Gabon and the IMF

Press Release: IMF Approves 14-Month US$102 Million Stand-By Arrangement for Gabon May 28, 2004

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

Libreville, May 6, 2004

The following item is a Letter of Intent of the government of Gabon, which describes the policies that Gabon intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Gabon, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Ms. Anne O. Krueger
Acting Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Ms. Krueger:

1. In 2003, the government of Gabon, aware of the need to face the difficult challenges resulting from the decline in oil production, debt burden, and low social indicators, adopted a medium-term adjustment program for the period 2003-06 that is aimed at diversifying its economy, accelerating growth, and reducing poverty. In the second half of 2003, as part of its medium-term program, the government implemented a staff-monitored program that has achieved satisfactory results. To enhance its adjustment and structural reform efforts, a program has been developed for 2004-05; its objectives and policies are presented in the attached memorandum of economic and financial policies. In support of these policies, the government of Gabon is requesting a 14-month Stand-By Arrangement with the Fund in an amount equivalent to SDR 69.44 million, corresponding to 45 percent of Gabon's quota in the Fund.

2. The government believes that the policies and measures described in the attached memorandum are sufficient to attain the program objectives, but it stands ready to take any further measures that may become appropriate for this purpose. The government will consult with the Fund periodically, in accordance with Fund policies on such consultations and will provide the Fund staff with any information that it may request for monitoring progress in program implementation. After the arrangement expires, and while Gabon has outstanding obligations to the Fund, we will consult with the Fund on Gabon's economic and financial policies at the initiative of the government of Gabon or at the request of the Managing Director, in line with the Fund's policies on such consultations.

3. Program implementation will be monitored through quarterly quantitative performance criteria, as well as structural performance criteria and benchmarks, and by means of quarterly reviews with the Fund, the first of which will be concluded by end-September 2004, the second by end-December 2004, the third by end-March 2005, and the fourth before end-June 2005.

4. The government authorizes the Fund to publish its memorandum of economic and financial policies for 2004-05 and the forthcoming staff report for the request of the Stand-By Arrangement.

Sincerely yours,


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

Memorandum of Economic and Financial Policies for 2004-05

I. Introduction

1. The government of Gabon has continued implementing its medium-term program covering 2003-06. Satisfactory performance was achieved under the staff-monitored program (SMP) covering September-December 2003,1 prepared with Fund staff in the context of our medium-term adjustment program. The objective of this program is to meet the difficult challenges facing the Gabonese economy, namely, a heavy debt burden, the prospect of a continuing decline in oil production, a low degree of economic diversification, and very weak social indicators in conjunction with a high poverty rate.

2. The government is convinced that the challenges facing the Gabonese economy require the continuation of the adjustment effort, together with a strengthening of the structural measures aimed at promoting private investment and economic diversification, so as to boost the rate of growth and reduce poverty consistently with the Millennium Development Goals. This memorandum describes the economic policies and objectives set by the government of Gabon for the period April 2004-June 2005, in support of which it is requesting a Stand-By Arrangement with the Fund. These policies are consistent with the main objectives of the interim poverty reduction strategy paper (dated October 28, 2003); that paper is being finalized in the context of a participatory process with donor support.

II. Recent Economic Developments and Performance Under the Staff-Monitored Program

3. Macroeconomic policy implementation in 2003 was broadly on track with program objectives. Based on provisional data, real GDP growth, at 2.8 percent, was higher than originally envisaged (0.1 percent in the program), reflecting stronger growth in the oil sector, which offset a lower-than-expected growth of the non-oil sector (with a growth rate provisionally estimated at 1 percent, compared with 2.4 percent in the program). The production of crude oil in 2003 rose to 13.4 million tons, an increase of 6.9 percent from the 2002 level, thanks to a vast investment and technological improvement program that made it possible to increase oil recovery in the Rabi field and in other fields. The growth of non-oil GDP was modest, owing to the decline in activity in the construction and public works, timber, and services sectors, which was offset by solid performance in the electricity, agriculture, transport, and manganese sectors. At the same time, inflation was contained at a low level, at only 2 percent on an annual average.

4. The external current account improved in 2003, with the surplus rising from 5.2 percent of GDP in 2002 to 10.5 percent in 2003, owing to the increase in oil exports (4.8 percent in value terms) accompanied by a reduction in imports (-5 percent in value terms). The overall balance of payments deficit was reduced. However, the increase in the Bank of Central African States (BEAC) foreign exchange reserves attributable to Gabon was smaller than in 2002, owing to substantial repayments of external debt arrears not eligible for rescheduling.

5. Monetary developments in 2003 were characterized by a pronounced decline in credit to the economy (7 percent of the beginning-of-period money stock). This reduction is explained by the treasury's settlement of arrears to the private sector, which, in turn, reduced its indebtedness to the banking system. This factor, in conjunction with modest increases in the banking system's foreign assets and in net credit to the government, resulted in a 1.2 percent drop in the money supply. While the banks' nonperforming loans as a percentage of gross lending rose modestly, the amount covered by provisions for bad debts was substantially increased. There was also an intensification of the inspection missions performed by the regional banking commission (COBAC).

6. To stabilize the macroeconomic situation, the government undertook a very ambitious fiscal adjustment effort, cutting the non-oil primary deficit from 16.8 percent of non-oil GDP in 2002 to 8.2 percent in 2003. A shortfall in non-oil revenue was offset by lower primary expenditure. On the revenue side, non-oil revenue fell short of target by CFAF 25 billion, or 1.2 percentage point of non-oil GDP, while oil revenue exceeded projections by CFAF 43 billion (1.2 percent of GDP). On the expenditure side, total outlays remained below the program target by the equivalent of 0.8 percent of non-oil GDP, mainly because of lower capital expenditure, which more than offset the overshooting of the wage bill target.

7. Four of the six quantitative benchmarks were observed. In particular, the benchmarks relating to the primary budget balance and the reduction of domestic arrears were observed and even slightly exceeded, and the program ceilings on the contracting of new external loans were respected. As for the benchmark relating to the nonaccumulation of external arrears not subject to rescheduling, some payments delays on debt obligations (totaling CFAF 4.8 billion, including CFAF 1 billion in respect of the guaranteed debt) occurred toward the end of 2003, but these were settled in early February 2004. The benchmark set for net bank credit to the government was exceed by an amount equivalent to 1.5 percent of GDP, but the efforts made in the last quarter of 2003 made it possible to narrow the slippage observed at end-September 2003 substantially.

