835.8 - 2012 (Proj.): -862.5 - Financial and capital account (billions of CFA francs): - 2006: 491.3 - 2007: 477.5 - 2008: 645.0 - 2009 (Proj.): 347.0 - 2010 (Proj.): 401.9 - 2011 (Proj.): 449.7 - 2012 (Proj.): 504.0 - Overall balance (billions of CFA francs): - 2006: 196.4 - 2007: 123.9 - 2008: 284.7 - 2009 (Proj.): -207.0 - 2010 (Proj.): 137.7 - 2011 (Proj.): 174.7 - 2012 (Proj.): 255.8 - Change in net reserves: - 2006: -196.4 - 2007: -123.9 - 2008: -284.7 - 2009 (Proj.): 207.0 - 2010 (Proj.): -137.7 - 2011 (Proj.): -174.7 - 2012 (Proj.): -255.8 ### Relations with the Fund and financial arrangements - Membership: Joined July 10, 1963; Article VIII. - Quota and holdings: - Quota: 56.00 (SDR Million) 100.00 percent of quota - Fund holdings of currency: 55.72 (SDR Million) 99.50 percent of quota - Reserve position: 0.28 (SDR Million) 0.50 percent of quota - SDR Department: - Net cumulative allocation: 9.41 (SDR Million) 100.00 percent allocation - Holdings: 0.13 (SDR Million) 1.39 percent - Outstanding Purchases and Loans: - PRGF arrangements: 26.43 (SDR Million) 47.19 percent of quota - Latest PRGF arrangements (dates, approved amounts, amounts drawn): - PRGF Feb. 16, 2005–May 31, 2008: Amount Approved 25.20 (SDR Million); Amount Drawn 4.20 (SDR Million) - PRGF Jan. 07, 2000–Jan. 06, 2004: Amount Approved 47.60; Amount Drawn 42.40 - PRGF Sep. 01, 1995–Apr. 30, 1999: Amount Approved 49.56; Amount Drawn 49.56 - Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal: 2008: 8.23; 2009: 7.30; 2010: 5.08; 2011: 2.68 - Charges/Interest: 2009: 0.21; 2010: 0.17; 2011: 0.14; 2012: 0.12 - Total: 2009: 8.43; 2010: 7.47; 2011: 5.22; 2012: 2.80 ### Debt relief and HIPC/MDRI status - HIPC Initiative (Enhanced Framework): - Decision point date: May 2001 - Assistance committed by all creditors (US$ million): 170.00 - Of which: IMF assistance (US$ million): 18.00 (SDR equivalent in millions: 14.25) - Disbursement of IMF assistance (SDR million): Assistance disbursed to the member: 8.55; Interim assistance: 8.55; Total disbursements: 8.55 - MDRI: Not Applicable ### Safeguards, exchange rate arrangement, and technical assistance - Safeguards: Most recent safeguards assessment of the Bank of the Central African States (BEAC) completed on August 30, 2004; assessment recommended further enhancements in external and internal audits and financial reporting; monitoring indicates certain vulnerabilities in internal controls; 2008 update safeguards assessment of BEAC is underway. - Exchange rate arrangement: The CFA franc is the BEAC common currency; devalued on January 12, 1994 (F 1=CFAF 50 to F 1=CFAF 100); since January 1, 1999, the CFA franc has been pegged to the Euro at EUR 1=CFAF 655.957. - Technical assistance (selected recent deliveries and timing): - FAD (AFRITAC): Tax and Customs Administration — November, 2008 - STA (AFRITAC): National Accounts — October 28–November 7, 2008 - STA (AFRITAC): Price Statistics — August 18–29, 2008 - STA: National Accounts — January–February 2008 - FAD: Budget — September–October 2007 - FAD (AFRITAC): Treasury management — August 2007 - STA (AFRITAC): National accounts — August 2007 - STA: Price statistics — May 2007 - AFRITAC Assessment mission — March 2007 - STA: Data ROSC — May 2006 - FAD: Strengthen budget and accounting transparency — May–June 2005 - FAD: Consolidate budget management — October 2004 - FAD: Implement customs action plan — April 2003 - STA: National account statistics — July 2002 - FAD: Assess fiscal reforms — May 2002 - FAD: Strengthen tax collections and VAT — June–December 2001 - STA: Multisector statistics mission — May 2000 ### Other institutional information - Finance Sector Assessments and ROSCs: - ROSC Data Module mission: May 26–June 8, 2005 - Joint IMF–World Bank FSAP for CEMAC countries: January 30–February 9, 2006 - Resident Representative: - Mr. Karangwa has been the Fund resident representative in N’Djamena since November 2007. *Source: Staff Report for the 2008 Article IV Consultation — Informational Annex (Prepared by the African Department; Approved by Emilio Sacerdoti and Anthony Boote; January 12, 2009).