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GabonLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Libreville, October 20, 2003

The following item is a Letter of Intent and a Memorandum of Economic Policies of the government of Gabon. It is being made available on the IMF website by agreement with the member as a service to users of the IMF website. This memorandum describes the policies that Gabon is implementing in the framework of a staff-monitored program. A members's staff-monitored program is an informal and flexible instrument for dialogue between the IMF staff and a member on its economic policies. A staff-monitored program is not supported by the use of the Fund's financial resources; nor is it subject to the endorsement of the Executive Board of the IMF.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. The government of Gabon is determined to strengthen its adjustment program, with a view to diversifying its economy, accelerating growth, and reducing poverty. In light of the weaknesses noted in implementing the adjustment program under the Stand-By Arrangement adopted by the Executive Board on October 23, 2000, the government has focused since 2002 on enhancing fiscal management and building institutional capacity for program implementation. The government also made great efforts to improve governance, restructure public enterprises, and promote private sector development. A comprehensive program for 2003-06 was prepared in consultation with Fund staff in early 2003, including quantitative quarterly targets for 2003 and structural indicators. The attached memorandum of economic and financial policies presents the medium term objectives and policies for 2003-06, including the main objectives of the budget for 2004 which will be submitted shortly to Parliament, and the detailed objectives for the period September-December 2003, including structural reforms, which constitute a staff-monitored program. We hope that the successful implementation of the staff-monitored program will lead to a program for 2004 that can be supported by the use of Fund resources.

2. The government believes that the policies and measures described in the attached memorandum are sufficient to attain the 2003 program objectives, but we will take any further measures that may become appropriate for this purpose. We will remain in close consultation with Fund staff on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP. The government will provide the Fund staff with all information that it requests to assess the implementation of the staff monitored program.

Very truly yours,

Paul Toungui
Minister of State for Economy, Finance,
Budget, and Privatization

Memorandum of Economic and Financial Policies

I. Introduction

1. Owing mainly to the drop in oil production, Gabon's economy continues to face major challenges, including the need to diversify the economy more rapidly and to reduce poverty. In view of the weaknesses in the implementation of previous adjustment programs, the authorities have focused since 2002 on strengthening budgetary management and program monitoring to ensure that their long-term efforts are underpinned by a solid foundation. Thus, efforts in the second half of 2002 focused on improving governance, reforming tax and customs administrations, strengthening the Budget and Treasury Departments, restructuring public enterprises, and promoting private investment. An austerity budget was also adopted for 2003.

2. After a brief review of economic performance since the adoption of the last Stand-By Arrangement in October 2000, this memorandum sets out the main economic and social objectives of the government's program for the period 2003-06, the detailed elements of the program for 2003 that is being implemented since the beginning of the year, and the budgetary objectives for 2004. The memorandum also presents in detail the policies and objectives for the period September-December 2003, which constitute a staff-monitored program; the quantitative benchmarks for end-September and end-December 2003, the structural benchmarks for this period, and the prior actions, are presented in attached Tables 1 and 2.

II. Recent Economic Developments

3. Economic and financial performance in the period 2000-02 was mixed. After the recession in 1999--when total real GDP declined by 9 percent and non-oil GDP fell by 10.5 percent, oil revenue fell by 26 percent, and the external current account deficit reached 6 percent of GDP--the economic and financial situation improved in 2000. Non-oil real GDP grew by 2 percent; the fiscal situation improved, owing to larger revenue collections (about 50 percent higher than in 1999) and reduced primary spending (2 percent lower); the external current account recorded a surplus of some 6 percent of GDP; and Gabon's contribution to the international reserve position of the regional central bank (BEAC) was positive (equivalent to about 3.5 percentage points of GDP). In 2001, non-oil GDP rose by 5 percent, but the easing of fiscal policy in the second half of the year led to a deterioration in government finances. The two initial reviews of the program supported by the Stand-By Arrangement were completed with a delay, on July 13, 2001, and the other reviews could not be completed. The fiscal situation worsened significantly, as indicated by the decline in the primary surplus from 17.5 percent of GDP in 2000 to 12 percent in 2001.1 The external current account deteriorated by about 6 percentage points of GDP, and Gabon's foreign asset contribution to the BEAC was negative by CFAF 119 billion, or 3.5 percent of GDP.

4. In 2002, the macroeconomic situation was characterized by a 1.4 percent contraction in oil-GDP, while non-oil GDP grew modestly (by 0.6 percent, based on provisional figures), associated with an expansion of credit to the economy and a sizable increase in non-oil imports. Inflation, as measured by the consumer price index (CPI), remained quite low (0.5 percent year-on-year at end-2002). The non-oil current account deficit was reduced significantly, from 13.7 percent of GDP in 2001 to about 10 percent in 2002, as interest payments on the external debt fell as a result of the December 2000 Paris Club rescheduling agreement. Nevertheless, because of the continued reduction in the volume of oil exports, the current account balance improved by only 0.4 percentage point of GDP to 0.7 percent of GDP.

5. On the fiscal side, non-oil budgetary revenue increased substantially, from the equivalent of 12.2 percent of GDP in 2001 to 13.9 percent of GDP in 2002, on account of the significant effort to collect value-added tax (VAT) and income tax arrears, and the large increase in personal income tax receipts; the latter benefited from the widespread use of the tax withholding procedure on business payments to individual enterprises and service providers, and to more rigorous collection efforts. At the same time, primary expenditures increased by 1.7 percent of GDP to 23.7 percent of GDP in 2002, owing to the overrun on outlays related to sovereignty and security funds (1.2 percent of GDP) and the restructuring costs of public enterprises (2 percent of GDP). The former was due in part to Gabon's contribution to the resolution of the acute regional political crises. Restructuring costs include the assumption by the government of Air Gabon's debt to its suppliers--in the context of its restructuring--and the debt of the public enterprises to the National Social Security Fund (CNSS).2 The primary budget surplus was equivalent to 7.9 percent of GDP in 2002, compared with a budget target of 9.5 percent, and substantial arrears (CFAF 280 billion) were accumulated on external debt.

6. In 2002, the government's net position vis-à-vis the banking system strengthened, and Gabon's contribution to the BEAC's international reserves rose by CFAF 92 billion (about 3 percent of GDP). Credit to the economy and broad money increased substantially, at annual rates of 8.7 percent and 5.7 percent, respectively. The banking system remained sound. Data from the regional banking commission (COBAC) show that all banks respected the prudential standards, although two banks were only slightly over the minimum liquidity ratio.

7. Structural reform efforts since 2002 have aimed at strengthening the government's management capacity. To that end, (i) laws to combat illicit enrichment were passed by parliament in 2002 and promulgated on May 7, 2003, all the members of the National Commission to Combat Illicit Enrichment were appointed in June 2003, and adequate budgetary resources for its operations have been appropriated; (ii) financial audits of oil companies initiated in 2001 and conducted by an international auditing company were completed in September 2002, and an action plan to implement the resulting recommendations is being carried out3; (iii) in the area of public expenditures, the new procurement code was adopted in December 2002, a new procurement commission has been established, and a General Director of Public Procurement was appointed in June; and (iv) the budgetary execution integrated information system (SII), formerly called CRYSTAL, was reactivated in early 2003. This system, which includes coverage of outlays of sovereignty and security funds, uses an interface with the treasury systems (which also covers the special funds) to track all stages of expenditure execution (commitment, control of services rendered, payment order, and payment).

