Press Release No. 05/30

Press Release: IMF Executive Board Approves US$38.2 Million PRGF Arrangement for Chad and Grants Additional Interim Assistance of US$2.1 Million Under the Enhanced HIPC Initiative

February 16, 2005

The Executive Board of the International Monetary Fund (IMF) today approved a three-year arrangement under the Poverty Reduction Growth Facility (PRGF) for Chad in an amount equivalent to SDR 25.2 million (about US$38.2 million) to support the government's economic program into 2008. The first disbursement under the arrangement will amount to SDR 4.2 million (about US$6.4 million).

In addition, the Board granted additional interim assistance under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in an amount equivalent to SDR 1.375 million (about US$2.1 million). This amount covers 13.2 percent of Chad's principal obligations due to the IMF between March 1 and December 31, 2005.

Following the Executive Board's discussion of Chad, Ms. Anne O. Krueger, First Deputy Managing Director and Acting Chair, stated:

"The Chadian authorities have continued to strengthen economic management and improve transparency. They made substantial progress in 2004 in finalizing the institutional arrangement for the transparent management of oil resources, and took measures to curtail expenditure in response to substantial shortfalls in external budget support and non-oil revenue, and to eliminate external payments arrears. Economic growth was high, inflation remained subdued, and the external position continued to strengthen.

"Notwithstanding this progress, Chad continues to face daunting challenges, including widespread poverty and important impediments to growth. The authorities need to continue efforts to manage the oil revenue in an efficient and transparent manner to reduce poverty, while preserving macroeconomic stability and long-term fiscal sustainability. Decisive progress is also needed on structural reforms, particularly in the cotton sector, to lay the foundations for a sustained expansion of the non-oil sector.

"The authorities' medium-term program, supported by a new PRGF arrangement, aims to create conditions for sustained private sector-led growth and poverty reduction, consistent with the objectives laid out in Chad's poverty reduction strategy. A key objective of the program is to ensure that oil revenues are effectively used to support lasting poverty reduction. Within this overall framework, the program focuses on consolidating the fiscal position through measures to enhance non-oil revenue collection, and strengthen the budgetary process as well as expenditure policy.

"The authorities are committed to accelerating structural reforms in key areas critical for improved governance and increased economic efficiency. They have put a particular emphasis on reforms of the cotton and energy sectors and the civil service. Progress in these areas, together with increased investment in infrastructure programmed for 2005, will contribute to productivity gains in the non-oil economy. Regarding the cotton sector, the authorities will prepare a reform strategy, in consultation with the World Bank, aimed at determining a timeline for the privatization of the cotton company, Cotontchad, and measures to strengthen producers' organizations.

"The authorities have continued efforts to meet structural conditions for the completion point under the enhanced HIPC Initiative. Progress has been marked in the education, health, and infrastructure sectors. Timely implementation of outstanding structural measures, as well as satisfactory performance under the new PRGF arrangement, will pave the way for Chad to reach the completion point under the HIPC Initiative," Ms. Krueger stated.

Background

Chad has made progress in recent years in macroeconomic stabilization and economic reforms. Nevertheless, it remains one of the poorest countries in the world, and continues to face important impediments to growth. The advent of oil production in late 2003 constitutes a unique opportunity for the authorities to reduce poverty substantially and make progress toward the Millennium Development Goals. This, however, requires continued efforts to strengthen economic policies and implement structural reforms needed to sustain private sector-led growth and improve Chad's medium-term growth prospects.

Growth performance averaged 10 percent a year since 2001, fueled by the construction of the Chad-Cameroon pipeline. In 2004, growth was limited to about 2 percent in the non-oil economy, because of the impact of low rainfall and of the desert locust infestation on agricultural output, and weak domestic demand. Inflation remained subdued, mainly reflecting a bumper crop in the preceding year. Chad's external position strengthened further with the significant increase in oil exports and the decline in imports following the completion of the oil pipeline construction. Fiscal performance was mixed in 2004. Despite spending cuts, shortfalls in revenue and external budget support led to an accumulation of domestic and external payments arrears.

In 2003-04, Chad made progress in implementing structural reforms aimed at strengthening expenditure management and improving transparency. In particular, the authorities nearly completed the institutional framework for the efficient management of oil revenue and put in place a computerized system for expenditure management. However, reforms in the cotton sector suffered considerable delays. The authorities continued efforts to meet conditions for reaching the completion point under the enhanced HIPC Initiative.

Chad reached the decision point under the enhanced HIPC Initiative in May 2001. Committed debt relief totaled US$170 million in net present value terms, including today's interim assistance, which is part of the IMF's share of HIPC Initiative relief, which amounts to US$18 million in net present value terms.

Program Summary

Chad's new PRGF-supported program aims to strengthen growth prospects and reduce poverty. It focuses on consolidating the fiscal position through improved non-oil revenue collection and strengthened expenditure and cash flow management. It also envisages further progress in structural reforms, particularly in areas critical for economic efficiency and governance.

Key macroeconomic objectives for 2005-07 are to achieve an annual real non-oil GDP growth rate of about 5.5 percent a year; limit annual inflation to about 3 percent; and reduce the external current account deficit (excluding official transfers) to 4.4 percent of GDP by 2007.

The program seeks to achieve a sustainable fiscal position over the medium term, while ensuring an efficient use of oil revenue for poverty reduction. Hence, it aims to narrow the non-oil primary base deficit to 4.1 percent of non-oil GDP by 2007, through the implementation of measures to strengthen non-oil revenue performance and a prudent expenditure policy. Structural reforms to strengthen budgetary procedures, as well as expenditure and cash management, will be critical for the achievement of fiscal objectives under the program.

The structural reform agenda includes measures to improve public sector efficiency through reforms in the civil service and in the energy and cotton sectors. The civil service reform focuses on enhancing personnel management. In the energy sector, the objective is to increase energy supply and to address the financial situation of the state-owned company. In the cotton sector, the authorities' strategy aims to disengage the state from the sector, while strengthening producers' organizations. Chad will also continue its efforts to meet structural triggers under the enhanced HIPC Initiative to reach the completion point in 2005.