* ### 1. Prepayment of Pipeline-related loans completed ### _cr0968 - 1. Prepayment of Pipeline-related loans completed ### Key events and planned missions - Prepayment of pipeline-related loans completed. (September 5, 2008.) - Joint WB-Government of Chad Evaluation/mission to assess impact of WB portfolio, progress in priority sectors, and progress on PFM. (Oct 27-Nov. 7 2008) - World Bank partially reopens office in N’Djamena. (January 2009) - Prime Minister to visit Washington when relations between the Chad and the Bank will be discussed. (Early 2009) ### Fund work program in the next 12 months - 2008 Article IV consultation, discussions of the 2009 budget, and first review of the SMP. (October 2008; Board meeting in December 2008) - Second review of the SMP and PRGF negotiations. (Q1/Q2 2009; Board meeting in Q2 2009) - Technical Assistance: - National account statistics. (Oct./Nov 2008) - Customs administration. (Q1 2009) - Debt management. (October 2008; Q1/Q2 2009) - Public financial management. (Q1/Q2 2009) ### Fund–Bank coordination: requests and joint products - Fund request to Bank: - Inputs for review of the 2009 Budget. - Assessing consistency of PRSP, PAPs, and MTEF. - Bank request to Fund: - Fund to keep Bank abreast of developments in Chad, including those related to the macroeconomic framework, implementation of the 2008 and 2009 budgets, preparations for the 2009 and 2010 Budgets, PFM and PRML issues. - Agreed joint products: - Debt sustainability analysis. - Assessment of HIPC completion point triggers. - JSAN of PRSP. ### Statistical issues — assessment of data adequacy for surveillance (As of December 23, 2008) - General conclusion: Data provision have serious shortcomings that significantly hamper surveillance. - National accounts: - Accuracy and reliability of key national aggregates are seriously affected by weak source data due to inadequate funding for the National Institute of Statistics, Economic and Demographic Studies (INSEED). - High degree of uncertainty regarding estimates of the level and growth rate of GDP and expenditure components that impact on ratios scaled by GDP. - Since early 2007, with assistance from AFRISTAT and Central AFRITAC, the authorities made a number of improvements and are currently in process of finalizing the national accounts estimates for 2005. - Sustained improvement requires a durable and substantial increase in resources, and ensuring absorption and retention of know-how transferred through technical assistance. - Price statistics: - In January 2008, the Harmonized Consumer Price Index (IHPC) covering the capital replaced the dated CPI. - Significant work still needed to improve reliability and visibility of the IHPC. - An August 2008 Central-AFRITAC mission agreed with INSEED a short-term program to improve timely production of the IHPC using new software. - Government finance statistics: - Reported for surveillance purposes include a quarterly Tableau des opérations financières de l’État (TOFE) and monthly debt statistics. - TOFE generally follows GFSM 1986 presentation, but is compiled by a working group drawing source data from disparate administrative sources, resulting in discrepancies between central government operations and financing data. - Monetary and financial statistics: - Monetary statistics, interest rates, and exchange rates are provided for surveillance purposes. - 2005 data ROSC mission found coverage of monetary statistics limited to the central bank and commercial banks; microfinance corporations are not covered by the depository corporations survey. - Monetary data on net credit to government frequently can not be reconciled with fiscal data due to differences in institutional coverage and grouping. - Cross-border cash circulation effects: - About 40 percent of banknotes issued in Chad by the BEAC national directorate circulate in Cameroon. - Currency in circulation in Chad includes some 10 percent of banknotes from Cameroon and 5 percent of banknotes from the Central African Republic. - BEAC MFSM migration project: - BEAC started in mid-2007 a project to migrate monetary statistics of CEMAC member countries to the MFSM methodology. - A regional workshop organized by the BEAC in December 2007 finalized mapping of source data from commercial banks to MFSM concepts; STA participated. - BEAC has yet to submit test data using the standardized report forms. - External sector statistics: - Poor quality attributed to inadequacies in staffing and material resources. - Foreign trade data compiled by INSEED on customs declarations are unreliable and suffer coverage problems; believed to be inconsistent with national accounts. - Exports data are estimated based on data provided by line ministries. - Improvements possible for imports, cotton and cattle exports, freight, and public transfers. - Tighter coordination among the CEMAC, INSEED, and other agencies is required. - Data standards and reporting: - Chad participates in the General Data Dissemination System. - A data ROSC was published in August 2007. - Chad does not report government finance statistics for publication in the Government Finance Statistics Yearbook or in International Financial Statistics (IFS). - Balance of payments statistics are not reported for publication in the Balance of Payments Statistics Yearbook or IFS. - Monetary and financial statistics, as well as international liquidity and exchange rates are reported for publication in IFS. ### Statistical appendix — select data observations and quality