8. In the fiscal area, a number of important measures have been taken, including: (i) the creation of a strengthened General Directorate of Taxes, which includes a large taxpayer unit; (ii) measures to reduce 2003 spending in connection with the security and sovereignty funds (presidential instruction) and the special funds (official decision by the Minister of Finance); (iii) the adoption in June 2003 of a plan of actions to eliminate customs and domestic tax exonerations; (iv) the adoption in August 2003 of a decree which reduces the number of advisors at the presidency, political institutions, and the ministries; the decree became effective in September; and (v) the inclusion in the regular budget execution process of capital expenditure related to the independence celebrations (fêtes tournantes), which represents almost 1.5 percent of GDP. Moreover, progress has been made in reforming the budget classification system, so that the 2004 budget will be based on the new system. In addition, to promoting private sector development, a one-stop center to simplify procedures for setting up new businesses became operational in November 2002.

III. Government Program for 2003-06

A. Main Challenges and Medium-Term Strategy

9. The country faces major challenges in four key areas: (i) the continued decline in oil production (representing approximately one-third of GDP), which fell from 18.5 million tons in 1997 to 12.6 million tons in 2002, and, barring the discovery of new fields, is expected to be halved over the next five years; (ii) heavy external debt service, representing almost 40 percent of fiscal revenue over the next few years--given the downward trend in oil revenue, the debt-service ratio will remain virtually unchanged in the medium term, despite the projected decline in debt service in nominal terms; (iii) a relatively high domestic cost structure that hampers competitiveness; and (iv) social indicators comparable to those of low-income countries, even though Gabon is classified as a middle-income country. While extreme poverty4 has been reduced significantly during the past four decades, more than 60 percent of the population lives below the poverty line, and access to basic social services remains limited for a large segment of the population, particularly in rural areas.

10. The government is determined to confront these challenges by pursuing and intensifying its fiscal adjustment efforts and structural reforms, including actions to improve competitiveness, so as to diversify the economy, achieve a sustained growth rate, and thereby reduce poverty on a lasting basis. Regarding fiscal adjustment, the government plans to strengthen collection of non-oil revenue and reduce nonpriority current expenditure in order to free up sufficient resources for investment in the social and economic infrastructure, and to regularize relations with foreign and domestic creditors. As described in the recently approved Law on Territorial Development and Planning, the country has significant economic potential, especially in wood processing, tourism, fisheries, and agro-industry. Structural reforms will focus on ensuring good governance and transparency, restructuring and privatize public enterprises, reducing the cost structure in the economy, and removing the barriers to private sector development--for instance, by improving the legal and regulatory framework. Despite the adjustment efforts and structural reforms, Gabon will continue to face large financing requirements and is seeking increased support from the international community, particularly in the form of substantial external debt relief.

B. Medium-Term Objectives

11. The government aims to achieve non-oil GDP growth of 2.4 percent in 2003 and 4 percent per annum in 2004-06, fueled by higher foreign investment and an improvement in the business climate. With the projected decline in oil GDP, total real GDP is expected to grow by only 1.0 percent on average in 2003-06. Although non-oil private sector savings and investment are expected to grow, total national savings is projected to decline by about 4 percentage points of GDP because of the fall in the oil surplus; the overall investment rate should stabilize at about 21 percent of GDP during the program period. The average annual inflation rate is to be contained to 2 percent, owing to implementation of a prudent fiscal policy. The projected decline in oil production from 12.6 million tons in 2002 to 8.8 million in 2006 is expected to bring about a shift in the current account balance from a surplus of 0.7 percent of GDP in 2002 to a deficit of 5.5 percent in 2006; the non-oil current account deficit, after widening from 9.8 percent of GDP in 2002 to 11.6 percent in 2003, would gradually narrow thereafter as non-oil exports pick up.

C. Macroeconomic Policies

Fiscal policy

12. Given the continued decline in oil production, fiscal consolidation will require an even greater mobilization of non-oil budgetary revenue and prudence in managing oil revenue. In addition, the government will establish clear spending priorities and a more rigorous control of the wage bill, and will reduce nonpriority current expenditure. The government will enhance its capacity to formulate and execute the public investment program, which will have to be aligned with the poverty reduction strategy. The interim poverty reduction strategy paper (I-PRSP) was adopted by the government in June 2003 as stipulated in the Law on Territorial Development and Planning, and the government expects to complete the final PRSP by end-June 2004. The process of evaluating the cost of the sectoral action programs is under way. These costs will be reflected in the 2004-06 three-year rolling investment program, which will be in line with the priorities set in the PRSP. With the help of donors, the government will conduct annual reviews to ensure that the capital budget is executed efficiently, in accordance with the development priorities.

13. Fiscal revenues are projected to decline from the equivalent of 31.5 percent of GDP in 2002 to about 27 percent in 2006, as the reduction in oil revenue will be offset only partially by the increase in non-oil budgetary receipts; the latter are expected to increase from 14 percent of GDP in 2002 to about 18 percent in 2006. Thus, by 2006 non-oil revenue would represent two-thirds of total revenue, as against 44 percent in 2002. This objective is to be achieved through the full effect of the wide-ranging revenue-enhancing measures implemented in 2002 and 2003 (see paras. 15-17), and through the impact over the medium term of the strengthening of tax administration. The adjustment program will also require a large effort to reduce expenditures. Thus, the government aims at reducing primary current expenditure from 19.7 percent of GDP in 2002 to 16 percent in 2006; the decline is even larger as a share of non-oil GDP, from 33.7 percent in 2002 to 20.8 percent in 2006. Capital expenditure would stabilize at about 5 percent of GDP during 2003-06. The cut in current expenditure as a share of GDP will come from (i) a progressive reduction of the wage bill in nominal terms, as recruitment in the social sectors will be offset by a reform in the system of allowance (see para. 32), strict observance of retirement regulations, reform of the promotion system, and a reduction in the number of advisors in the offices of the President, the Prime Minister, ministers and other government bodies, as discussed below; and (ii) the containment of expenditure on goods and services and transfers, as a result of a cut in sovereignty expenditure, rigorous management of public service consumption, and the phasing out of transfers to public enterprises following their privatization. Given the decline in domestic debt service in 2004-06, the financing gap is projected to be about 9 percent of GDP on average during this period, and could be covered by external debt rescheduling and assistance from multilateral institutions, including the Fund.

Fiscal policy in 2003

14. The key fiscal policy target for 2003 is to achieve a primary surplus of 10.9 percent of GDP. Given the decline in oil revenue of 1.5 percentage points of GDP projected for 2003, this fiscal target implies an adjustment in the non-oil primary deficit of some 8½ percentage points of non-oil GDP (from 16.8 percent of non-oil GDP in 2002 to 8.2 percent in 2003). Such an adjustment, along with the use of a part of the windfall oil revenue realized in 2002, will allow the repayment of a large part of arrears to external creditors, to pay all arrears on domestic debt, and to reduce the treasury float (instance de paiments) to less than three months of nonwage primary expenditure.

