Press Release No. 07/88

Press Release No. 07/88

The Executive Board of the International Monetary Fund (IMF) today approved a three-year SDR 77.15 million (about US$117.3 million) Stand-By Arrangement for Gabon to support the country's economic program. The Gabonese authorities have indicated that they intend to treat the arrangement as precautionary.

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and acting Chairman, stated:

"High oil prices and the favorable global economic environment provide Gabon with an opportunity to address pressing development needs and accelerate economic reforms aimed at reducing the economy's vulnerability to swings in oil prices and preparing it for the post-oil era.

"Building on its Growth and Poverty Reduction Strategy, Gabon's economic program, for which the Fund provides support through a three-year Stand-By Arrangement, rests on three pillars: placing public finances on a permanently sustainable basis; strengthening public financial management, including the administration of oil revenue; and removing structural obstacles to private sector non-oil growth.

"Fiscal adjustment is critical to ensuring that public finances will remain sustainable in the face of historically volatile oil prices and the finite horizon of Gabon's oil reserves. The program envisages a significant step toward fiscal consolidation in 2007. A key measure is the sharp reduction in fuel price subsidies, which became effective in the first quarter of the year, accompanied by an increase in well-targeted spending to mitigate the impact of the reduction in subsidies on the poorest households. Looking ahead, it will be important to ensure that budgetary spending limits for the rest of the year are observed.

"Strengthening public financial management is an essential pillar of the economic reform program. With the objective of raising the quality and effectiveness of public expenditure, measures are underway to improve budget preparation and execution, including by introducing a medium-term expenditure framework and reinforcing public procurement. Important steps are also being taken to strengthen oil revenue administration. Improving public debt and asset management is key to achieving long-term fiscal sustainability. This will require a prudent debt strategy and an effective management of long-term fiscal reserves.

"Private sector development is critical for Gabon's long-term economic prosperity. To that end, the authorities' strategy appropriately focuses on restructuring public enterprises and improving the regulatory framework and the business environment, including by enhancing governance and transparency. The recent publication of Gabon's second EITI report, which expanded its coverage to include both the oil and the mining sectors, represents an important step in this process and the basis for further progress in this area. Strengthening the financial system to improve access to credit by the private sector is also a priority," Mr. Portugal said.

ANNEX

Recent Economic Developments

Against the background of declining oil production, the authorities embarked on a comprehensive economic reform program in 2003. In the context of a 14-month Stand-By Arrangement in 2004-05, they restored macroeconomic stability, eliminated all external payments arrears, and introduced far-reaching structural reforms to foster non-oil growth. The overall fiscal surplus and current account surplus of the balance of payments increased. Expenditure restraint contributed to a significant improvement in the non-oil balance, and the non-oil primary deficit fell to 9 percent of non-oil GDP by 2004, compared to close to 17 percent in 2001-02.

However, with a heavy political agenda in 2005-06 and oil prices setting new records, fiscal discipline proved difficult to sustain and structural reforms stalled. While the overall fiscal surplus and the balance of payments continued to strengthen in response to high oil prices, the non-oil primary deficit widened to 17 ½ percent of non-oil GDP in 2005, well above the government budgetary target.

Non-oil economic activity strengthened further in 2006, partly in response to the large fiscal stimulus, and inflation also rose from the very low level experienced in 2004-05, reaching 6.4 percent at end-December 2006. But while buoyant oil revenue continued to generate large fiscal surpluses, spending overruns put pressure on the non-oil deficit, which rose to an estimated 18 percent in 2006.

Program Summary

The key objectives of the government's program are to prepare the economy for the post-oil era and to make decisive progress in poverty reduction. To that end, the proposed program will rest on three pillars:

• making significant progress toward a permanently-sustainable fiscal position, with the aim of avoiding harmful, oil revenue-related boom-bust cycles and preparing for the eventual exhaustion of oil reserves;

• strengthening oil revenue administration and public financial management, with the objective of raising the quality and effectiveness of public spending to ensure a higher return on physical infrastructure investment and improve social services;

• removing structural obstacles to private sector-led non-oil growth, by improving the business climate, including through enhanced governance and transparency.