assessments (As of December 22, 2008) - Exchange Rates: - Date of Latest Observation: Daily - Date Received: Daily - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: - Date of Latest Observation: June 2008 - Date Received: July 2008 - Frequency of Data/Reporting/Publication: M / M / M - Reserve/Base Money: - Date of Latest Observation: Oct. 2008 - Date Received: Oct 2008 - Frequency: M / M / M - Broad Money: - Date of Latest Observation: Oct. 2008 - Date Received: Oct 2008 - Frequency: M / QM / M - Central Bank Balance Sheet: - Date of Latest Observation: Oct. 2008 - Date Received: Oct 2008 - Frequency: M / M / M - Consolidated Balance Sheet of the Banking System: - Date of Latest Observation: Oct. 2008 - Date Received: Oct 2008 - Frequency: M / M / M - Interest Rates: - Date of Latest Observation: August 2008 - Date Received: Sept 2008 - Frequency: MI / QM / M - Consumer Price Index: - Date of Latest Observation: Oct. 2008 - Date Received: Oct 2008 - Frequency: M / M / M - Revenue, Expenditure, Balance and Composition of Financing — General Government: - Date of Latest Observation: May 2008 - Date Received: July 2008 - Frequency: Q / Q / Q - Revenue, Expenditure, Balance and Composition of Financing — Central Government: - Date of Latest Observation: May 2008 - Date Received: July 2008 - Frequency: Q / Q / Q - Stocks of Central Government and Central Government-Guaranteed Debt: - Date of Latest Observation: Dec. 2007 - Date Received: July 2008 - Frequency: Q / Q / Q - External Current Account Balance: - Date of Latest Observation: 2006 - Date Received: July 2008 - Frequency: A / A / A - Exports and Imports of Goods and Services: - Date of Latest Observation: 2006 - Date Received: July 2008 - Frequency: A / A / A - Services GDP/GNP: - Date of Latest Observation: 2007 - Date Received: July 2008 - Frequency: A / A / A - Gross External Debt: - Date of Latest Observation: Dec. 2007 - Date Received: July 2008 - Frequency: Bi-M / Bi-M / Bi-M - International Investment Position: - Date of Latest Observation: NA - Date Received: NA - Frequency: NA / NA / NA ### Joint World Bank–IMF Debt Sustainability Analysis (Approved January 13, 2009) - Overall assessment: - Based on the external Low-Income Country (LIC) Debt Sustainability Analysis (DSA), Chad’s risk of debt distress is moderate although subject to important risks in the external environment and the conduct of economic policy. - The inclusion of domestic debt does not alter the assessment of Chad’s risk of debt distress. - Recent developments in external debt: - Strong growth in overall GDP stemming from the oil sector, reduced external financing, and continued debt servicing improved Chad’s external debt situation. - By end-2005—the basis for the last DSA—the stock of debt had declined to below 30 percent of GDP, from over 60 percent at the HIPC Initiative decision point. - The stock of external debt declined further to 23 percent of GDP at end-2007. - All of Chad’s external debt is public debt; the bulk is owed to multilateral creditors IDA and the African Development Bank (AfDB). - Nominal debt levels are sensitive to exchange rate changes, mainly through the Euro-dollar rate given that the CFA franc has a fixed parity with the Euro (about one quarter of debt is denominated in Euro or CFA). - Debt levels were further reduced because Chad made principal payments as scheduled while contracting only moderate amounts of new debt. - In 2008, the debt stock declined significantly after Chad prepaid to the IBRD the balance on the loan that financed the government’s equity share in the oil pipeline plus to IDA the two associated credits for capacity building (around CFAF 31 billion in total). - Debt management and institutional steps: - Chad’s debt management is guided by the framework adopted in March 2007 by the Economic and Monetary Community of Central Africa (CEMAC). - Debt management capacity has been significantly strengthened. - A new software introduced in 2008 permits integration of domestic and external debt, will be used to publish a new statistical bulletin, and the debt department plans its own website. - Starting 2009, unpaid bills at the end of the complementary period of the budget year will be formally recognized as debt and transferred to the debt department to better track treasury arrears (arrierés comptables). - HIPC Initiative and MDRI status: - Chad is eligible for the enhanced Heavily-Indebted Poor Countries (HIPC) Initiative. - Decision point reached on May 24, 2001; HIPC Initiative debt relief was estimated at US$170 million in 2001 NPV terms (of which US$68 million by IDA and US$18 million by the IMF). - Part was to be delivered as interim assistance with the remainder at the completion point. - Creditors delivering interim assistance include IDA, IMF, AfDB, the Paris Club, and other