15. Given the volatility of world oil prices, oil revenue projections for 2003 are prudent, based on an average Brent oil price of US$27.2 per barrel in 2003 and a production of 12.3 million tons; oil revenue are projected to reach CFAF 527 billion in 2003, equivalent to 16.2 percent of GDP. Any surplus over oil revenue projections will be deposited in the Fund for Future Generations (FFG).

16. Non-oil revenue is targeted to increase from 13.9 percent of GDP in 2002 to 15.5 percent in 2003. These projections are based on the full effect of the tax measures adopted in the 2002 Budget Law and the 2002 Supplementary Budget Law, as well as the administrative measures taken to improve tax collection. The tax measures include an increase in beverage and tobacco excise rates, and a decrease in the rebates applicable to the taxable base; the reduction of VAT thresholds by about 30 percent; increases in the area tax (taxe de superficie) and stumpage fees (taxe d'abattage) in the forestry sector; and a rise in the domestic consumption tax on fuel. The administrative measures include the introduction of reference prices as a base for the export tax on logs (adopted in June 2003) and the strengthening of customs procedures by implementing UNCTAD's automated system for customs data (ASYCUDA), in effect since June 2003; a stepping up of personal income tax audits with the help of the mobile audit team established in 2001; tax audits of 35 large enterprises; a follow-up on the results of the tax audit of COMILOG (the manganese company); and increased efforts to collect tax arrears and follow up with delinquent taxpayers.

17. The government is continuing the reforms needed to eliminate distortions in the current tax system. In particular, based on a recently completed comprehensive survey of tax exemptions, the government has adopted in June 2003 a plan of action to eliminate all special agreements, with the exception of those granted under the mining sector and forestry code or provided under the investment charter or Vienna Convention. In this connection, exemptions granted to a number of construction companies and agribusinesses were eliminated in June 2003. No new exemptions will be granted and the existing exemptions will not be renewed (structural benchmark). The principle that all government procurement must be on an all-taxes-included basis will be rigorously applied. For the manganese sector, the taxable base for the export tax, which is grossly undervalued, will be readjusted. Moreover, measures will be introduced in 2004 to replace the VAT exemptions for investments in specific sectors by a system of deferred VAT payments on imports of capital goods; to this end, the government has requested the assistance of the IMF's Fiscal Affairs Department. The government is in the process of strengthening the recruitment and training of tax officers, in order to increase the frequency of detailed tax audits both of oil and non-oil companies.

18. The government is determined to ensure that the forestry taxation system provides appropriate incentives to forestry projects that guarantee sustainable development and local processing of wood, according to the main principles of the new forestry code. To that end, the budget law for 2004, to be submitted to Parliament during the month of October, has revised the area tax (taxe de superficie) and the stumpage fee (taxe d'abattage). The former has been set at CFAF 600 per hectare, with a 50 percent reduction for concessions with sustainable development plans. The stumpage fee has been set in a range of 3 to 9 percent of the reference price per cubic meter, according to production areas, with a rebate of 15 percent for exported logs and 50 percent for logs to be processed locally.

19. On the expenditure side, primary expenditure is to be reduced by 2.7 percent of GDP in 2003 to the equivalent of 20.8 percent of GDP. This adjustment effort reflects the government's commitment to reduce current expenditure, particularly subsidies and transfers and spending on goods and services, and to contain the wage bill (see para.21).

20. Spending on transfers and subsidies is targeted to decline by about CFAF 42 billion (1.3 percent of GDP) in 2003 to CFAF 116.9 billion. These savings reflect the determination expressed by the highest authorities in Gabon to reduce spending on the security and sovereignty funds, which will drop from CFAF 80 billion in 2002 to CFAF 25 billion in 2003. In this context, benefits to members of the government and official entities were reduced by more than 60 percent in 2003. Also, spending on scholarships has been contained (for example, imposing limits on the shipment of personal effects and reducing the number of scholarships for study abroad).

21. The government has continued its effort to reduce public consumption spending begun in 2002, with the aim of limiting in 2003 outlays on goods and services at CFAF 126.8 billion, a savings of CFAF 30 billion over 2002 (some 0.8 percent of GDP). The measures taken in 2002 to contain telephone usage (particularly limits on international calls and the use of mobile phones) has led to a cut in spending from CFAF 1.5 billion per month in 2002 to about CFAF 700 million per month in 2003. Similarly, as a result of investment made to eliminate fraudulent hookups and curtail losses on water leakages, spending on electricity and water is to decline from CFAF 14.8 billion in 2002 to CFAF 11.2 billion in 2003. The savings on other goods and services has come from stepped-up spending controls, in particular the reactivation of the SII and the redeployment of financial controllers in the spending ministries, which began in 2002.

22. The government has strengthened its efforts to control the wage bill, so as to reduce it from 10.9 percent of non-oil GDP in 2002 to 10.7 percent in 2003. The initial target on the wage bill (CFAF 218 billion), agreed with Fund staff early in the year, has been adjusted upwards to CFAF 223 billion, to take into account the impact of the regularization of the position of civil servants on the basis of normal advancement, as a result of the civil service census of 2001. The government has continued to rigorously control civil service staffing levels, specifically by (i) applying more strictly the rules on the age limit for retirement, and on separation from the civil service of local elected officials, (ii) limiting recruitment to the education, health, and security sectors in line with the priorities set in the I-PRSP, and (iii) reducing by more than half the number of advisory positions in the presidency, the ministries and other institutions. This latter measure, which entered into effect in September, is expected to produce savings on a full year basis of about CFAF 1.6 billion (0.7 percent of the wage bill). A number of additional measures are under preparation to contain the wage bill; they include: (i) the extension of the measure on senior advisors to special appointees at the presidency, deputy secretary generals, deputy inspector generals and inspectors of ministries, and special envoys abroad; (ii) reduction of the period in which functional indemnities are received after termination of function; (iii) the harmonization of the regime of functional indemnities, and elimination of seniority increases for such indemnities; (iv) the revision of the law concerning severance pay for contractual employees.

23. In 2003 capital expenditure will rise by 0.8 percentage points of GDP to 4.8 percent. Spending in the health and education sectors will rise from 0.5 percent of GDP in 2002 to some 0.7 percent of GDP in 2003. To improve capital budget execution, the government has begun to take administrative measures to ensure that (i) the capital budget enters into effect at the beginning of the fiscal year, and the function of appropriations manager is assigned to well-trained officials, in order to avoid breakdowns in the expenditure commitment procedures; (ii) public expenditure approval and control procedures are made more efficient; (iii) new procurement procedures are rigorously followed to avoid overvaluation and to improve the transparency of tenders; and (iv) only projects included in the budget are implemented. Moreover, to allow for better tracking of the capital budget, the General Planning Office will prepare quarterly reports on financial and physical execution, starting in the last quarter of 2003 (structural benchmark).