8. The major factor behind the slippage in net credit to the government was the lower-than-projected nonbank financing,owing to the sizable drawdowns on prior balances with the treasury by local governments and treasury correspondents, in particular the Social Guarantee Fund (CNGS) the National Housing Fund, and the National Water Fund. The slippage at end-December 2003 would have been smaller by 0.3 percentage points of GDP (CFAF 10.6 billion) had the definition of net credit to the government not included the increase in private deposits with the postal checking system (CFAF 3.6 billion), which do not constitute amounts available to the treasury, and had the reduction in the amount of payments in process at the decentralized treasury offices (CFAF 5.5 billion) and at the embassies (CFAF 1.5 billion) been included in the definition of the reduction in float at the treasury.2

9. Despite the efforts made to control current expenditure, the wage bill exceeded the indicative target set forth in the program, in particular because of the impact of the regularization of the administrative position of government employees following the 2001 census, and the recruitment in the security, education, and health sectors. The reduction in the number of advisors to the Office of the President of the Republic and in the ministries and other institutions, decided in August 2003, did not begin to have a financial impact until December 2003. However, total primary expenditure, excluding interest payments, remained below the indicative target, mainly because the level of capital expenditure financed on external resources fell short of projections.

10. Significant progress was also made in the implementation of structural reforms. All the structural benchmarks included in the SMP were observed, with the exception of the benchmark relating to adoption of the civil service ethics code, which was met one month late in early February 2004, and the benchmark pertaining to the completion of the action plan for restructuring the timber marketing board, SNBG.

11. Preparation of the action plan for restructuring the SNBG was not completed because the study conducted by the international consulting firm, KPMG, the conclusions of which were presented in December 2003, did not provide an adequate basis for redefining the company's role in the forestry sector. Consequently, the tender for a new study financed by the World Bank was launched in March 2004 on the basis of terms of reference agreed with that institution. Based on the recommendations of this new study, an action plan for restructuring the company will be defined by end-November 2004.

12. Progress has been made in the privatization process. A foreign investor has expressed interest in the rubber plantation company (HEVEGAB), for which a call for bids was issued in September 2003, and in the palm oil company (AGROGABON). In addition, five bidders were prequalified in October 2003 for the partial privatization of Gabon Telecom (sale of 35 percent of its capital with a management contract); the information memorandum was distributed to the five prequalified operators in early April 2004.

13. In 2003, the government pursued the process of price liberalization. In this context, the list of products subject to price surveillance was reduced in 2003, eliminating from the list vegetable oils, soap, mineral water, poultry, yogurts and paper products.

14. In view of the difficult economic and social environment, and to ensure the success of its adjustment program, in September 2003 the government concluded a social truce with social partners, which calls for wage moderation, a strengthening of the pension system, the strengthening of the medical insurance system, the continuation of the regularization of the administrative and financial situation of civil servants, and tax reductions on basic necessities, in order to moderate prices. In conformity with these commitments, at end-2003 the government widened the list of products subject to the reduced VAT rate of 10 percent with a view to contributing to price moderation. The government is convinced that the best instrument to achieve price moderation for widely used consumer products is to ensure adequate competition in supply and distribution channels. Accordingly, it has rescinded the measure widening the price controls adopted in early April 2004, and is committed not to resort in the future to such measures nor to intensify the price controls existing at end-December 2003 (structural benchmark).

III. Program for 2004-05

15. The policies that Gabon intends to implement in order to meet the medium- and long-term challenges are based on vigorous fiscal adjustment and in-depth structural reforms; the latter should make it possible to enhance competitiveness, diversify the economy, ensure sustained growth of non-oil GDP, and sustainably reduce poverty. As part of its fiscal adjustment effort, the government will endeavor to bolster non-oil revenue and reduce nonpriority expenditure in order to free sufficient resources for investment and for social and economic infrastructure, and to normalize its relations with its domestic and external creditors. Gabon has significant economic potential in many areas, including timber processing, tourism and ecotourism, fisheries, agro-industry, cash crops (coffee and cocoa), non-oil mining, and high value-added services. To tap this potential, structural reforms will be focused on factors that are crucial for attracting investment and improving the business climate, in particular good governance and transparency, the restructuring and privatization of public enterprises, the reduction of costs in the economy, and removal of the obstacles to the development of the private sector, with emphasis on improving the legal and regulatory framework. Support from the international community and development partners will be needed, both in the form of substantial external debt relief, given the sizable financing requirements, and through the mobilization of financial and technical resources directed to developing non-oil activities.

IV. Macroeconomic Objectives and Policies

16. The government projects a non-oil GDP growth rate of 3 percent in 2004 and 3.5 percent in 2005. In view of the continued expected decline in oil production, total real GDP is expected to grow by only 0.7 percent on average in 2004-05. Average annual inflation is to be contained at 2 percent, owing to implementation of prudent fiscal and monetary policies. With oil production expected to fall from 13.4 million tons in 2003 to 11.5 million tons in 2005, the overall balance of payments deficit is projected to widen from 1 percent of GDP in 2003 to 3.5 percent in 2005; the non-oil current account deficit is projected to increase from 12.6 percent of GDP in 2003 to 15.9 percent in 2004, because of a pick-up in imports, and a decline in forestry exports; the latter is expected to be temporary, with a pick-up projected in 2005-06. As a result of the increase in foreign direct investment related to privatization, the intensification of oil recovery activities, and the improved business climate, gross private investment is projected to increase by 0.7 percentage point of GDP in 2004 and reach 21 percent of GDP in 2004-05.

A. Fiscal Policy

17. Fiscal policy aims at achieving primary budget surpluses of 10.3 percent of GDP in 2004 and 8.6 percent in 2005 (down from 11.4 percent in 2003), thereby limiting the financing gap to the amount that can be covered by debt rescheduling by Paris Club and London Club creditors and the use of IMF resources. Thus, the non-oil primary budget deficit is to decline from 8.2 percent of non-oil GDP in 2003 to 7.5 percent in 2004 and 5.7 percent in 2005. The overall budget surplus will enable Gabon to be current on nonreschedulable external obligations, to reduce net domestic government borrowing substantially, and to increase deposits with the central bank, including those of the Fund for Future Generations (FFG). External budgetary financing will include disbursements under a structural adjustment loan from the African Development Bank (AfDB) currently under negotiation, and grants from the European Union, in addition to debt rescheduling being requested from bilateral official creditors and commercial banks.

18. Oil revenue is projected at CFAF 508 billion (15 percent of GDP) in 2004, based on an average Brent oil price of US$30.0 per barrel, an exchange rate of CFAF 532.6 per U.S. dollar, and a production of 13.3 million tons. This projection includes the payment of back taxes pursuant to the tax audits of the oil companies (CFAF 11.8 billion) conducted in 2002 by an internationally recognized firm. The program also provides for a replenishment of the resources of the FFG, which declined substantially in 2003 owing to the repayment of external payments arrears: 10 percent of oil revenue will be deposited in the FFG, and the use of any oil revenues exceeding the program objectives will be according to the terms of the technical memorandum of understanding (TMU).