bilateral creditors. - Over seven years most creditors reached the limit of their interim relief (the IMF in 2005, the AfDB in 2006 and IDA in 2007). - Macroeconomic performance and political obstacles prevented Chad from reaching the HIPC completion point—principal obstacles included inability to meet agreed fiscal targets and satisfactorily implement a program under the IMF’s PRGF. - The 2005 PRGF expired in 2008 without any reviews being concluded. - Subsequent 2008 efforts via an SMP were derailed by further fiscal slippages. - Completion point timing depends on authorities’ progress toward a new PRGF arrangement and satisfactory performance under a PRGF-supported program. - Completion point also requires one year satisfactory implementation of the PRSP and meeting a number of floating completion point triggers in governance and five Priority sectors. - The Government of Chad adopted a new PRSP in April 2008. - MDRI implications: - Upon reaching the HIPC completion point, Chad would become eligible for MDRI relief covering the full stock of debt owed to IDA, IMF, and AfDF on disbursements before end-2004 for IMF and AfDF and before end-2003 for IDA. - For Chad, MDRI debt relief would be equivalent to approximately US$1 billion in nominal terms over 45 years or US$567 million in end-2006 NPV terms. *Prepared by the staffs of the International Development Association and the International Monetary Fund (January 13, 2009).* ### 6. Chad has no public domestic debt instruments. CEMAC plans for creating a domestic ### _cr0968 - 6. Chad has no public domestic debt instruments. CEMAC plans for creating a domestic ### Domestic public debt stock and settlement plans - An independent auditor identified in 2006 claims worth CFA 142 billion (4.6 percent of GDP) as of end-2005, to be paid either immediately or upon further verification. - Domestic debt categories: treasury arrears (arrierés comptables), rescheduled debt (debt conventionnées), and legal obligations (engagements juridiques). - All domestic debt is in national currency; only a small portion of rescheduled debt earns interest. - Reported stock of public domestic debt (Billions of CFA francs; Percent of GDP): - 2005: Budget arrears 34.1; Rescheduled debts 69.4; Legal commitments 38.6; Total 142.2; Total 4.6 - 2006: Budget arrears 24.8; Rescheduled debts 71.8; Legal commitments 31.3; Total 127.9; Total 3.9 - 2007: Budget arrears 22.3; Rescheduled debts 52.4; Legal commitments 24.5; Total 99.2; Total 3.0 - 2008: Budget arrears 1.3; Rescheduled debts 33.7; Legal commitments 24.5; Total 59.4; Total 1.6 - Policy actions and timeline: - A partial domestic debt repayment plan envisaged payment of CFAF 40 billion over 2008-10 (adopted April 2008). - In July 2008 a government commission began updating the stock as of end-2007 to enable a final arrears clearance and domestic debt settlement plan in early 2009. - No public debt guarantees are registered in the debt department. ### Macroeconomic assumptions for the baseline DSA (2008-2028) - Real sector assumptions (selected): - GDP in constant prices: 2005 7.9; 2006 0.2; 2007 0.2; 2008 -0.4; 2009 3.6; 2010 3.5; 2011 3.6; 2012 2.7; 2013 2.5; 2008-2013 Average 2.6; 2014-2028 Average 3.8 - Non-oil sectors: 2005 11.0; 2006 4.7; 2007 3.1; 2008 3.2; 2009 5.0; 2010 4.7; 2011 4.7; 2012 4.7; 2013 4.7; 2008-2013 Average 4.5; 2014-2028 Average 4.8 - Oil sector: 2005 1.5; 2006 -10.5; 2007 -7.7; 2008 -11.6; 2009 -1.5; 2010 -1.2; 2011 -1.0; 2012 -6.1; 2013 -8.1; 2008-2013 Average -4.9; 2014-2028 Average -8.1 - Oil production and prices: - Oil production (millions of barrels): 2005 62.9; 2006 56.7; 2007 52.4; 2008 46.5; 2009 45.6; 2010 45.6; 2011 45.6; 2012 43.3; 2013 39.8; 2008-2013 Average 44.4; 2014-2028 Average 19.3 - Reference oil price (US$/barrel): 2005 53.4; 2006 64.3; 2007 71.1; 2008 97.0; 2009 50.0; 2010 60.0; 2011 64.8; 2012 67.0; 2013 68.8; 2008-2013 Average 67.9; 2014-2028 Average 6.8 - Other key macro assumptions (selected): - Inflation (percent, GDP deflator): 2005 23.1; 2006 6.2; 2007 1.8; 2008 11.9; 2009 -19.0; 2010 7.5; 2011 3.8; 2012 1.9; 2013 1.2; 2008-2013 Average 1.2; 2014-2028 Average 2.3 - Current account balance: 2005 -17.4; 2006 2.4; 2007 -9.0; 2008 -10.5; 2009 -9.5; 2010 -19.6; 2011 -8.6; 2012 -8.8; 2013 -7.7; 2008-2013 Average -10.8; 2014-2028 Average -10.0 - Public sector revenues (incl. grants): 2005 12.7; 2006 18.8; 2007 24.2; 2008 29.4; 2009 11.3; 2010 15.6; 2011 16.9; 2012 18.1; 2013 17.4; 2008-2013 Average 18.1; 2014-2028 Average 18.3 - Public sector expenditures: 2005 13.1; 2006 16.5; 2007 21.1; 2008 22.9; 2009 19.5; 2010 15.0; 2011 15.2; 2012 15.5; 2013 16.3; 2008-2013 Average 17.4; 2014-2028 Average 18.9 - Primary deficit: 2005 -4.1; 2006 0.0; 2007 1.3; 2008 4.7; 2009 -9.9; 2010 -1.6; 2011 -0.5; 2012 -0.1; 2013 -1.7; 2008-2013 Average -1.5; 2014-2028 Average -3.9 - Non-oil primary deficit (percent of non-oil GDP): 2005 -5.2; 2006 -15.0; 2007 -22.0; 2008 -28.1; 2009 -14.4; 2010 -7.9; 2011 -7.9; 2012 -7.5; 2013 -7.4; 2008-2013 Average -12.2; 2014-2028 Average -4.0 ### Oil sector role and assumptions - No new oil discoveries are assumed; projections based on gradual depletion of the Doba field. - Long-term oil production projection: annual production declining from 46 million barrels in 2008 to 11 million in 2028. - Chad’s oil sells at a discount of $10-15 per barrel relative to international reference prices such as Brent. - Medium-term reference oil price follows IMF World Economic Outlook projections; long-term trend assumed to realign towards about $60 per barrel (2006 level). - For the outer years, government “take” from oil revenue assumed to be 50 percent of gross oil revenues. ### Fiscal policy, external financing, and borrowing assumptions - Fiscal reaction to declining oil revenue: combination of expenditure reduction and revenue-raising through broad-based taxation of non-oil sectors, targeting a non-oil primary deficit below 4 percent. - Chad assumed to remain IDA-eligible over the projection period and continue to receive concessional finance. - Present total grants and loans unusually low: 2007 level was only half that of 2004 (in terms of GDP). - New borrowing assumptions: - 70 percent of new borrowing assumed to have a grant element of around 60 percent (IDA terms). - 30 percent of new borrowing assumed to have a grant element of 35 percent. - Combined effect: grant-equivalent financing rises to 3.6 percent of GDP in the outer years. - Following settlement of current domestic debt by 2010, a small build-up of new domestic debt projected at CFAF 5 billion per year as CEMAC develops a domestic securities market. - Baseline does not assume HIPC completion point debt relief in absence of a PRGF arrangement. ### External DSA baseline, scenarios, and stress tests - Policy performance classification: Chad’s CPIA rating averaged 2.77 for 2005-07, placing it in the Weak Policy category; CPIA declined from 2.9 in 2005 to 2.6 in 2007. - Threshold comparisons indicate under the baseline Chad’s public- and publicly-guaranteed external debt indicators remain comfortably below thresholds and are stable or declining. - Alternative “historical” scenario: key variables stay at historical averages, implying continuation of fairly large current account deficits financed mostly by FDI and resulting in debt buildup; the historical scenario causes the PV of debt-to-exports ratio to cross the threshold. - Standard bound tests (six tests including export growth shock and 30 percent depreciation) show: - The most extreme test results appear in 2018. - For two of five key ratios the extreme bound tests cross thresholds (notably under “export growth” and “depreciation” tests). - The “export growth” test assumes minus 40 percent export growth in 2009 and 2010. ### Public DSA baseline, scenarios, and stress tests - Baseline public debt assumptions: - Repayment of current domestic debt stock by 2010. - Small domestic debt rebuild of CFAF 5 billion per year thereafter. - Growth in non-oil revenue offsets loss in oil revenue. - Under baseline, public debt ratios peak in 2009 and then show a slight steady decline over the projection period. - Alternative scenarios: - “Historical” scenario: key variables set at historical averages → primary deficits over projection period and significant deterioration in all three public-debt ratios relative to baseline. - “Fix primary balance” scenario: continuation of the unusually large primary surplus of 2008 → rapid repayment of all debt. - Most extreme bound test: “lower long-run GDP growth” - Assumes average growth rate of 1.4 percent for 2009-28 versus 3.6 percent under baseline. - Under this test PV of debt-to-GDP reaches 100 percent in the outer years. - The 1.4 percent rate approximates overall real GDP growth if non-oil GDP growth remained at 3.6 percent (1988-97 rate) and oil GDP declines, yielding overall 2009-28 growth of 1.3 percent. ### Debt distress classification and policy implications - Staff assessment: Chad is at moderate risk of debt distress based on external debt burden indicators; inclusion of domestic debt does not change this assessment. - Rationale for “moderate risk”: - Baseline does not breach thresholds, but the “historical” scenario and two bound tests do. - Conduct of economic policy and debt management presents sizeable risks to the baseline. - Improvement since 2006: previous assessment judged Chad’s debt outlook fragile with high risk of debt distress; improved prudence in debt management and a more favorable balance of payments outlook account for improvement. - Key risks highlighted: - External sector shocks could push debt ratios over thresholds. - Major long-term risk: non-oil GDP growth may stagnate at pre-oil low rates; failure to invest oil revenues efficiently and to implement structural reforms would undermine the baseline strategy of offsetting declining oil export proceeds with higher non-oil exports and higher non-oil revenue. *Source: Chadian authorities; and IMF staff projections as presented in the provided DSA chapter.