24. The government is determined to enhance the effectiveness and transparency of budgetary management. The reforms underway include (i) enhanced use of the reactivated SII; (ii) preparation of monthly balances for the treasury with delays not exceeding two months, and establishment of a single database that covers both expenditure and treasury accounting procedures; (iii) finalization of the new budget classification system (economic, administrative, and functional classifications) by end-2003 (structural benchmark); (iv) inclusion of expenditure relating to the Road Maintenance Fund (FER) in the government budget, starting with the 2004 budget (structural benchmark); and (v) the rigorous monitoring on a monthly basis of the use of special fund resources in the context of regular budget execution, and inclusion of these special funds in the 2005 government budget. The budget execution laws will be submitted to the Audit Court within the statutory deadlines. Moreover, with external assistance, the government plans to introduce a medium-term budget framework and an expenditure programming system with specific targets and increased accountability of managers; both should be operational, starting with the 2005 budget.

Budgetary outcome for the period January-August 2003 and prospects through end-year

25. The budgetary execution during the first half of 2003 was in line with targets established at the beginning of the year in consultation with Fund staff. Owing to a shortfall in customs revenue, due to weak imports, non-oil revenues fell short of the target by CFAF 15 billion; this has been offset by lower-than-targeted current and capital expenditure, despite a small overrun in the wage bill; thus, the non-oil primary deficit was in line with the target. Because domestic arrear reduction (mainly float at the Treasury) exceeded substantially the target, the target for the government position toward the banking system, adjusted for the excess in oil revenue, was not met. During the first half of 2003, arrears on debt to multilateral organizations, on post-cutoff-date bilateral debt, and on bilateral debt obligations from the last Paris Club rescheduling were fully repaid. In the period July-mid-September customs revenue improved, while expenditures remained in line with agreed targets. Non- reschedulable debt service continued to be paid in a timely manner.

26. The authorities will continue to monitor carefully the performance on non-oil revenue in the last part of the year, and will stand ready to contain expenditure commitment to ensure that the non-oil primary deficit target for the full year 2003 is met. The reduction of domestic arrears will be kept within the annual target, so as to contain the recourse to bank financing within the agreed limits (see attached Table 1). The limit on bank financing to the government through end-December 2003 has been raised from the level established early in the year, to reflect postponement of budgetary assistance by the African Development Bank to 2004. To cover the financing need, the government is in the process of negotiating the deferral to 2004 of certain obligations on domestic debt and on non-guaranteed suppliers' credits. With the postponement of a meeting of Paris Club creditors, originally expected to take place in the last quarter of 2003, arrears will continue to be accumulated towards bilateral creditors on reschedulable debt.

Budgetary targets for 2004

27. In line with the medium term objectives, the draft budget law for 2004, to be submitted to Parliament shortly, aims at reducing further the non-oil primary deficit to 6.9 percent of non-oil GDP, from 8.2 percent in 2003. Oil revenue is projected to decline to CFAF 431 billion (13 percent of GDP), based on an assumption of an average Brent oil price of US$ 25.5 per barrel, and a production of 11.8 million tons. Consistent with the statutes of the FFG, an amount equivalent to 10 percent of projected oil revenues will be deposited in the account of the FFG. Non-oil revenue is targeted to reach 15.9 percent of GDP, up from 15.5 percent in 2003, based on a further strengthening of tax administration, including curtailing exemptions and the effective implementation of the new tax provisions concerning the forestry sector. Primary expenditure is targeted to decline to 20.7 percent of GDP, with a further effort to contain the wage bill, so as to free resources for priority sectors, such as health. Capital outlays will remain at about 5 percent of GDP; the public investment program will give priority to roads, the health sector, security, and the judicial system.

Monetary policy

28. Regional monetary policy will continue to be pursued in a manner consistent with the fixed exchange rate regime. The money supply for Gabon is projected to grow by 6½ percent on average during the 2003-06 period, in line with nominal non-oil GDP growth. Net foreign assets are expected to increase, primarily owing to anticipated foreign direct investment, especially in the context of the privatizations. Fiscal consolidation during 2003-06 will reduce the need for bank lending to the government and will allow for an expansion in bank credit to the private sector of about 10 percent per year, in line with the projected nominal GDP growth of the non-oil sector. Given the low level of inflation, the central bank will have a margin for reducing nominal interest rates while maintaining a positive real differential with the euro area.

29. In the first half of 2003 broad money was stable, as the forestry sector reduced its indebtedness toward the banking system, and net credit to government declined; this was offset by a significant increase in net foreign assets of the banking system. In the second half of the year broad money is projected to increase by about 2 percent, reflecting some acceleration in credit to the economy. The government expects to draw on its deposits in the banking system, and net foreign assets are projected to decline, because of heavy debt service obligations falling due.

Reform of the financial sector

30. The deepening of the financial sector and the maintenance of its soundness are essential components of the government medium-term program. The Financial Sector Assessment Program (FSAP) identified the main structural weaknesses and risks in the Gabonese financial sector as (i) a lack of bank portfolio diversification; (ii) high exposure to government suppliers and public enterprises; and (iii) underdevelopment of nonbank financial institutions and microfinance. In this context, the regional banking commission (COBAC) has increased the number of inspectors in recent months, and inspections will focus more on risk diversification. When necessary, COBAC will recommend further increases in the capital of the banks. In the area of microfinance, a Central African Economic Monetary Community (CEMAC) regulation establishing operating conditions for microfinance organizations was adopted in April 2002. In this context, the Development and Expansion Fund (FODEX) is facilitating the creation of a network of mutual savings and loan institutions in rural areas. A CEMAC regulation on money laundering and combating the financing of terrorism was recently adopted, and a national financial intelligence unit will be established shortly to implement the provisions of the regulation. Moreover, in accordance with the recommendations of the Report on the Observance of Standards and Codes (ROSC) and the safeguards assessment of the regional central bank, measures to improve the BEAC accounting system have been adopted to bring it into compliance with international standards; the internal auditing system is also being strengthened. Measures have also been taken to modernize the interbank settlements system in the context of the CEMAC.

31. The Central African Stock Exchange (BVMAC) is being created, and its capital is being paid in. The stock exchange will support the mobilization of savings and the financing of private sector investment. It should become operational in 2004.

Foreign trade

32. In the area of trade policy, the government supports the efforts being undertaken within the CEMAC to reduce the maximum rate under the common external tariff (CET) to 20 percent. Moreover, the government is determined to eliminate all import surcharges by end-2004.5 The surcharges on lubricants and mineral water will be eliminated by end-December 2003 (structural benchmark). The quantitative restrictions on sugar imports will be eliminated by end-June 2004 at the latest, when the government's obligation to the buyers of the recently privatized company expires.

33. Concerning the forestry sector, the government has commissioned a study of forestry exports to clarify the respective roles of the national log marketing company (SNBG) and private operators, in order to ensure maximum efficiency in the exporting of logs. Discussions with private operators in the forestry sector are already under way, with a view to improving the marketing of logs; the price paid at the point of export (prix plage) will be adjusted regularly to reflect international prices. A plan of actions for the restructuring of SNBG will be adopted before end- 2003 (structural benchmark), and will constitute a component of the forestry and environmental project under preparation with World Bank assistance.

D. Structural Reforms and Poverty Reduction

34. Comprehensive structural reforms are necessary to facilitate diversification of the economy, promote the development of the private sector, ensure good governance, and combat poverty.

