Public Information Notice No. 10/77

Public Information Notice: IMF Executive Board Concludes 2010 Article IV Consultation with Chad

June 21, 2010

On June 16, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chad.¹

Background

Chad is among the poorest countries in the world. It has experienced conflict for most of the past thirty years. The country’s key medium-term challenge is to seize the opportunity provided by oil production since 2003 to increase growth of the non-oil sector and reduce poverty. The second Poverty Reduction Strategy Paper (PRSP) highlights the importance of fiscal sustainability, sound public financial management, and high quality spending to promote diversification of the economy and reduce poverty.

Output contracted by 2 percent in 2009 because of a large reduction in agricultural production due to poor rainfall and the trend decrease of oil production. Inflation increased to 10 percent in 2009, but has started to wane in the aftermath of the fuel and food crisis.

The bad harvest could imply food shortages for up to 2 million people (18 percent of the population). The need for additional food is estimated at between 80,000 and

100,000 metric tons, which the government has started to meet in cooperation with donors.

The global financial crisis affected Chad mainly through the decline in oil prices. The fiscal position deteriorated sharply in 2009 as the government increased spending levels while oil revenue collapsed. The overall fiscal balance moved from a sizeable surplus (some 7 percent of non-oil gross domestic product -- GDP) in 2008 to a large deficit (about 21 percent of non-oil GDP) in 2009, which was financed by the depletion of oil savings, borrowing from the regional central bank, and foreign financing (mainly grants).

The fall in oil prices in 2009 induced a sharp deterioration of both the current account and the overall balance of the balance of payments, and a reduction of imputed gross official reserves (to 3 months of imports of goods and services, excluding oil sector imports financed by the oil consortium).

As a member of the CFA franc zone, Chad has no independent monetary policy. Broad money contracted slightly in 2009 in line with the drop in economic activity. The banking sector is subject to vulnerabilities, stemming from its lack of depth, high credit concentration, the fragile situation of some banks, insufficient on-site supervision, the poor functioning of the judiciary system, and, more broadly, the underdevelopment of financial markets in the Central African Economic and Monetary Community.

The macroeconomic outlook is shaped by the expected rebound of agriculture, the construction of a second oil extraction project, the gradual recovery of oil prices, and the need for fiscal adjustment in response to financing constraints.

Executive Board Assessment

Executive Directors noted that the global financial crisis has affected Chad mainly through the decline in oil prices, which caused a large deterioration in the balance of payments and the fiscal position. At the same time, GDP contracted as a result of a large drop in agricultural production. While agricultural output is expected to recover, there is an impending food shortage that needs to be addressed urgently. Over the medium term, the trend decline in oil resources will require significant fiscal policy adjustment.

Directors expressed concern over the looming food shortage. They urged prompt further action to fill the food shortfall in time to avoid famine. Further efforts to improve agricultural productivity will be critical to prevent the recurrence of food shortages.

Directors noted the large deterioration of the fiscal position in 2009, the depletion of oil savings, and the sizable increase in public debt arising from two large nonconcessional loans and borrowings from the regional central bank. To ensure debt sustainability, Directors advised the authorities to tighten fiscal policy within a medium-term framework that factors in the trend decline of oil production over the next 20 years. This would entail steadily reducing the non-oil primary deficit while focusing spending on priority areas. Directors recommended adopting a supplementary budget for 2010 along these lines. They encouraged the authorities to refrain from nonconcessional borrowing.

Directors emphasized that improving public financial management is key to transforming oil wealth into sustained growth and making progress toward the Millennium Development Goals. The main priorities are preserving the exemplary transparency of oil revenue, implementing the Extractive Industry Transparency Initiative, expanding recent improvements in tax administration, aligning spending with the Poverty Reduction Strategy, and improving public investment planning and procurement. Improved fiscal policy and public financial management would also pave the way for a timely agreement on a new staff monitored program.

Directors noted the assessment that the current level of the real effective exchange rate does not pose immediate problems for external sustainability, although significant fiscal adjustment will be needed over time. To improve competitiveness, a more supportive business climate is needed to promote private-sector non-oil growth. Directors called for early action to improve the judicial system, deepen the financial sector and ensure compliance of banks with prudential guidelines, and reform the state-owned cotton and utility companies.

Directors encouraged the authorities to allocate sufficient resources to statistical collection and analysis to address the shortcomings in Chad’s macroeconomic statistics.

Directors commended the authorities for preparing a frank and comprehensive second National Poverty Reduction Strategy (NPRS II) that draws on the lessons learned during the implementation of the first NPRS. They welcomed the focus on restoring security, improving governance, achieving a greater diversification of the economy, strengthening institutional capacity, and promoting human development. They stressed that success hinges on a strengthened commitment to poverty reduction and good governance, and encouraged the authorities to focus on a manageable number of critical objectives and to closely monitor implementation progress.