19. Non-oil revenue is projected to increase by about 0.4 percentage point of non-oil GDP to 24.0 percent in 2004, and to rise further to 24.6 percent in 2005. This increase is expected to originate from the following: (i) the effective implementation of the new forestry taxes (area tax and stumpage fee) adopted in the 2004 budget law; and (ii) the measures adopted in 2003 to strengthen tax administration, including the implementation of the action plan to eliminate tax exemptions other than those under the mining, forestry, and investment codes (structural benchmark), the completion of the tax audit of large enterprises initiated in 2002, and strengthened controls of taxpayers and collection of overdue tax obligations. Since January 2004, any business that has obtained exemptions without prior approval from the Ministry of Finance shall be subject to the normal tax code provisions. The government has also established a timetable for implementing the recommendations made by the November 2003 FAD technical assistance mission, including the establishment of a large enterprise tax unit (LTU) within the Directorate-General of Taxes (structural performance criterion) and the gradual transfer of the responsibility for tax collection from the treasury to the tax directorate. The weaknesses identified with respect to taxpayer registration, in particular the lack of a unique identifying number, will be corrected.

20. Regarding forestry taxes, tax assessments will be performed by the tax directorate in collaboration with the forestry administration, whose staff in the field are tasked with monitoring activities at work sites and classifying the timber harvested. Assessment of the stumpage fee will be based on the documentation certifying the footage cut, as approved by the forestry administration. A system to ensure the tracking of transported timber will be introduced during 2004.

21. Primary expenditure is to decline by 1.3 percentage points of non-oil GDP between 2003 and 2005, to 30.5 percent. The expenditure reduction will result mainly from cuts in the wage bill and outlays under the special funds. The program envisages the containment of other primary current expenditure, including security and sovereignty expenditure, and spending on public utility consumption. Current expenditure for education, health, and social assistance will be monitored closely, with quarterly floors established for 2004 that are based on the annual budgetary appropriations. Capital spending is projected to increase by 1.1 percent of non-oil GDP between 2003 and 2005, to 7.5 percent.

22. The government has adopted a number of measures to cut the wage bill by CFAF 6 billion, so as to contain it in 2004 at CFAF 226 billion (6.6 percent of GDP), compared with CFAF 229 billion recorded in 2003 and a trend of CFAF 232 billion in 2004 in the absence of measures. These include a reform of functional indemnities, a further reduction in the number of senior civil servants, including those in ministers' cabinet offices, a streamlining of the compensation paid to contractual staff, and rigorous compliance with the rules on retirement. Furthermore, steps will be taken to ensure that staff seconded to other agencies do not remain on the payroll. In the 2005 budget law, allocations for scholarships (1 percent of GDP) will be based on better prioritization and will be awarded in accordance with criteria better related to student merit and parents' ability to pay. In addition, university scholarships granted for study abroad will be reduced, due to the ongoing improvement of Gabon's national institutes of higher education. The government will request support from donors for technical assistance directed, in a first stage, toward improving the effectiveness of scholarships for study abroad. A study to that effect should be completed by end-October 2004 (structural benchmark), so that appropriate measures can be reflected in the 2005 budget. The savings generated in the scholarship area should provide room to increase budgetary appropriations for national educational institutions. In 2003, the budget allocation for civil service pensions proved inadequate. Accordingly, the government is contemplating a restructuring of the pension system, including the too generous special regimes.

23. The program for 2004-05 envisages a further reduction in the float at the treasury and the clearance of the remaining domestic arrears, in consultation with the private creditors grouped in the Libreville Club.3 The government has begun to review the stock of outstanding wage arrears (back pay on promotions); this review will be completed by end-September 2004 (structural benchmark), so that arrangements can be made for the settlement of these arrears. A substantial improvement is also targeted in the government's position toward the banking system, in an amount equivalent to 1.4 percent of GDP.

24. The government is committed to improving further fiscal management, which will be formulated within a clearly defined strategy consistent with the country's priority development objectives; this strategy will be presented in the PRSP now being finalized, which will be updated annually. To this end, it is essential to ensure better integration between the current and capital budgets; the coordination of these budgets will be improved at the time of preparation of the budget law and the budget conferences. Multiyear programming will become an essential frame of reference, with the system of program authorizations and payment credits used as a genuine budget management tool. To ensure rapid implementation of the capital budget at the start of the year (structural benchmark), the detailed plans for the use of capital appropriations will be drawn up in the draft budget law, beginning with the 2005 law (structural benchmark); consistency between the appropriations and the sectoral strategies will strictly be ensured. This will make it possible to determine quarterly floors for the execution of priority capital expenditures in 2005.

25. The government is aware that a medium-term expenditure framework (MTEF) that integrates current and capital expenditure, is essential for ensuring consistency between the budget and the development strategy. However, in view of the complexity of this task, the government plans to begin in 2005 with a pilot experiment that could cover several priority sectors (education, health, and public works). The MTEF will adopt a more analytical presentation of the budget structure by program/projects, which will be tracked in accordance with the timetable for budget preparation, and based on a rigorous assessment of costs. This experiment will be used as the framework for revising Organic Law No. 4/85 on the budget, which envisages the introduction of program-based budgets.

26. Considerable efforts have been made to adapt the budgetary nomenclature to international standards, and the functional classification system is expected to become operational in the months ahead. In this connection, the shared expenditure items (water, electricity, and telephone) will be broken down by ministerial department.

27. The provisions of the laws on government accounting and the budget laws will be rigorously observed. This implies the following: (i) reintegration of the special accounts into the budget law beginning in 2005 (structural benchmark); (ii) observance of the limits specified for the complementary period for completing payments on the previous year's budgetary expenditures; (iii) an increased effort to establish the monthly balances of the treasury accounts promptly (two months after the end of the period); and (iv) the rapid regularization of the treasury's suspense accounts and the accounts that present balances anomalies.

28. An in-depth reassessment of budgetary procedures will be conducted in 2004, with assistance from development partners, with a view to eliminating the redundant ex ante budgetary controls (appropriation administrators and the directorates-general of the budget, financial control, and the treasury), as these burden budgetary management. The assessment will also aim to further developing ex post controls and internal and external audits (including by the Auditor General's Office, Cour des comptes). This process will be based upon an in-depth diagnosis of the expenditure circuit and on a public expenditure review scheduled for the second half of 2004 with World Bank assistance. Taken together, these actions will provide the basis for revising Law No. 5/85, establishing the general regulations for government accounting.

29. Significant progress has been made in developing a high-performance integrated information system for the public finances management. In particular, the system makes it possible to monitor the administrative and accounting phases of revenue and expenditure effectively. The computerized system for the treasury's accounts will be replaced by a more updated one, which is expected to become operational in 2005.