Government reform

35. The government has initiated major reforms of the civil service to improve its efficiency and contain costs. These reforms include the (i) harmonization of the payroll and personnel databases; and (ii) adoption by parliament of the two laws organizing the civil service (already under discussion in parliament) and establishing the general civil service regulations (adopted by the government in August, and transmitted to parliament in September). These two laws will be supplemented by more specific personnel regulations for regular civil servants and contractual government employees. The new general civil service regulations should contribute to this effort, as they embody the principle of merit-based promotions and rationalize the benefits system by making it more rigorous. A review of the benefits granted to contractual government employees is also planned, in order to achieve greater equity among the various categories of government workers and to reflect labor market conditions. In addition, the ethics code for civil servants is under preparation and will be adopted by the government by end-2003 (structural benchmark). The preparation of the new organization charts will begin in the second half of 2003 and be completed in 2004. An important objective will be to contain costs and streamline cumbersome government structures while improving their efficiency. The computerized civil service management system (ANITA), which will ensure full consistency between the payroll and the civil service roster, will be implemented by end-July 2004.

Private sector development

36. The government recognizes that improving the business climate, promoting competition, and creating adequate infrastructure are essential to stimulate the growth of the non-oil sector. In this context, the government will give priority in the 2003-06 period to implementing the sectoral infrastructure programs that are needed to support economic development, such as (i) improvement of the road network and rehabilitation of the ports in the context of the Priority Action Program for the Urban Sector and Transport (PAPSUT); and (ii) improvement of telecommunication services. The PAPSUT program, which is supported by foreign lenders and donors, appropriately views the rehabilitation and improved efficiency of the ports as essential to reducing factor costs and attracting high-value-added activities, such as transshipment and processing. In this context, an agreement has been signed in September 2003 with a reputable foreign port operator which will manage the main activities of the two ports of Owendo and Port Gentil under a 15-year concession. The modernization of telecommunications services (including connection to the submarine fiber-optic cable) should facilitate an expansion in economic activity. Efforts will be made to improve the operation of the one-stop center for investors, which has been in operation since end-2002. In coordination with the Foreign Investment Advisory Service (FIAS) of the International Finance Corporation (IFC), the World Bank will carry out an analysis of the impediments to investing in Gabon. The study will be completed during 2004 and will contain a specific action plan that will be implemented rapidly.

37. Significant efforts have been made in recent years to improve the functioning of the judicial system and legal environment. These efforts have included strengthening the courts, computerizing the registry of the commercial court in Libreville, and training judges and improving their working conditions. Efforts in the area of training will continue. In particular, the Uniform Acts of the Organization for the Harmonization of Business Law in Africa (OHADA), to which Gabon is a signatory, covering commercial law, corporate law, bankruptcy, and arbitration, have helped to clarify the legal context for business. Mechanisms will be established to facilitate recourse to arbitration as a means of resolving commercial disputes.

38. The list of products subject to price controls (régime de la liberté surveillée) will be reduced, by removing edible oils, soap, and mineral water from the list by end-2003. Moreover, the General Directorate of Price Controls will be abolished by end-December 2003 (structural benchmark). The new General Directorate of Competition and Consumption will have the task of improving the functioning of market forces and the protection of consumer rights.

Restructuring and privatization of public enterprises

39. The government is determined to give new impetus to the privatization of public enterprises that has been under way in recent years, with technical assistance from the World Bank. The privatization of Gabon Telecom, begun in April 2002, has been delayed, as the potential investors were more interested in obtaining a management contract than in taking over the company. With the assistance of the HSBC investment bank, the government has now adopted a two-stage privatization strategy: (i) a call for bids for the sale of a controlling share, coupled with a management contract, which was launched in June 2003, with the final offers to be tendered by end-March 2004; (ii) the majority of the capital will be opened subsequently, when market conditions improve.

40. The restructuring of Air Gabon began in 2000 with the assistance of the Lufthansa Consulting Company. After the substantial financial investment made by the government in 2002, it is imperative that management performance improves quickly. The company has made a significant effort to streamline operations by restructuring the network, renegotiating leasing contracts, improving customer loyalty programs, and enhancing billing and financial management. Passenger and freight traffic increased sizably in 2002, and the restructuring measures under way should improve the company's operating results in 2003. This will be an important step toward preparing the company for privatization.

41. In the agro-industry sector, the government is determined to complete the privatization of the palm oil company (AGROGABON) and the rubber production company (HEVEGAB). A temporary administrator was appointed for AGROGABON in January 2003, with the task of rehabilitating the processing plants and plantations, redefining the company's commercial policy, and launching tenders for the privatization of the company before end-2003. At HEVEGAB, the downsizing exercise is under way, and the upturn in production is encouraging. The call for bids for privatization has been launched on September 30, 2003, thus meeting the related structural benchmark. The government has launched a restructuring program at the national timber marketing company (SNBG) that is aimed at improving its management and reducing its costs. An accounting and financial audit by an internationally recognized accounting firm is under way. The Minister of Finance will henceforth be responsible for financial oversight of the company. Finally, in order to preserve the credibility of the privatization program, the government will make sure that past privatization agreements will be respected. To that end, after the termination of the concession contract with the company Transgabonnais, which took place in May 2003, operations have been entrusted to the company SETRAG ( Société d'Exploitation du Transgabonnais), for a transitory period of four months renewable once. A new concession company will be selected with the assistance of the World Bank and the African Development Bank. The government has recently agreed with the previous operator on a financial compensation scheme.

42. The government is continuing the reform of the National Social Security Fund (CNSS) with the assistance of the International Labor Office (ILO) and the World Bank. The planned short-term reforms include (i) improvement of the management of the CNSS by strengthening its decision-making procedures and accountability to business and labor; (ii) completion of the computerization of the records of all beneficiaries; and (iii) privatization of the management of the three hospitals, so as to improve the quality of care and reduce costs; to that end, tenders for their privatization were launched in July 2003. Moreover, the actuarial study of the pension system by the ILO is scheduled to be completed by end-December 2003. This study will include recommendations to return the old age pension insurance system to a sound actuarial position. The revision of the social security code will formalize the initiatives currently under way to strengthen the system.

Social policy

43. With the assistance of the United Nations Development Program (UNDP), the government has defined strategies for the sectors that contribute directly to poverty reduction, as indicated in the I-PRSP. The priorities identified include education, vocational training, health, water, agriculture and rural development, AIDS prevention, and improvement of living conditions. In particular, the actions in the health and education sectors are based on needs revealed by the school-zone map and the National Health Action Program (PNAS). In the health sector, the priorities are as follows: (i) the 385 existing dispensaries should be fully operational; (ii) the 15 maternal and child health centers, the 52 medical centers with a surgical unit, and the 9 regional hospitals should be fully functional; (iii) immunization campaigns should be carried out according to the required standards; and (iv) inventory disruptions should be avoided in the distribution of drugs to the dispensaries and health centers. In the education sector, the priority is to reduce the teacher-pupil ratio and the dropout rate, and to ensure that there is an adequate supply of educational materials. The details on the necessary measures, implementation timetable, performance indicators, and costs of these programs will be included in the PRSP. The social indicators will be monitored by Gabon's Social Change Observatory and will be based on the 2003 survey of household expenditure currently being conducted. The social objectives to be monitored annually will be those selected as Millennium Development Goals.

