Public Information Notice No. 13/50

Public Information Notice: IMF Executive Board Concludes 2012 Article IV Consultation with Chad

May 14, 2013

On December 14, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chad on a lapse of time basis. Under the IMF’s lapse of time procedures, the Executive Board completes the Article IV Consultations without convening formal discussions.¹

Background

Economic performance in 2011–12 has been marked by increased oil exploration, weather shocks, and coming on stream of several large industrial projects. A severe drought provoked a food security crisis and a sharp increase in inflation in late 2011. Some fiscal consolidation was achieved in 2011 but was largely reversed in 2012.

After a strong recovery in 2010, real gross domestic product (GDP) growth slowed to 1.7 percent in 2011 as oil production declined and the drought affected agricultural production. Helped by high international prices of crude oil and the completion of several large, foreign-financed industrial projects, the balance of payments posted a surplus.

In 2012, real GDP growth is estimated to have rebounded to about 5½ percent, driven by the coming on stream of several industrial projects and a recovery in agriculture. Inflation is expected to drop to about 6 percent at year’s end, if the effects of the recent floods on food prices remain contained.

In the near term, growth will be stimulated by public investments in infrastructure and bringing on stream new oil developments. In the medium term, oil production is expected to rise, with a corresponding increase in exports and government revenues. However, absent further oil discoveries, proven reserves will be exhausted in twenty years.

In the area of public financial management (PFM), the repeated use of emergency spending procedures has led to significant budget overruns. Subsidies to public enterprises have surged, and the policy framework for public enterprises remains a challenge.

The public debt-to-GDP ratio increased significantly in recent years and will likely rise further over the medium term, reflecting the impact of the Master Facility Agreement (MFA) signed in 2011 with the Eximbank of China.

Chad’s weak business climate is perceived as an obstacle to private sector development. The shared awareness of the problem between the local business community and the authorities is promising but the task ahead is challenging.

Financial sector conditions have improved since the 2011 Financial Sector Assessment Program mission, owing to the recapitalization of state-owned banks, strong growth of several private banks, and technological innovations, including mobile banking. Nevertheless, private sector access to financial services remains limited and the banking system remains excessively exposed to the government.

Executive Board Assessment

In concluding the 2012 Article IV Consultation with Chad, Executive Directors endorsed staff’s appraisal as follows:

The improved security situation, strong oil revenue receipts, and prospects for additional oil production coming on stream over the next few years create a unique opportunity for Chad to address its development and poverty reduction needs. To capitalize on these favorable circumstances, Chad needs a medium-term strategy for transforming the oil windfall into a source of sustainable growth for the non-oil economy, putting in place a market-oriented policy framework for the new enterprises, and introducing public financial management reforms to optimize the use of additional oil resources.

Chad’s vulnerability to weather shocks came to the fore in the context of the 2011 drought and recent floods. Staff welcomes the broadening of the policy focus from the emergency response toward building resilience. To this effect, the cost of implementing the contemplated policies to address food security should be properly evaluated and provided for in the budget, including sufficient appropriations for the replenishment of buffer stocks and the implementation of a multi-pronged strategy to strengthen Chad’s resilience to weather shocks.

The relatively good fiscal performance registered in 2011 helped steer the economy toward medium-term sustainability; however, weaker fiscal discipline in 2012 reignited concerns about the course of fiscal policy. The 2012 supplementary budget deviates from a sustainable path. The envisaged expansion of the deficit also entails a draw-down of the deposits at the Banque des Etats de l’Afrique Centrale and thus delays the realization of financial savings to protect Chad against the risk of a downward shift in international oil prices.

The authorities should uphold the central role of the budget as a fiscal policy instrument and press ahead with PFM reforms. Currently, the budget does not accurately reflect the government’s economic policies and the continued recourse to extra-budgetary spending undermines the implementation of stated budget objectives. The lack of progress on PFM reforms entails unnecessary costs. To remedy these shortcomings, the authorities should follow through on the implementation of their PFM reform agenda. These reforms should be accompanied by the strengthening of institutional, technical, and human capacities of the Ministry of Finance and Budget (MFB) and the harmonization of local practices with the new directives of the Communauté Economique et Monétaire de l’Afrique Centrale (CEMAC).²

The early experience with the new public enterprises underscores the importance of putting in place an appropriate market-oriented policy framework for these companies. The authorities’ intention to reduce subsidies for public enterprises is welcome. However, to ensure that these enterprises contribute to the development of a modern industrial fabric in Chad, they should have a degree of freedom in price setting consistent with cost recovery. And, a regulatory framework for healthy competition should be established in the sectors susceptible to monopolistic practices. For the oil refinery, it remains crucial to find an export outlet for its excess production to increase its capacity utilization and improve its financial condition.

Public domestic and external debt levels remain manageable for the time being, but the authorities’ intention to scale up foreign debt-financed public investment entails an elevated risk of debt distress. The authorities are encouraged to calibrate their public investment policy, taking into account Chad’s debt service capacity and its high vulnerability to oil price shocks. Being a low income country, Chad should seek highly concessional terms for its external loans. The authorities are encouraged to seek to resolve the incompatibility between the MFA and debt sustainability objectives.

The 2013 budget should be anchored on the objective of medium-term fiscal sustainability, taking into account the need to build a precautionary savings cushion. Given the firm expectation of a significant increase in oil revenue from the new oil projects coming on stream in the near term, staff currently recommends a non-oil primary deficit (NOPD) path that is less constraining compared with the path in the 2011 Article IV consultation. Nevertheless, starting with 2013 and over the medium term, a gradual tightening of the NOPD would be required to offset the expected decline in oil revenues over the long term. This gradual tightening would generate savings, primarily, to serve as a cushion against an oil revenue shock, but also to help smooth the transition to the post-oil era.

The publication of the White Book by the National Council of Employers of Chad is an important step toward improving Chad’s business climate. The authorities are encouraged to work closely with the business community to further the agenda outlined in the White Book, in particular by improving the legal environment for private enterprises, making tax policy more business-friendly, professionalizing tax and customs administration, and developing the key elements of infrastructure.

The recapitalization of state-owned banks improved financial stability indicators but the concentrated exposure of banks to the public sector remains a source of risk. In the short term, to mitigate this risk, banks are encouraged to continue holding capital buffers in excess of the required minimum 8 percent. Looking forward, a durable solution to this problem would come from greater private sector participation, which should be encouraged, including by setting incentives for informal sector enterprises to migrate to the formal sector. Further, the strengthening of the centralized credit registry would help contain credit risk, and the implementation of the anti-money laundering framework would help strengthen governance.