30. The government is also committed to improving the financial position of public agencies and local governments, which have become increasingly dependent on central government resources. In this context, the government plans to strengthen the pension system through (i) the timely payment of its obligations to the National Social Security Fund (CNSS), (ii) the rapid conclusion of the CNSS's restructuring plan, and (iii) a restructuring of the National Social Guarantee Fund (CNGS). The CNSS reform is being pursued with assistance from the International Labor Office (ILO) and the World Bank. It entails (i) improving management by strengthening decision-making procedures and accountability toward social partners; and (ii) completing the computerization of all files of those entitled to benefits. To improve the quality of health care and reduce the management costs of the three CNSS hospitals, these have been placed under private management effective March 1, 2004. In addition, the actuarial study on the pension system conducted by the ILO is scheduled to be completed by end-2004. This study will make recommendations aimed at ensuring the equilibrium of the old-age pension system. Revision of the social security code will provide a formal framework for strengthening the social security system. As regards the CNGS, its own resources and budgetary transfers cover less than 50 percent of administrative expenses and benefit costs. In order to increase the CNGS's own resources, Law No. 10/82 of January 24, 1983 will be revised to raise contribution rates to appropriate levels. In addition, the transfers to the CNGS envisaged under the 2004 budget (CFAF 1.2 billion) will be revised upward under the supplementary budget law for 2004. This measure will be accompanied, however, by a plan for reducing the administrative costs of the CNGS from 18 percent to about 10 percent of total expenditure. A performance contract aimed at reducing operating costs and improving services will be concluded with the CNGS before end-September 2004 (structural benchmark).

31. The government has resolved to improve the financial position of local governments, which are facing serious difficulties. To increase their revenue, the government is strengthening the collection of property taxes using property surveys that will permit the proper recording of property and the issuance of tax assessments. The collection of other local taxes, such as the business license tax, will also be strengthened; the tax base for property taxes in Libreville and Port-Gentil will be finalized by end-December 2004 (structural benchmark). An interministerial committee has been established with the participation of the Senate and the Auditor General's Office to make recommendations on local authorities' finances. The report will be finalized and presented to the government before end-October 2004 (structural benchmark), so that a set of measures can be included in the 2005 budget law, but provisional data should be available already by end-August. Data on local authorities' finances (revenue, expenditure, deficit and financing) will be collected regularly and monitored on a quarterly basis by the treasury. Measures have been taken by the treasury to ensure that ceilings on local authorities' expenditures are observed through appropriate cost-cutting measures, including containment of the number of employees and the wage bill.

32. With regard to civil service reform, the government will continue its ongoing efforts to improve the effectiveness of the civil service, in particular by streamlining its structures and containing costs. The draft laws organizing government services and reforming the general civil service regulations are expected to be approved by parliament in 2004. The latter provides for a merit-based promotion system, streamlines the compensation system, and is expected to yield substantial savings on the 2005 wage bill. The new civil service organization charts will be completed before end-December 2004, and the civil service and payroll databases are to be harmonized before end-2004 (structural benchmark), based on the computerized civil service management system (ANITA) being developed.

B. Monetary and Financial Sector Policies

Monetary policy

33. The monetary authorities will continue to pursue monetary policy at the regional level in a manner consistent with the fixed exchange rate regime. The money supply for Gabon is projected to grow by 5.3 percent on average during the 2004-05 period, in line with nominal non-oil GDP growth. Net foreign assets are expected to increase, primarily owing to foreign direct investment. At the same time, fiscal consolidation will allow a reduction of net bank credit to the government. Bank credit to the private sector is expected to expand by about 7.5 percent per year on average after the decline in 2003, in line with the objective for nominal GDP growth in the non-oil sector, as recovery is anticipated in public works and in investment in the forestry, telecommunications, and water and power sectors.

Reform of the financial sector

34. Strengthening the financial sector and maintaining its soundness are essential components of the government's medium-term program. The Financial Sector Assessment Program (FSAP) identified the main structural weaknesses and risks in the Gabonese financial sector as the following: (i) insufficient 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 strengthened the regulations relating to surveillance of the foreign exchange position, provisioning for bad debts, and risk coverage and diversification by credit institutions. COBAC has also increased the number of inspections in recent months. The banks' internal audit function is being strengthened in accordance with COBAC recommendations.

35. In the area of microfinance, a Central African Economic and Monetary Community (CEMAC) regulation establishing the operating conditions for microfinance institutions 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, which could play an important role in revitalizing activity in the agricultural sector. Ultimately, it is envisaged that FODEX might become a structure for refinancing the microfinance networks. Furthermore, the government is aware that revitalizing economic activity requires financing structures, such as savings banks and mutual credit associations, that would enable small savers to obtain loans to launch new small-scale activities. To this end, it will request technical and financial assistance from donors. It is envisaged that credit lines for promoting small and medium-sized enterprises could be opened with local banks, using AfDB resources. Studies to this end are in progress. The government is also considering promoting housing finance by the creation of a system of housing loans related to savings (épargne-logements), and improving efficiency in the issuance of property titles.

36. A CEMAC regulation on money laundering and combating the financing of terrorism was recently adopted, and national financial intelligence units 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 audit system is also being strengthened. Measures have also been taken to modernize the interbank settlements system within the CEMAC.

37. The authorities are taking measures to strengthen the extensive network of the postal checking and saving system, which can play an important role in mobilizing savings. This is part of the restructuring of the post office system after telecommunications operations were spun off in 2001.

38. The Central African Stock Exchange (BVMAC) is being created, and CFAF 1.779 billion in capital has already been subscribed. The stock exchange will support the mobilization of savings and the financing of private sector investment. It is expected to become operational in 2004.

V. Foreign Trade Policy — Balance of Payments and Debt Sustainability Outlook

39. With regard to 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 the import surcharges rapidly. The surcharges on lubricants and mineral water were eliminated in late December 2003, and the only import surcharges still in place are on poultry products and cigarettes; these will be eliminated by end-December 2004 (structural benchmark). The quantitative restrictions on sugar imports will be eliminated by end-2004, in the context of similar measures to be adopted in the other CEMAC countries. However, in view of the need to provide some degree of temporary protection for sugar production in the CEMAC area in response to the subsidies provided in the industrial countries, the government will ask that the CEMAC submit a request to the World Trade Organization (WTO) to authorize temporary protection of the sugar sector at the regional level.

40. As indicated in paragraph 14, the overall balance of payments deficit is expected to increase in 2004 and 2005, reflecting the decline in petroleum exports and the increase in debt service. In view of the magnitude of the arrears on the external debt that must be settled (CFAF 320 billion), the financing gap for 2004 is equivalent to 14 percent of GDP. The projected financing gap for 2005 is equivalent to 5 percent of GDP. To cover these gaps, the government plans to request, in addition to Fund support, a rescheduling of the debt to Paris Club creditors and the commercial banks, including the arrears, which amount to approximately CFAF 470 billion in 2004 and CFAF 150 billion in 2005. In addition, the AfDB is finalizing a structural adjustment credit, of which CFAF 45 billion is to be disbursed in 2004. Budgetary support from the European Union is projected to amount to CFAF 2.5 billion in 2004.