Good governance

44. The government recognizes that good governance is a determining factor in promoting growth and effective social and economic policies. To ensure transparency, the National Commission Against Illicit Enrichment will publish quarterly and annual reports on its activities (particularly the number of cases investigated). The necessary budgetary resources have been placed at the disposal of the Commission. The budget for 2004 will include adequate provisions for the operations of the Commission (structural benchmark). Furthermore, the recent creation of the National Public Procurement Commission, supported by a General Directorate of Public Procurement, is an important factor in the effort to ensure transparency in the management of public resources. With regard to the declaration of assets by public officials, an IMF expert has provided technical assistance in June and July 2003; the related draft decree has been reviewed by the Anti-Corruption Commission and will be finalized before end-December 2003 (structural benchmark).

E. Program Monitoring

45. As indicated in the technical memorandum of understanding (see Annex I), the government has enhanced its ability to monitor the program closely and will report regularly to the Fund on its implementation. The implementation of the program will be monitored through quantitative benchmarks for end-September and end-December 2003, and structural benchmarks for the period September 1-December 31, 2003, presented respectively in Tables 1 and 2.

Table 1. Gabon: Quantitative Benchmarks and Indicative Targets
Under the Staff-Monitored Program, 2002-03

(In billions of CFA francs; cumulative flows from January 1st)1
  Sep. Dec.
    Target Est.   Target Est.   Prog. Prog.

Ceiling on the net claims of the banking system
       on the government2
-51.5   3.4     -5.3     8.8 7.1
    Adjusted target2 . . .   35.8 -17.2   -31.5 -4.4   -41.3  
Ceiling on the contracting or guaranteeing of new
    nonconcessional external debt with maturity
    of over 1 year by the government3,4
17.7   42.5 0.9   42.5 0.9   32.5 32.5
Ceiling on outstanding stock of new
    nonconcessional external debt with
    original maturity of one year or less owed or
    guaranteed by the government3,4
0.0   0.0 0.0   0.0 0.0   0.0 0.0
Limit on the accumulation of external
    payments arrears5
216.9   0.0 0.0   0.0 0.0   0.0 0.0
Floor on the net reduction of domestic
    payments arrears (reduction "–")
-65.8   -6.3 -64.2   -30.3 -67.8   -59.9 -80.0
Floor on the primary fiscal balance
    (on a payment order basis)6
272.0   118.7     246.3     299.8 355.4
Adjusted target6 . . .   133.7 172.4   296.4 296.7   354.8  
Indicative targets:                    
Floor on non-oil government revenue 479.0   112.4 111.6   252.7 237.7   367.5 503.6
Ceiling on the government wage bill on
    a payments order basis
220.6   56.7 58.6   107.9 112.4   162.4 223.0
Ceiling on total noninterest expenditure on
    a payments order basis
817.9   151.2 111.0   295.4 278.9   463.2 678.7
Memorandum items:                    
Nonproject external financing disbursements
    (excluding IMF)
1.9   0.6 0.0   1.3 0.0   1.9 3.9
External debt service due (excluding IMF) 361.3   84.7 86.9   154.0 156.7   231.1 301.7
Domestic debt service due 109.1   39.7 26.4   61.2 53.8   78.6 89.3
Oil revenue 609.0   156.9 171.8   287.8 337.8   393.7 526.6
Rescheduling of external debt7 0.0   46.5 0.0   77.7 0.0   125.5 156.2
Privatization proceeds 1.8   1.0 1.0   1.0 1.0   1.0 1.0

Sources: Gabonese authorities; and staff estimates and projections.
1Targets for March and June 2003 are prior actions. Targets for September and December 2003 are becnhmarks under the SMP.
2The benchmarks will be adjusted upward/downward for any lower/higher oil revenues, lower/larger nonproject external financing disbursement net of external debt service paid, larger/smaller net reductions in domestic arrears, and smaller/larger privatization proceeds, as defined in paragraphs 17 and 18 of the TMU, relative to program targets.
3This benchmark applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the IMF Executive Board on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this benchmark are rescheduling arrangements and purchases from the Fund. For purposes of this benchmark, the term "nonconcessional" means that the debt has a grant element of less than 35 percent calculated on the basis of currency-specific discount rates that are based on the OECD commercial interest reference rates (CIRRs).
4Excluded from this benchmark are rescheduling arrangements, purchases from the Fund, and normal import-related credits.
5The nonaccumulation of new external payments arrears will constitute a continuous benchmark.
6The benchmark on the primary fiscal balance will be adjusted upward/downward for any higher/lower-than-programmed oil revenue (see paragraph 17 of the TMU).
7These amounts represent the estimate of obligations falling due in 2003 that are reschedulable.

Table 2. Gabon: Prior Actions, and Structural Benchmarks
for the Staff Monitored Program


Implementation Period

Prior actions


Preparation of monthly reports encompassing treasury expenditures and payment orders issued by the General Directorate of the Budget (MEFP, ¶7).


Satisfactory completion of a six-month track record (January-June 2003) of overall government operations (¶25).

Targets for end-March and end-June 2003 met, with the exception of the government position vis-à-vis the banking system at end-June

Settlement of the external payments arrears outstanding as at end-December 2002 on the post-cutoff date debt and debt rescheduled under Paris Club VII, and the multilateral debt (¶25).


Appointment of the members of the National Commission to Combat Illicit Enrichment and provision of adequate resources for 2003 for the functioning of the commission (¶7).


Adoption of an action plan to eliminate tax exemptions under special agreements, with the exception of those relating to the mining and forestry sector, investment charter, and Vienna Convention (¶17).



Structural benchmarks


Fiscal policy


Adoption by the Council of Minister of a draft budget law for 2004 based on the new budget classification system (¶24).

End-December 2003

Integration of the budget of the Road Maintenance Fund (FER) in the 2004 government budget (¶24).

End-December 2003

Preparation of a report on the execution of the investment budget in the January-September 2003 period (¶23).

End-December 2003

No granting of exemptions to any company beyond those already provided for under the mining, forestry, and investment code, and no renewal of existing exemptions (¶17).

Continuous benchmark


External Sector


Removal of the surtax on lubricants and mineral water (¶32).

End-December 2003


Good governance


Finalization of the decree requiring a wealth declaration by public officials(¶44) .

End-December  2003

Adoption by the Council of Ministers of the draft ethics code for government officials under preparation (¶35).

End-December 2003

Inclusion in the annual government budgets, starting with 2004, of an adequate operating budget for the National Commission to Combat Illicit Enrichment (¶44).

End-December 2003


Development of the private sector


Launching of call for bids for the privatization of HEVEGAB

Done on September 30, 2003

Adoption of a plan of action for the restructuring of the national forestry company (SNBG) aimed at clarifying the respective roles of SNBG and private operators and making the system for determining the port price more flexible (¶33).

End-December 2003

Abolition of the General Directorate of Price Controls (¶38).