* ### 22. As at the time of the 2006 DSA, there is a considerable risk that fiscal discipline will ### _cr0968 - 22. As at the time of the 2006 DSA, there is a considerable risk that fiscal discipline will ### Fiscal risks and contingent scenarios - As at the time of the 2006 DSA, there is "a considerable risk that fiscal discipline will not prevail in the near term, possibly leading to the accumulation of new domestic arrears." - Additional downside risk: the government may assume large debts in connection with oil ventures, "possibly collateralized against future oil income and on non-concessional terms." - Upside scenarios: - Debt outlook could improve if ongoing exploration results in new significant oil or mineral discoveries. - "Attainment of the HIPC Initiative completion point would ensure debt sustainability even under more adverse circumstances." - Stress-test time horizon and framing: - Indicators and stress tests reported for 2008-2028. - The "most extreme stress test is the test that yields the highest ratio in 2018." ### Key debt indicators and projections (selected) - Projection horizon: 2008-2028 (figures and stress tests reported for this period). - Public and publicly guaranteed external debt (nominal) examples: - External debt (nominal) reported values include: 30.5, 25.9, 22.2, 20.7, 23.6, 20.6, 18.6, 17.9, 17.6, 17.1, 13.7 (selected historical years). - Identified net debt-creating flows (selected): -8.6, -3.5, -2.2, -4.6, 6.6, -3.0, -3.8, -4.4, 0.1, 2.4, 3.1. - Non-interest current account deficit (selected series): -2.6, 8.7, 10.3, 25.8, 29.5, 9.4, 16.8, 7.2, 6.7, 5.9, 10.1, 10.0, 7.9, 9.2. - Exports and imports (selected percentages): Exports: 55.5, 56.4, 54.8, 56.0, 36.2, 38.7, 39.5, 38.2, 31.5, 23.5, 17.2. Imports: 48.6, 51.5, 52.2, 48.8, 50.6, 47.0, 46.0, 44.2, 43.1, 37.4, 29.8. - Net FDI (negative = inflow) (selected): 1.7, -10.4, -10.1, -14.0, 14.9, -14.3, -9.6, -9.7, -10.0, -10.0, -9.8, -7.2, -4.3, -6.4. - Endogenous debt dynamics (selected): -7.6, -1.7, -2.4, 0.3, -0.6, -0.5, -0.5, -0.3, -0.2, -0.4, -0.5. - PV of external debt (selected years): 17.2, 13.6, 17.2, 15.2, 13.9, 13.4, 13.1, 12.3, 8.9 (selected projection years). - PV of PPG external debt in percent of exports (selected): 31.5, 24.2, 47.5, 39.3, 35.1, 35.0, 41.5, 52.3, 51.7. - PV of PPG external debt in percent of government revenues (selected): 75.7, 48.8, 150.7, 100.9, 82.9, 77.9, 80.1, 80.2, 53.8. - Debt service ratios (selected): - Debt service-to-exports ratio (in percent): 1.8, 2.0, 1.5, 3.1, 3.7, 2.8, 2.5, 2.4, 2.9, 3.5, 3.7. - PPG debt service-to-revenue ratio (in percent): 10.4, 6.6, 3.5, 6.3, 11.7, 7.1, 5.9, 5.3, 5.6, 5.3, 3.8. - Total gross financing need (Billions of U.S. dollars) (selected): 0.0, 0.0, 0.1, -0.3, 0.6, -0.1, -0.2, -0.3, 0.1, 0.4, 0.9. - Non-interest current account deficit that stabilizes debt ratio (selected): -1.4, 13.3, 13.9, 10.9, 13.8, 10.1, 8.8, 6.5, 10.4, 10.2, 8.2. ### Macroeconomic assumptions and recent performance (selected) - Real GDP growth (selected series and projections): 7.9, 0.2, 0.2, 8.2, 10.5, -0.4, 3.5, 3.5, 3.6, 2.7, 2.5, 2.6, 3.5, 4.7, 3.8. - GDP deflator in US dollar terms (change in percent) (selected): 23.3, 7.0, 11.1, 8.4, 11.6, 20.5, -24.1, 8.1, 5.0, 2.6, 1.4, 2.3, 1.5, 3.3, 2.1. - Effective interest rate (percent) (selected): 1.0, 1.1, 0.9, 1.0, 0.3, 1.3, 1.3, 1.3, 1.2, 1.2, 1.2, 1.2, 1.0, 1.0, 1.0. - Growth of exports of G&S (US dollar terms, in percent) (selected): 43.8, 8.9, 8.0, 45.5, 85.7, 22.7, -49.2, 19.8, 11.0, 2.0, -14.2, -1.3, -2.4, 6.4, 1.8. - Growth of imports of G&S (US dollar terms, in percent) (selected): 7.3, 13.5, 12.8, 30.3, 53.3, 12.3, -18.5, 3.9, 6.4, 1.1, 1.4, 1.1, 1.8, 6.3, 3.4. - Grant-equivalent financing (in percent of GDP) (selected projection years): 1.8, 1.7, 2.1, 2.1, 2.8, 2.9, 3.6, 3.9, 3.6. - Government revenues (excluding grants, in percent of GDP) (selected): 9.4, 16.9, 22.8, 27.8, 11.4, 15.1, 16.7, 17.2, 16.4, 15.4, 16.6, 15.7. - Nominal GDP (Billions of US dollars) (selected): 5.9, 6.3, 7.0, 8.4, 6.6, 7.4, 8.1, 8.5, 8.8, 10.5, 20.9. - PV of PPG external debt (in Billions of US dollars) (selected): 1.2, 1.1, 1.1, 1.1, 1.1, 1.1, 1.2, 1.3, 1.9. - Memorandum: (PVt-PVt-1)/GDPt-1 (in percent) (selected): -1.0, 0.0, -0.2, -0.1, 0.2, 0.2, -0.1, 0.4, 0.4, 0.4. ### IMF Executive Board assessment — selected findings and metrics - Timing: Executive Board concluded Article IV consultation