41. In cooperation with Fund staff, the government has updated the debt sustainability scenario. The latter shows that the public debt will peak in late 2004 at 68 percent of GDP but will decline in subsequent years, as the primary budget surplus will be used to reduce domestic debt in 2004-06. The ratio of external debt to GDP is expected to increase from 55.9 percent at end-2003 to 61.6 percent at end-2006, followed by a reduction to less than 50 percent after 2012. The debt-service burden is projected to increase from17.2 percent of export receipts in 2004 to 21.2 percent in 2006; in terms of budgetary revenue, debt service is projected to increase from 32.4 percent in 2004 to 35.5 percent in 2006.

VI. Structural Reforms

42. The government is convinced that wide-ranging structural reforms are essential to facilitate diversification of the economy and reduce poverty. In particular, it will be necessary to promote the development of small and medium-sized enterprises by eliminating administrative and regulatory barriers, strengthening the judicial system, and markedly improving the business climate. To this end, the government is counting on support from donors, including the World Bank, the AfDB, and the European Union.

A. Forestry Sector

43. In the forestry sector, a number of important measures have been implemented in 2004, in keeping with the undertakings set forth in the sector development policy letter prepared in March 2004 in cooperation with the World Bank and other donors. The key measures include the following: (i) preparation in January 2004 of a list of all forestry concessions, which was provided to the Directorate-General of Taxes so as to ensure that all concession holders pay the area tax; (ii) a rigorous follow-up of tax payments by concession holders and termination of noncompliant concessions; (iii) finalization of the national forestry concession map by end-2004; (iv) a prohibition on offering new concessions outside the auction system; (v) the grouping of small concession holders, and the search for financing and the mobilization of resources to enable them to develop sustainable forestry management plans; (vi) the launching of a new study on the role of the SNBG, to be completed by October 2004; and (vii) adoption by end-November 2004 of a time-bound action plan to restructure the SNBG in accordance with the study's recommendations (performance criterion).

44. Given the drop in purchases of logs by Asian customers since November 2003, the need to lower prices for customers who had to cope with a doubling of freight costs, and the appreciation of the CFA franc against the U.S. dollar, a number of steps were taken to reduce the SNBG's operating costs in early 2004, based on decisions by its board of directors of December 19, 2003. These consisted of a staff reduction on the basis of voluntary departures and reductions in other operating expenses, and made it possible to reduce the SNBG's margin on exports of okoumé by 5 percent, assuming a stagnation of export volumes at 950,000 cubic meters in 2004. The port price (prix plage) paid to forestry producers was also cut by 6 percent effective January 1, 2004. These reductions made it possible to lower the price for the final customer and thereby stimulate sales. Since March 2004, there has been a rebound in exports to the Asian market, but it is necessary to continue holding down expenses throughout the sector, including the SNBG's margin, given the persistence of relatively low export prices and the high price of ocean-going freight. To this end, the SNBG is rigorously carrying out the measures adopted by the latest board of directors' meeting, and a report on their implementation has been submitted to the board meeting held at end-April 2004. Furthermore, the study of the timber sector financed by the World Bank and the French Development Agency will examine ways to enhance the effectiveness of the other parties involved in the sector, including port and storage services.

B. Public Enterprise Restructuring and Privatization

45. The government has resolved to complete the public enterprise privatization program now under way with technical assistance from the World Bank. In the agro-food sector, negotiations with a buyer for the sale of the palm oil company (AGROGABON) and the rubber production enterprise (HEVEGAB) are well advanced, and are expected to be concluded before end-April 2004. The sale contract includes a commitment on a sizable investment plan, thus contributing to a recovery in these sectors. As regards Gabon Telecom, the final offers from the prequalified buyers are expected to be made by end-May 2004, and the successful bidder is to be selected by end-September 2004 (structural benchmark). The majority of its capital will be opened during a second stage, when market conditions have improved.

46. The government has retained the services of a consulting firm for the restructuring of the postal service, in agreement with the AfDB. The study was initiated on March 15, 2004 and is expected to be completed by end-August 2004. The aim of the study is to redefine the missions of the postal service (mail and parcel delivery), so that the postal operator renders quality services, provides an adequate universal service level, and improves its financial position. These measures will be part of a medium-term development strategy. The consultants will also assess the possibilities for expanding the postal checking and postal savings account network.

47. The restructuring of the national air carrier (Air Gabon) is continuing in accordance with an operational and financial plan for the 2004-06 period. Important measures have been taken, beginning in 2003, to strengthen the company's administrative and financial management, including the restructuring of the network, renegotiation of lease contracts, development of customer loyalty, and improvement of the invoicing and collection system. These measures were reinforced by the appointment of a new financial director in late 2003, imparting a new impetus to the collection of claims and to cost cutting. These efforts made it possible to reduce the operating deficit before depreciation in 2003 and should allow the achievement of an operating surplus before depreciation in 2004 (structural benchmark). Quarterly financial reports will be communicated to the Ministry of Finance, which will ensure a close monitoring of the implementation of the company's rehabilitation. The government regards these measures as a crucial stage in the privatization of the company. As regards the railroad, the contract for the management and operation of rail activity awarded to SETRAG (Société d'Exploitation du Transgabonais) in 2003 was renewed on February 1, 2004 for an additional 18 months, pending suitable conditions for offering it on a concessions basis again.

C. Private Sector Development

48. The government is convinced that improving the business climate, as well as the legal and regulatory framework, is essential for stimulating the growth of the non-oil sector. In the weeks ahead, the Foreign Investment Advisory Service of the International Finance Corporation (IFC) will conduct a diagnostic study on the impediments to private sector development. This study will be followed by other specific studies on the tax incentives system, the legal and regulatory framework, and the role of the financial sector. Implementation of the recommendations of the study, scheduled to be completed in 2005, will constitute a key component of a possible World Bank Private Sector Development/Diversification project in the context of its Country Assistance Strategy (CAS). Efforts are being made to improve the operation of the one-stop shop for investors (the private investment promotion agency, APIP), in particular by ensuring the adequate staffing of the office of the clerk in the Court of First Instance in Libreville. The APIP, whose budget has been increased, will prepare quarterly reports on the number of newly created firms and on the status of their operations. To promote employment, vocational training centers will be strengthened with donor support in order to address the significant unmet demand for qualified staff. These centers should provide training that is more focused on meeting business demands.

49. Moreover, the government is continuing to improve the functioning of the judicial system and legal environment, including by making the property registry (cadastre) more efficient and issuing land tenure titles. In recent years, efforts have been focused on rehabilitating courthouses, computerizing the clerk's office at the Commercial Tribunal in Libreville, and training and improved working conditions for judges. The Uniform Acts of the Organization for the Harmonization of Business Law in Africa (OHADA), in particular as regards commercial law, company law, summary debt collection procedures, and arbitration, have helped clarify the legal framework for business. During the period of the program, judicial training efforts will be intensified and mechanisms established for facilitating recourse to arbitration as a means of resolving business disputes. In order to speed up the registration of real property, the cadastre will be reorganized in coordination with the Directorate-General of Taxation.