End-December 2003

Technical Memorandum of Understanding

1. This memorandum spells out the understandings for the monitoring of program implementation, and the data that will have to be reported to the IMF staff for the purpose of the staff monitoring program (SMP). In this context, it defines (a) the quantitative and structural benchmarks; (b) the indicative targets; (c) the adjusters for the quantitative benchmarks; and (d) the key assumptions used in the formulation of the program for 2003 presented in the Memorandum for Economic and Financial Policies (MEFP) of the government of Gabon attached to the letter from the Minister of Economy, Finance, Budget, and Privatization to the Managing Director of the International Monetary Fund dated October 20, 2003.

A. Monitoring of Program Implementation

2. Monitoring of the implementation of the program will be made on the basis of an assessment of the observance of the quantitative and structural benchmarks at specified dates; and (b) observance of quarterly indicative targets.

B. Quantitative Benchmarks, Indicative Targets, and Adjusters

Quantitative benchmarks, and indicative targets

3. The quantitative benchmarks are specified in Table 1 of the MEFP attached to the letter of October 20, 2003. The quantitative benchmarks are the following:

  • a ceiling on the net claims of the banking system on the central government;

  • a ceiling on new nonconcessional external debt with original maturity of more than one year owed or guaranteed by the government (cumulative from January 1st);

  • a ceiling on the outstanding stock of new nonconcessional external debt with original maturity of up to (and including) one year owed or guaranteed by the government;

  • a zero limit on the accumulation of external payments arrears (a continuous performance criterion);

  • a floor on the net reduction in the domestic payments arrears of the central government (cumulative from January 1st); and

  • a floor on the primary fiscal balance, on a payment order basis (cumulative from January 1st).

4. The program includes adjusters for the quantitative benchmarks as specified in paragraphs 17 and 18 below and in footnotes 2 and 7 of Table 1 of the MEFP attached to the letter of October 20, 2003.

5. The indicative targets (cumulative from January 1st), which will be instruments to monitor performance under the program, are as follows:

  • a floor on government non-oil revenue;

  • a ceiling on the total government wage bill, on a payments order basis; and

  • a ceiling on total noninterest expenditure, on a payments order basis.

Definitions and computation

6. The outstanding amount of the net claims of the banking system on the central government is measured in accordance with the accounting practice at the central bank, the BEAC, along the lines of the IMF format. As of December 31, 2002, this outstanding amount was CFAF 222.3 billion, and its breakdown was as follows:

    Net Claims of the Banking System on the Central Governme
    (In billions of CFA francs)

    Statutory advances from the BEAC 187.9
    Plus: CFA franc counterpart of use of Fund resources 42.2
    Plus: consolidated advances 1.3
    Minus: deposits at the BEAC 100.8
       Of which: Account for Future Generations 70.4
    Plus: net borrowing from the commercial banks1 89.1
    Plus: CCP deposits 2.5
       Total 222.3

7. The Account for the Fund for Future Generations (AFFG) at the BEAC will be fed in 2003 with oil revenues in excess of the programmed levels (based on program baseline assumptions detailed in para. 20). The AFFG is part of the net claims of the banking system on the government.

8. The benchmarks on nonconcessional external debt are ceilings on new nonconcessional external debt. The benchmark on the contracting and guaranteeing of new non-concessional debt with maturity over one year by the government applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the IMF on August 24, 2000, but also to commitments contracted or guaranteed for which no value has yet been received. Excluded from this benchmark are rescheduling arrangements and purchases from the IMF. The benchmark on the outstanding stock of nonconcessional external debt,6 with an original maturity of up to one year (one year included) excludes rescheduling arrangements, purchases from the IMF, and normal import-related credits. The concessionality of debts will be calculated on the basis of the reference interest rates for the specific currencies of denomination used, as established by the Organization for Economic Cooperation and Development (OECD). A debt is deemed to be on concessional terms if, at the time of the initial disbursement date, the ratio between the present value of the loan calculated on the basis of the reference interest rates, on the one hand, and the face (nominal) value of the loan, on the other hand, is less than 65 percent (i.e., a grant element of at least 35 percent).

9. The accumulation of external payments arrears, which is a continuous performance criterion with a zero limit, is calculated as the difference between (a) the gross amount of all the maturities falling due on account of contractual external debt-service obligations (interest and principal, including moratorium and late/penalty interest, where applicable); and (b) the amount of actual payments made during the period under consideration. Arrears resulting from the nonpayment of the debt service for which a rescheduling agreement is sought are excluded from this definition.

10. The net change in domestic payments arrears of the central government corresponds to the change since January 1st in the treasury float plus the difference between (i) the amount due on the treasury debt (interests), as well as the securitized commercial agreements and "other" debt (interest and principal); 7 and (ii) the amount actually paid in the period in question. The treasury float consists of the "payment orders at the treasury" and the "other treasury float."8 The "payment orders at the treasury" corresponds to the difference between the cumulative payment orders (ordonnancements)9 and the cumulative actual payments (checks encashed--cash basis). At end-December 2002, the government's domestic payments arrears amounted to CFAF 173.9 billion, comprising CFAF 126.0 billion in outstanding treasury float and CFAF 22.5 billion in "other treasury float," and CFAF 25.4 billion of payments arrears on the domestic debt as defined above.10

11. Total government revenue is measured on a cash basis and includes offsetting revenue and expenditure operations, including private sector tax obligations offset against government obligations to the private sector. Tax receipts are specified in the attached Table 1 on central government financial operations (Tableau des opérations financières de l'Etat-TOFE), including all earmarked revenues (Road Fund and special funds).

12. Total government expenditure include spending on payment order basis (ordonnancements), and treasury advances (avances non régularisées), and outlays on special funds. The indicative target on total noninterest expenditure is calculated on the basis of this definition.

13. The primary fiscal surplus, on a payment order basis (ordonnancements), is defined as the difference between (a) total government revenue on a cash basis; and (b) total noninterest current expenditure plus investment expenditure (including foreign-financed investment) and net lending.

14. The indicative target on the government wage bill is defined on a commitment basis (engagements) for all personnel (whether on a permanent or a temporary basis) of the civil service and the security and defense forces. The wage bill consists of all remunerations, including indemnities, social contributions, housing allowances, and other allowances.

15. The restructuring costs posted as "financing" represent the social costs relating to the public enterprises to be liquidated or privatized in the context of the central government's divestiture of its productive sector holdings, the operating costs (consultants, etc.) of the Secretariat of the Privatization Committee, and the costs of voluntary departures in the context of the administrative reform. The other expenditures, intended in particular for maintaining the activity of the other public enterprises included in the privatization program, are posted under "transfers and subsidies".

16. The financial operations specified in the attached Table 1 on central government financial operations (Tableau des opérations financières de l'Etat-TOFE) relating to treasury correspondents (correspondants du Trésor), local governments (collectivités locales), and expenditure for which the government's bank accounts have not been debited (dépenses non imputées en banque) must correspond to the change from period to period in the overall balance of these accounts taken together. The Government will provide information on the overall balance of all these accounts on a quarterly basis to the IMF.

