Press Release No. 98/16

The International Monetary Fund (IMF) today approved the third annual loan under the Enhanced Structural Adjustment Facility (ESAF)¹ equivalent to SDR 16.52 million (about US$22 million), to support Chad’s economic program for 1998-99. The loan is available in two equal semiannual installments, the first of which will be made available on May 6, 1998.

Background

In July 1995, the government of Chad adopted a medium-term economic recovery strategy designed to establish the basis for sustainable economic and social development. Comprehensive reforms have been undertaken since then. On the fiscal side, the reforms focused on revamping indirect taxation and customs tariffs, and strengthening and modernizing tax administration. Structural reforms were aimed at liberalizing the economy and foreign trade, as well as stimulating private initiative, in particular privatizing or liquidating 25 public enterprises, abolishing import and export licenses, streamlining the labor code, liberalizing most prices, and implementing a new mechanism for determining the producer price for cottonseed. These reforms have allowed Chad to make significant progress toward achieving a sustained economic recovery, with real GDP growing by 3.6 percent a year on average, despite unfavorable weather conditions, and yearly inflation reduced to 5.6 percent. Also, the current fiscal deficit was reduced to 0.7 percent in 1997 from 2.8 percent in 1995, while the external current account deficit averaged 19 percent of GDP during 1995-97. Nevertheless, despite this encouraging performance, Chad’s economy continues to be dependent on an insufficiently diversified agricultural sector, a narrow industrial sector, and weak trade and transportation sectors, and remains hampered by poor infrastructure and shortage of skilled human resources. At the same time, the position of public finances remains fragile.

The 1998-99 Program

The government’s overall objective is to strengthen macroeconomic adjustment, with a view to reducing financial imbalances and achieving sustainable growth. The key macroeconomic targets of the 1998-99 program are to (1) achieve annual real GDP growth of 6 percent; (2) limit annual inflation to 3.5 percent; and, (3) contain the current account deficit at 17 percent of GDP in 1998. To achieve these objectives, the authorities will strengthen the fiscal adjustment effort launched in previous years. While the overall budget deficit, on a commitment basis, will be limited to 8.6 percent of GDP, the current budget for 1998 projects a surplus of 0.7 percent of GDP, to be achieved through an increase in total revenues by 36 percent to 9 percent of GDP, from 7.3 percent of GDP in 1997, driven in part by improvements in the efficiency ofrevenue collection, tightening controls on exemptions, and strengthening the customs directorate and computerizing its operations. Expenditures, will be restructured in favor of health and education, and a comprehensive reform of the civil service will be initiated. The regional monetary authorities will maintain a prudent policy stance, in line with the program objectives for low inflation, while consolidating foreign exchange reserves.

Structural Reforms

Under the program, the government will pursue structural reforms to enhance the efficiency of the productive sectors of the economy and improve government revenues. In this context, the government will restructure the cotton, sugar, electricity, water, and telecommunications sectors, which will include the privatization of state-owned corporations. Also, actions are being taken to strengthen the banking system and increase competition, notably through the privatization of the two remaining state-owned banks.

Addressing Social Needs

The government will continue to implement social policies to achieve a substantial reduction in poverty. These policies will aim in particular at expanding the education and training system, improve health services, control population growth, and strengthen the role of women in Chad’s economic and social development. The government will also step up labor-intensive public works projects, improve urban lighting and household refuse collection, and increase access to drinking water in rural areas.

The Challenge Ahead

Chad’s medium-term balance of payment outlook will be affected by the development in the oil sector. The external current account deficit is expected to widen in 1999-2000 as the gains in terms of increased export volumes are expected to be more than offset by the sharp rise in imports connected with investment related to the exploitation of oil reserves. Overall financing requirements are expected to be mostly covered by official transfers and concessional loans. Chad joined the IMF on July 10, 1963, and its quota² is SDR 41.3 million (about US$56 million). Its outstanding use of IMF financing currently totals SDR 44 million (aboutUS$59 million).

Chad: Selected Economic Indicators 1995 1996 1997 1998* 1999** 2000** (Percent change) Real GDP 0.9 3.5 6.5 6.0 6.0 6.1 Consumer prices (average) 9.5 11.3 5.6 3.5 3.3 3.0 (Percent of GDP) Overall budget balance, commitment basis; excluding grants (deficit-) -11.9 -11.0 -9.9 -8.6 -9.0 -8.7 External current account balance, excluding official transfers (deficit-) -18.9 -19.2 -20.2 -17.0 -19.3 -19.1 (Months of imports) Gross official reserves 4.0 4.3 3.1 3.0 2.7 2.7 Sources: Chad authorities; and IMF staff estimates and projections. *Program. **Projection. 1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5½-year grace period. 2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.