50. The government will continue to accord priority to the development of sectoral programs in the infrastructure area, which are essential for supporting the expansion of economic activity. In this context, generalized application of the procedures followed in the World Bank's PROTOTIPPE project for public investment execution will make it possible not only to improve the effectiveness of public expenditure, but also to support the development of small and medium-sized enterprises. The government is counting on donor support for continuing the PAPSUT (Priority Action Program for the Urban Sector and Transportation), which is aimed at improving the road network and rehabilitating ports, with a view to reducing factor costs. In addition, the placement under private management, since April 1, 2004, of a portion of the activities of the ports of Owendo and Port Gentil as part of a 15-year concession arrangement should enhance the efficiency of port operations and improve external competitiveness. Similarly, the modernization of telecommunications services will be essential to private sector development.

51. To improve the regulatory framework for the private sector, the government is envisaging the adoption of the implementing modalities for the mining code by end-2004 (structural benchmark). The government will endeavor to liberalize domestic trade by improving competition and market access; to that end it will take into account the recommendations that will be made by the study on the investment climate, to be conducted soon by the Foreign Investment Advisory Service of the International Finance Corporation. The new Directorate-General of Competition and Consumption, which replaced the Directorate-General of Price Controls in 2003, will be responsible for promoting respect for the free play of competition and the defense of consumers.

D. Good governance

52. The National Commission Against Illicit Enrichment (CNCEI) has already begun its prevention work by organizing consciousness-raising workshops with financial administrations and other spending agencies. It decided to organize its activities under two separate subcommittees, the Prevention and Education Subcommittee and the Investigation Subcommittee, in accordance with the recommendations of IMF- financed experts. A first activity report will be submitted by end-December 2004 (structural benchmark). The budget law for 2005 will include adequate provisions for the operation of the CNCEI (structural benchmark). The Directorate-General of Public Procurement, established in 2003, has begun the audit of the Road Maintenance Fund and will audit the execution of the works carried out under the capital budget relating to the Independence Day celebrations. In addition, it is responsible for auditing the services delivered under government contracts for amounts in excess of CFAF 30 million. The government plans to adhere to the Extractive Industries Transparency Initiative, and to this end contacts are in progress with the international community to finalize the adherence modalities.

E. PRSP Preparation Process

53. The government intends to complete the preparation of a final PRSP in early 2005, with the assistance of donors, and the World Bank and International Monetary Fund plan to conduct a joint assessment of this paper. The paper will draw onthe results of a participatory survey on the perception of poverty (EPP) conducted in 2003, the household expenditure survey of 2003, and the General Population and Housing Census (RGPH) recently completed, as well as on the national quantitative survey on poverty, to be carried out from March to July 2004 with donor support. Moreover, donors will help the government conduct a participatory survey on poverty, to be completed by end-September 2004. The major objectives pursued in the poverty reduction strategy are focused around seven priority areas: (i) reduce unemployment; (ii) halt the rural economic decline; (iii) improve access to basic social services; (iv) revitalize the social safety nets; (v) ensure that the poor have better living conditions; (vi) prepare a gender-focused program; and (vii) introduce integrated and efficient governance. The authorities are preparing master plans for the sectors most involved in poverty reduction (education, health, housing, and fighting against unemployment), which will include a quantification of the costs of the related spending programs. These costs will have to be compatible with the medium-term budget framework, and will be used in preparing the 2005 budget law, as well as the public investment program and medium-term expenditure framework covering the 2005-07 period. The findings of the quantitative survey on poverty will be used to update the social indicators, which will be revised annually through additional surveys. The monitoring of PRSP implementation, and its annual assessment and updating, will be carried out by a steering committee to be created during 2004.

VII. Program Monitoring

54. Program implementation will be monitored in quarterly reviews with the Fund and by using quantitative and structural performance criteria and benchmarks. Quarterly quantitative performance criteria and indicative targets for 2004 are presented in Table 1, while structural criteria and benchmarks are in Table 2. Table 2 also includes prior actions.

Table 1. Gabon: Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement, 2003–04
(In billions of CFA francs; cumulative flows from January 1) 1/






Performance criteria
   Ceiling on the net claims of the banking system on the
   central government 2/
      Adjusted target 2/
   Ceiling on the contracting or guaranteeing of new
   nonconcessional external debt with maturity of over
   one year by the central government 3/
   Ceiling on outstanding stock of new nonconcessional
   external debt with original maturity of one year or less
   owed or guaranteed by the central government 4/
   Ceiling on the accumulation of external payments
   arrears by the central government 5/
   Stock of arrears on domestic debt of the central
   government 6/
   Floor on the primary fiscal balance of the central
   government, excluding grants and foreign-financed
   investment (on a payments order basis) 7/
      Adjusted target 7/
Indicative targets
   Floor on non-oil central government revenue
   Ceiling on the central government wage bill on a
   payments order basis
   Ceiling on total noninterest domestic expenditure of
   the central government, on a payments order basis 8/
   Floor on current expenditure for the sectors of
   education, health, and social assistance.
   Floor on the net reduction of unpaid payments
   orders at the treasury 9/
Memorandum items:
   Nonproject external financing disbursements
   (excluding IMF)
   External debt service due (excluding IMF)
   Domestic debt service due
   Oil revenue
   Rescheduling of external debt 10/
   Privatization proceeds

Sources: Gabonese authorities; and staff estimates and projections.

1/ Indicative targets for March 2004. Targets for June, September, and December 2004 are performance criteria under the Stand-By Arrangement.
2/ The performance criterion will be adjusted upward/downward for any lower/higher oil revenues, larger/lower payment of external debt service (net of nonproject external financing disbursements), larger/smaller net reductions in domestic arrears, and smaller/larger privatization proceeds, relative to program targets. The performance criterion will be revised upward for higher-than-programmed reduction in the float up to a limit of CFAF 13 billion. The performance criterion will be adjusted downward for unprogrammed rescheduling/deferment on domestic debt in excess of CFAF 13 billion.
3/ This performance criterion 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 performance criterion are rescheduling arrangements and purchases from the Fund. For purposes of this performance criterion, 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).
4/ Excluded from this performance criterion are rescheduling arrangements, purchases from the Fund, and normal import-related credits.
5/ The nonaccumulation of new external payments arrears will constitute a continuous performance criterion.
6/ As defined in paragraph 10 of the technical memorandum of understanding (TMU). The ceiling will be adjusted downward for unprogrammed rescheduling/deferrals.
7/ The performance criterion on the primary fiscal balance will be adjusted upward/downward for any higher/lower-than-programmed oil revenue.
8/ Noninterest spending excluding foreign-financed investment.
9/ Including the reduction of arrears on the wage bill and the payment of compensation for social violence. Excess oil revenue, or unprogrammed rescheduling/deferment on domestic debt, can be used for additional reduction of the float, up to CFAF 13 billion.
10/ These amounts represent end-2003 stock of arrears and the obligations falling due in 2004 that could be rescheduled.