Adjustments to quantitative benchmarks

17. A specific contingency mechanism for oil revenue is established for 2003, given the importance of oil for the Gabonese economy and the uncertainties regarding oil prices and output. As noted in paragraph 7, if oil revenue is above the baseline projections in a given quarter, the surplus will be deposited in the Account of the Fund for Future Generations with the BEAC, with a corresponding downward adjustment in the ceiling on net credit from the banking system to the government and an upward adjustment in the floor for the primary fiscal balance. If oil revenue in CFA franc terms is lower than programmed because actual oil prices and/or output are lower than projected in the baseline scenario, the shortfall, with a cumulative maximum of CFAF 33 billion (1 percent of GDP),11 could be offset by additional net bank credit--with an upward adjustment in the ceiling on net credit from the banking system to the government, and a downward adjustment in the floor on the primary fiscal balance. The remaining shortfall is to be covered by additional fiscal tightening (higher non-oil tax revenue and/or lower noninterest expenditure than programmed). If the oil revenue shortfall exceeds 2 percent of GDP, the quarterly fiscal targets will be reassessed in consultation with Fund staff.

18. The program also includes (downward/upward) adjusters for the performance criteria on net credit from the banking system to the government for higher/lower-than-programmed nonproject external financing disbursements (net of external debt service effectively paid)12, and for lower/higher-than-programmed net reduction of domestic arrears. The net credit from the banking system to the government will be adjusted upward for the total shortfall (i.e., the net external financing shortfall plus the excess in net reduction in domestic payments arrears), with a cumulative maximum of CFAF 33 billion.13 The program also includes a symmetric (downward/upward) adjuster for the net bank credit to the government for privatization proceeds higher/lower than projected in the program. The program's assumptions related to oil revenues, external and domestic debt service, disbursements on external nonproject financing, and privatization proceeds are indicated in Table 1 of the Memorandum.

C. Structural Benchmarks

19. The structural performance criteria and benchmarks are specified in Table 2 of the MEFP attached to the letter of October 20, 2003.

D. Key Assumptions of the 2003 Program

20. The main assumptions of the program are the following:



World Brent oil prices (U.S. dollar per barrel)


Gabonese export oil prices (U.S. dollar per barrel)


Oil output (in millions of metric tons)14


Exchange rate (CFA francs per US$1, annual average)


E. Reporting Requirements

21. To facilitate monitoring of program implementation, the government of Gabon will prepare and send to the IMF monthly reports within four weeks following the end of the preceding month. In addition, the Technical Support Unit of the Interministerial Committee for Monitoring the Structural Adjustment Program will communicate each month to the IMF's African Department by fax or by e-mail the data required to monitor the implementation of the program. Such data will include (but are not limited to) the following:

    (a) the comprehensive monetary survey, the central bank balance sheet, and the consolidated balance sheet of the commercial banks;

    (b) the net financial position of the government with the BEAC (PNG) and net credit from the banking system to the government, showing separately the cumulative deposits in the Special Account;

    (c) central government financial operations (opérations financières de l'Etat) on a payment order basis (ordonnancements) (attached Table 1), identifying any discrepancy between the fiscal deficit and changes in domestic and external arrears, on the one hand, and total net domestic bank/nonbank and net external financing, on the other;

    (d) the detailed breakdown of petroleum receipts by nature (royalties, profit tax, and other) and by company, and the underlying basis when available (e.g. production, prices, turnover, costs, etc.), as well as the detailed breakdown of non-oil receipts (by type of tax) and nontax revenue;

    (e) the detailed breakdown of total central government expenditure, on an adjusted commitment basis, adjusted payment order basis, and cash basis as presented in the Tableau Integré produced by the Statistical Committee (Comité statistique).

    (f) the details for domestic and external debt-service obligations, on a contractual and actual payments basis, respectively, with a breakdown into interest and principal and by creditor, as well as any possible accumulation of domestic or external arrears;

    (g) the details for the outstanding stock of domestic arrears (month to month) and the cumulative flows from January 1st, 2003: the net accumulation of new arrears during 2003 as defined in paragraph 10 by the difference between payment orders (ordonnancements) and payments made (cash basis), as well as the repayment of pre-2003 arrears, with both items to be broken down by wages and salaries, goods and services, transfers and subsidies, interest, capital expenditure, and net lending, and to show any stock-flow adjustment.

    (h) the amount of new external debt contracted or guaranteed by the government, with the detailed information on the original terms and conditions (currency of denomination, interest rate, grace period, and maturity);

    (i) actual disbursements on non-project-related external financing, including on newly contracted loans, and the amounts of debt relief granted to Gabon by external creditors;

    (j) indicators and other statistical data on recent economic developments, such as the household consumer price index, merchandise imports and exports (in value and volume terms) by major category, oil production and exports of oil and timber (in value and volume terms), as well as the quarterly reports on economic activity prepared by the General Directorate of the Economy and the Interinstitutional Committee on Statistics; and

    (k) a status report on the implementation of the structural reforms specified in Table 2 of the MEFP attached to the letter of October 20, 2003.

22. The Technical Support Unit of the Interministerial Committee for Monitoring the Structural Adjustment Program will provide the African Department of the IMF with any other information that the latter may deem necessary or that may be requested by the staff of the IMF for the effective monitoring of the program.

1End-2001 fiscal data were revised in mid-2002 to reflect extrabudgetary expenditures, amounting to about 4 percent of GDP; they were related to election expenditures and were identified only after the conclusion of the 2001 Article IV conclusion.
2The decision to assume the arrears of Air Gabon and the arrears of a number of public enterprises to the National Social Security Fund (CNSS) was taken in 2001 and implemented in early 2002.
3Tax audits which were recommended for two oil companies have been carried out; negotiations with the relevant oil companies on the phase III of the exploitation of the Rabi field-another recommendation of the report--were completed in May 2003.
4Extreme poverty is defined as two-thirds of average consumption.
5As of January 1, 2003, the surcharges were applicable to edible fats and oils, soap, poultry products, mineral water, cigarettes, and industrial lubricants.
6The term "debt" has the meaning set forth in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision number 12274-(00/85) August 24, 2000).
7The domestic debt includes the outstanding amounts of (a) securitized commercial agreements as validated by the Ministry of Economy, Finance, Budget, and Privatization as at end-December 2002; (b) the debt of the treasury; (c) payroll arrears prior to 2001 (capitalized back pay); and (d) "other," consisting of amounts due to the SEEG, CNSS, Gabon Telecom, Gabon Poste and Air Gabon's supplier debt taken over by the government in 2001/2002.
8The "other treasury float" includes the accounts on "subsidies," "consignments," "accounting agencies," and "installments to be allocated."
9As defined below in paragraph 12.
10Outstanding arrears on the bank debt in moratorium, which is included in the net claims of commercial banks on the government, are equal to zero.
11The cumulative maximum upward adjustment in net credit from the banking system to the government (CFAF 33 billion) applies to all adjusters combined.
12External debt service due minus any accumulation of external arrears minus debt relief obtained. The programmed amounts of debt service, payments arrears, debt relief, and nonproject external financing are calculated in CFA franc terms based on currency-specific exchange rates. The actual amounts are calculated in CFA franc terms based on the actual transactions in foreign currency and the exchange rates published by the Fund.
13The cumulative maximum upward adjustment in net credit from the banking system to the government (CFAF 33 billion) applies to all adjusters combined.
14The average conversion rate is 7.3 barrels per metric ton.