with Chad on January 28, 2009; Public Information Notice dated January 30, 2009. - Recent macro performance and risks: - Chad is landlocked, affected by conflict and political instability. - "Real GDP in 2008 is expected to decline by ½ percent" (attributed to further drop in oil production and the February 2008 rebel attack). - Inflation: reached "11¾ percent on a 12-month basis at end-November 2008." - Import cover expected to rise to "10½ months of imports of non-oil goods and services in 2008, from 5¼ months in 2006." - The global economic crisis expected to affect Chad through lower oil prices with major fiscal implications. - Fiscal deterioration: - "The non-oil primary deficit deteriorated from 4 percent of non-oil GDP in 2004—the onset of oil revenues—to an expected 28 percent (commitment basis) in 2008." - Fiscal management problems: bypassing budget procedures, extrabudgetary spending, limited medium-term planning, weak budget control, and concerns over absorptive capacity and quality of public spending. - Financial sector and monetary context: - As a CFA franc zone member, Chad has no independent monetary policy. - Broad money and private sector credit grew rapidly in 2008, driven by reserves buildup. - Banking sector vulnerabilities: lack of depth, some undercapitalization, need to strengthen supervision. - Real exchange rate: "appreciated significantly (25 percent) since 2000, even though it depreciated over 2007-08." - Debt and HIPC: - "Risk of debt distress is now moderate"; lower exports and growth remain important risks. - IMF Directors welcomed the intention to improve debt sustainability and to attain the HIPC Initiative completion point "as soon as possible." - Several Directors encouraged authorities to refrain from non-concessional borrowing. ### Policy recommendations and program priorities - Fiscal policy and public financial management: - Improve long-run fiscal sustainability through a concerted medium-term fiscal adjustment effort. - Strengthen public financial management, raise non-oil revenues, and improve targeting and efficiency of spending. - Adopt a permanent income framework to relate fiscal policy to oil wealth and reduce short-term oil price volatility. - Issue a revised 2009 budget based on realistic oil revenue assumptions and stronger efforts to streamline non-security outlays (e.g., wage bill, transfers to inefficient SOEs). - Strengthen medium-term budgeting, cash management, procurement, and the role of line ministries in budget formulation and execution; request technical assistance where needed. - Continue clearing domestic arrears (authorities have started doing so). - Transparency and resource management: - Early participation in the Extractive Industries Transparency Initiative encouraged. - Design a new permanent oil revenue management mechanism in coordination with the Fund and partners. - Debt management: - Improve debt sustainability efforts, avoid non-concessional borrowing, and strengthen relationships with key partners to reach HIPC completion point. - Structural and statistical reforms: - Improve infrastructure (reduce transport and energy costs), strengthen governance, develop the financial sector, and pursue other structural reforms to boost productivity and export performance. - Address serious shortcomings in macroeconomic statistics by providing adequate resources to the National Statistics Institute and requesting technical assistance. *Source: IMF staff report and Public Information Notice (Article IV consultation with Chad, January 2009).* ### 1. We are thankful to Management and the staff for the fruitful policy dialogue they ### _cr0968 - 1. We are thankful to Management and the staff for the fruitful policy dialogue they ### Fiscal performance and reserves - The overall fiscal surplus in percent of non-oil GDP is estimated to have increased threefold between 2007 and 2008. - Oil revenue augmented while the increase in total expenditures in percent of non-oil GDP were maintained significantly below that of total revenue. - The authorities increased the level of priority expenditures, notably on education and health. - International reserves remain at healthy levels although they have been affected by the decline in oil prices. - Between 2006 and 2008, gross official reserves are estimated to have doubled, reaching about 10 ½ months of imports of non-oil goods and services. ### Recent shocks, inflation, and monetary response - The difficult security situation early last year had a big toll on recent economic performance and non-oil primary balance. - Real GDP growth has remained low as a result of the adverse impact on non-oil GDP and the decline in oil production. - The non-oil primary deficit increased, partly reflecting higher priority spending. - Inflation picked up sharply at the