Table 2. Gabon: Prior Actions, and Structural Performance Criteria and Benchmarks Under Proposed Stand-By Arrangement, 2004-05

Implementation Period

Prior actions
Budgetary execution through end-March 2004 in line with program targets, including the non accumulation of non-reschedulable external arrears  
Adoption by Council of Ministers of the letter of development policy for the forestry sector, prepared in consultation with the World Bank, including a priority agenda for 2004-05 (MEFP, para. 43).  
Selection of consultant to conduct the study to restructure the timber marketing board SNBG and redefine its role (MEFP, paras. 11 and 43).  
Transmittal to Fund staff of the report by SNBG on the implementation of the cost-cutting measures adopted by the company's board on December 19, 2003 (MEFP, para. 44).  
Entry into effect of the set of measures to reduce the wage bill, agreed during the March 2004 Fund staff mission (MEFP, para. 22).  
Abrogation of the Prime Minister's decree of April 2, 2004 widening the list of products under the price surveillance regime (MEFP, para. 14).
Structural performance benchmarks
Fiscal policy/Development of the private sector
Adoption of a decree establishing the large enterprise tax unit within the tax administration department, which covers all enterprises with annual turnover over CFAF 1 billion (MEFP, para. 19).
End-September 2004
Forestry Sector  
Adoption of time-bound action plan to streamline SNBG, on the basis of World Bank financed study (MEFP, para. 43).
End-November 2004
Structural benchmarks
Civil service reform  
Harmonization of the civil service and payroll rosters, based on the computerized civil service management system (ANITA) (MEFP, para. 32).
End-December 2004
Fiscal policy  
Integration in the 2005 government budget of all special funds (MEFP, para. 27).
End-December 2004
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 (MEFP, para. 19).
Continuous benchmark
Completion of assessment of stock of wage arrears (MEFP, para. 23).
End-September 2004
Finalization of taxable base for local real estate taxation for Libreville and Port-Gentil (MEFP, para. 31).
End-December 2004
Establishment of detailed budgetary appropriations for the investment expenditures, according to the budgetary classification, in the 2005 Budget Law submitted to parliament (MEFP, para. 24)
End-December 2004
Entry into effectiveness of budgetary credits for the 2005 budget before end- February 2005 (MEFP, para. 24).
End-February 2005
Establishment of a performance contract with the National Social Guarantee Fund, CNGS (MEFP, para. 30).
End-September 2004
Issuance of interministerial report on local authorities' finances (MEFP, para. 31).
End-October 2004
Preparation of a study with recommendations to prioritize the university scholarship system (MEFP, para. 22).
End-October 2004
Good governance  
Preparation of the first report on the operations of the Commission Against Illicit Enrichment (MEFP, para. 52).
End-December 2004
Inclusion in the 2005 budget of an adequate operational budget for the National Commission Against Illicit Enrichment (MEFP, para. 52)
End-December 2004
Development of the private sector  
Selection of the successful bidder for Gabon Télécom (MEFP, para. 45).
End-September 2004
Adoption of the implementation regulations for the mining code (MEFP, para. 51).
End-December 2004
No recourse to price control measures, and no widening of the list of products subject to the price surveillance regime at end-December 2003 (MEFP, para. 14).
Continuous benchmark
Public enterprises  
Achievement of a surplus in 2004 in the operational results of Air Gabon, before depreciation (MEFP, para. 47).
End December 2004
Trade reform  
Removal of import surcharges on poultry and cigarettes (MEFP, para. 39).
End December 2004


Technical Memorandum of Understanding

1. This memorandum spells out the understandings for the monitoring of program implementation, and the reporting requirements for the period May 2004-June 2005. In this context, it defines (a) the quantitative performance criteria; (b) the structural performance criteria and benchmarks; (c) the quantitative indicative targets; (d) the adjusters for the quantitative performance criteria; and (e) the key assumptions used in the formulation of the program for 2004-05 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 May 6, 2004.

A. Monitoring of Program Implementation

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

B. Quantitative Performance Criteria, Quantitative Indicative Targets and Adjusters
Quantitative performance criteria and indicative targets

3. The quantitative performance criteria are specified in Table 1 of the MEFP attached to the letter of May 6, 2004. The quantitative performance criteria 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 contracted or guaranteed by the central government;
  • 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 central government;
  • a zero limit on the accumulation of external payments arrears by the central government (a continuous performance criterion);
  • a ceiling on the stock of domestic payments arrears of the central government (as defined in paragraph 10) ; and
  • a floor on the primary fiscal balance of the central government, on a payments order basis (excluding foreign-financed investment, FINEX, cumulative from January 1st).

4. The program includes adjusters for the quantitative performance criteria as specified in paragraphs 20-24 below and in footnotes 2, 6 and 7 of Table 1 of the MEFP.

5. The quantitative indicative targets (cumulative from January 1st) are as follows:

  • a floor on central government non-oil revenue;
  • a ceiling on the total central government wage bill, on a payments order basis;
  • a ceiling on total noninterest expenditure, on a payments order basis;
  • a floor on current expenditure for the sectors of education, health and social assistance, as defined in paragraph 17; and
  • a floor on the reduction of the float at the treasury, wage arrears (rappels) and obligations resulting from political violence.

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, excluding deposits of the postal checking account system.4 As of December 31, 2003, this outstanding amount was CFAF 231.9 billion, and its breakdown was as follows:

Net Claims of the Banking System on the Central Government(In billions of CFA francs)
Statutory advances from the BEAC
Plus: CFA franc counterpart of use of Fund resources
Plus: consolidated advances
Minus: deposits at the BEAC
   Of which: Account for Future Generations
Plus: net borrowing from the commercial banks1

7. The Account for the Fund for Future Generations (AFFG) at the BEAC will be fed in 2004 by 10 percent of oil revenue and oil revenues in excess of the programmed levels (based on program baseline assumptions detailed in para. 26). The use of AFFG resources is discussed in paragraphs 20-21. The AFFG is part of the net claims of the banking system on the central government.

8. The performance criteria on nonconcessional external debt are ceilings on new nonconcessional external debt. The performance criterion on the contracting and guaranteeing of new nonconcessional debt with maturity over one year by the central 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 performance criterion are rescheduling arrangements and purchases from the IMF. The performance criterion on the outstanding stock of nonconcessional external debt,5 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 by the central government 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 stock of domestic payments arrears of the central government corresponds to the stock of payments arrears on: (i) interests on treasury debt, securitized commercial agreement, "other" debts, and bank debt; (ii) the principal on securitized commercial debt agreements and "other" debts.6 At end-December 2003, the stock of domestic payments arrears amounted to CFAF 21.2 billion, of which CFAF 4.6 billion on interests and CFAF 16.6 billion on principal.

11. The treasury float consists of the "payment orders at the treasury" and the "other treasury float."7 The "payment orders at the treasury" corresponds to the difference between the cumulative payment orders (ordonnancements)8 and the cumulative actual payments (checks encashed—cash basis). At end-December 2003, the central government's domestic payments arrears amounted to CFAF 94 billion, comprising CFAF 84,7 billion in outstanding treasury float and CFAF 9.3 billion in "other treasury float." The net reduction of the treasury float is defined as the reduction in the float existing at end-2003, excluding the accumulation of new float during 2004.9

12. Total central government revenue is measured on a cash basis and includes offsetting revenue and expenditure operations, including private sector tax obligations offset against central 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).

13. Total central government expenditure include spending on payment order basis (ordonnancements), and treasury advances (avances à régulariser), and outlays on special funds and earmarked revenues. The quantitative indicative target on total noninterest expenditure excluding foreign-financed investment (FINEX) is calculated on the basis of this definition.

14. The primary fiscal surplus, on a payment order basis (ordonnancements), is defined as the difference between (a) total central government revenue (excluding grants) on a cash basis; and (b) total noninterest current expenditure plus investment expenditure (excluding foreign-financed investment), net lending, and outlays of the Road Fund and on earmarked revenues.

15. The indicative target on the central 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.

16. The wage arrears (rappels) correspond to the unpaid financial impact of advancement promotion of civil servants at end-2002 (line 1281 of the budget).

17. Expenditure for the education and health sectors correspond to spending on goods and services for education, health and social affairs services. Under the quantitative indicative target for 2004, the following outlays will be monitored: (i) expenditures on goods and services for the Ministries of Education, Health, Social solidarity, social affairs and well-being, Family and child protection (title 5, chapters 81, 82, 84, 91, 93 and 94); and (ii) transfers and subsidies in favor of private education and social safety nets of the Ministries of National solidarity and Family (lines 6421 and 6511 under chapters 81, 93 and 94).

18. 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".

19. 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 other treasury operations correspond to the change from period to period in the balance of these accounts. The Government will provide information on the balance of all these accounts on a monthly basis to the IMF.

Adjustments to quantitative performance criteria

20. A specific contingency mechanism for oil revenue is established for 2004-05, given the importance of oil for the Gabonese economy and the uncertainties regarding oil prices and output. 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 central 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, the exchange rate and/or output are lower than projected in the baseline scenario), the shortfall could be offset by additional net bank credit-with an upward adjustment in the ceiling on net credit from the banking system to the central government, and a downward adjustment in the floor on the primary fiscal balance. The cumulative ceilings to the adjustor are CFAF 17.0 billion for end-June, CFAF 25.5 billion for end-September, and CFAF 34.0 billion (about 1 percent of GDP) for end-December 2004. If the oil revenue shortfall exceeds the maximum adjustor, the quarterly fiscal targets will be reassessed in consultation with Fund staff.

21. The Government will be able to use part of the excess oil revenue (up to a cumulative maximum of CFAF 13 billion (0.3 percent of GDP)) to reduce the float at the treasury, over the programmed amount.10

22. The program also includes (downward/upward) adjusters for the benchmarks on net credit from the banking system to the central government for (i) lower/higher-than programmed external debt service effectively paid11 (net of nonproject external financing disbursements); (ii) lower/higher-than-programmed net reduction of domestic arrears; and (iii) higher-than-programmed net reduction in the float at the treasury during 2004. The upward adjustment in the performance criterion on net bank credit to the central government under (iii) is limited at CFAF 13 billion.

23. In case of a rescheduling/deferment is obtained on current maturities on domestic debt managed by the Debt department (securitized commercial agreements and "other" debt agreements), the resulting margin could be used to reduce additional float at the treasury, up to a limit of CFAF 13 billion above program targets. The unused margin will be deposited at the BEAC.

24. The program also includes a symmetric (downward/upward) adjuster for the net bank credit to the central 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, expected external debt rescheduling, and privatization proceeds are indicated in Table 1 of the Memorandum.

C. Structural Performance Criteria and Benchmarks

25. The structural performance criteria and benchmarks are specified in Table 2 of the MEFP attached to the letter of May 6, 2004.

D. Key Assumptions of the 2004-05 Program

26. 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)12
Exchange rate (CFA francs per US$1, annual average)

E. Reporting Requirements

27. 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 to the IMF's African Department, within the four weeks following the end of period, 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 central government with the BEAC (PNG) and net credit from the banking system to the central government, with a separate line for the Account of the Fund for Future Generations;

(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 (electronic file);

(g) the details on the stock of external and domestic debt at the end of each month (electronic file);

(h) the details for the outstanding stock of domestic arrears (month to month) and the cumulative flows from January 1st, 2004: the net accumulation of new arrears during 2004 as defined in paragraph 11 by the difference between payment orders (ordonnancements) and payments made (cash basis), as well as the repayment of pre-2004 arrears, with both items to be broken down by wages and salaries, goods and services, transfers and subsidies, interest, capital expenditure, and net lending; any stock-flow adjustment not consistent with flows should be explained (electronic file).

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

(j) 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 (electronic file);

(k) monthly information on the oil sector: export prices, effective exchange rate, production per oil field, exports, based on data from the Direction Générale des Hydrocarbures (electronic file);

(l) 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 categories on the basis of customs data, log production and exports (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;

(m) a status report on the implementation of the structural reforms specified in Table 2 of the MEFP attached to the letter of May 6, 2004; and

(n) quarterly data on the finances of local authorities.

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.

1 The SMP was presented to the Board in the context of the 2003 Article IV consultations held on November 10, 2003.
2 Under the SMP, a reduction in the treasury float above the program target gave rise to an upward adjustment of the net credit to government benchmark.
3 As regards the arrears of the Road Maintenance Fund, whose expenditures were not incorporated into the budget until 2004, repayment will be preceded by an audit of claims by the procurement directorate or by an independent audit firm.
4 The deposits of the postal checking account system are excluded since they are not at the disposal of the treasury.
5 The 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)
6 The nonbank 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 2003; (b) the debt of the treasury; and (c) "other" debts, 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.
7 The "other treasury float" includes the accounts on "subsidies," "consignments," "accounting agencies," including "transfers between accounting offices" related to budgetary operations, and "installments to be allocated."
8 As defined below in paragraph 13.
9 Under the program, payments for wage arrears ("rappels") and compensation for political violence are considered as a reduction in the float at the treasury.
10 Payments for wage arrears ("rappels") and compensation for political violence are considered as a reduction in the float at the treasury.
11 External 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.
12 The average conversion rate is 7.3 barrels per metric ton.