onset of the recent food price shock. - Authorities took temporary measures: tax relief, temporary export suspension, and assistance to low-income public sector workers. - The regional central bank, BEAC, adopted a tighter monetary stance through the imposition of higher reserve requirements and policy rates to mitigate inflationary pressures. ### Convergence and inflation outlook - The authorities continue to attach high value to compliance with the convergence criteria set forth by the CEMAC. - All primary criteria but the one related to annual inflation were met. - In the absence of shocks, inflation is forecast to return to a level consistent with the CEMAC criterion over the medium-term. ### Economic outlook - Non-oil GDP growth is expected to rebound starting from 2009, fueled by construction, service, and manufacturing. - Oil GDP is expected to continue to decline this year—albeit at a much slower pace—because of lower production. - Inflation is forecasted to drop sharply this year and to be subdued going forward, barring unexpected shocks. ### Fiscal policy stance and budgeting - The authorities remain committed to preserving fiscal sustainability, improving public financial management, and making effective use of oil revenue while laying the foundations for sustained growth. - The 2009 budget programs a reduction in the non-oil primary deficit of about 7 percentage points of non-oil GDP. - Authorities will closely monitor budget execution and are prepared to take corrective actions; they intend to revise the budget around mid-2009 in the event oil prices remain out of line with their projections. ### Revenue administration and oil revenue management - Authorities will benefit from Fund technical assistance in the areas of tax and customs administration; they request Management to approve the formulated request. - With regard to oil revenues, the authorities remain committed to their effective use, notably with the aim at diversifying the economy. - They plan to carry out a comprehensive review of the oil fiscal regime and work is underway to enhance monitoring of oil revenue collection. ### Public financial management and donor support - Authorities will continue to strengthen public financial management, building on recent improvements in the budget framework aimed at preventing extrabudgetary spending and better monitoring capital expenditures. - The Chadian authorities request donor assistance in support of their action plan to modernize public financial management (PAMFIP). ### Financial sector soundness and financial development - Chad’s economy has not yet been affected by the current global financial turmoil and economic slowdown, though this could change if the crisis affects domestic banks and oil prices remain low for a sustained period. - Most financial sector soundness indicators in Chad remain strong. - The banking system continues to perform well, with highly profitable banks, improving asset quality ratios of nonperforming loans to banking loans, and adequate liquidity. - Authorities intend to take steps to strengthen the system and improve credit access; the new microfinance strategy is meant to serve these purposes. ### Structural reforms of state-owned enterprises - Authorities will pursue reform of large state-owned enterprises such as the cotton company, Cottontchad, and the water and electricity company, STEE, to improve efficiency and reduce fiscal costs. - A financial and technical audit of Cottontchad has been launched to determine restructuring needs and the roadmap for reform of the cotton sector. - A restructuring of STEE is envisaged that entails notably the breakup of the company into two distinct water and electricity entities. ### Public debt management and arrears - Authorities will continue to exercise prudence in managing public debt and are determined to safeguard public debt sustainability and make progress toward HIPC completion point. - With regard to domestic debt, authorities resumed last year clearance of domestic arrears and intend to continue making further progress. ### Conclusion and requests to the Fund - Weak capacities and a fragile security situation have been key sources of policy challenges, particularly on the fiscal front. - Authorities will welcome donor assistance and Fund advice; Fund assistance to members under similar circumstances is viewed as having added significant value. - Authorities continue to express their interest in an SMP with a view to facilitating access to a new PRGF arrangement. - The staff calls on Management and staff to consider favorably the authorities’ request for an SMP and to lay the foundations for a quick start of the implementation of such a program. *Staff report content as provided in the source PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0968.pdf_