The government's program aims for significant, front-loaded fiscal adjustment, which is needed to put public finances on a more sustainable footing. At the same time, it encompasses a comprehensive strategy to strengthen public financial management, which is critical both to guard against the risk of renewed fiscal slippage and to raise the quality and effectiveness of public spending. And finally, it incorporates an agenda for private sector development, which is essential for long-term, sustainable growth.

Gabon: Selected Economic Indicators, 2004-10
	2004	2005	2006	2007	2008	2009	2010
		Prel.	Est.	Program projections
	(Annual percent change)
GDP at constant prices	1.3	3.0	1.2	5.6	4.2	4.3	3.5
Oil	-1.0	-0.4	-8.9	5.3	2.9	3.1	-0.5
Non-oil	2.3	4.3	4.9	5.7	4.7	4.7	4.7
GDP at current prices	7.8	20.5	9.2	2.3	9.0	5.3	2.9
GDP deflator	6.3	17.0	7.9	-3.1	4.6	1.0	-0.6
Oil	15.7	39.7	19.2	-11.6	6.7	-0.5	-1.4
Non-oil	0.5	1.0	4.8	6.1	3.5	2.9	2.2
Consumer prices
Yearly average	0.4	0.0	4.0	5.5	3.0	2.5	2.0
End of period	-0.5	-0.5	6.4	4.5	2.7	2.3	2.0
External sector
Exports, f.o.b. (CFA francs)	19.6	35.3	5.9	-2.1	9.8	3.2	-0.6
Of which: oil	16.0	38.5	4.5	-4.7	10.5	2.8	-2.0
Imports, f.o.b. (CFA francs)	7.2	10.3	15.6	15.1	8.5	7.5	7.1
Export volume	4.1	0.8	-9.6	5.5	3.4	3.8	0.1
Import volume	1.3	4.1	10.8	16.4	14.3	13.6	8.6
Terms of trade (deterioration - )	8.6	26.8	12.2	-6.1	11.8	5.1	0.6
Nominal effective exchange rate (- = depreciation)	1.8	-2.9	2.6	...	...	...	...
Real effective exchange rate (- = depreciation)	-1.2	-5.2	7.4	...	...	...	...
Central government finance
Total revenue	7.2	25.7	10.5	0.4	8.1	4.2	2.2
Oil revenue	7.6	44.4	11.7	-7.4	9.3	1.3	-2.2
Non-oil revenue	6.8	2.6	8.5	14.4	6.2	8.4	8.3
Total expenditure	6.6	21.7	7.8	-4.0	0.8	2.7	2.1
Current	4.6	20.3	4.8	-6.2	0.0	2.1	1.5
Capital	22.4	20.9	23.5	-0.5	3.7	5.3	4.5
	(Change in percent of beginning-of-period broad money, unless otherwise indicated)
Money and credit
Net domestic assets	-23.8	-11.9	-3.4	-7.0	-25.1	-22.5	-20.6
Domestic credit	-21.0	-9.7	-2.2	-6.8	-19.6	-21.2	-31.1
Central government	-13.6	-14.2	-11.7	-17.3	-27.0	-28.1	-37.6
Credit to the economy	-6.5	6.6	10.7	10.6	7.7	7.1	6.5
(annual percentage change)	-9.3	11.6	21.3	20.5	14.0	12.3	10.8
Broad money	11.6	26.0	17.4	14.1	8.3	7.7	7.0
Velocity of broad money (non-oil GDP)	3.4	3.0	2.6	2.5	2.5	2.5	2.5
	(Percent of GDP, unless otherwise indicated)
Nominal GDP (Billions of CFA francs)	3,792	4,571	4,992	5,106	5,565	5,861	6,032
Nominal Non-oil GDP (Billions of CFA francs)	2,091	2,204	2,421	2,713	2,938	3,165	3,386
Central government
Non-oil primary balance (in percent of non-oil GDP)	-9.1	-17.5	-18.0	-11.6	-10.0	-8.8	-7.4
Augmented non-oil primary balance (in percent of non-oil GDP)1	-9.9	-17.8	-19.7	-12.4	-10.0	-8.8	-7.4
Overall balance (payment order basis)	7.6	8.6	9.2	10.0	11.4	11.5	11.5
Overall balance (cash basis)	2.6	7.8	8.6	9.7	11.0	11.2	11.6
Domestic bank financing	-2.3	-2.4	-1.9	-3.3	-5.4	-5.8	-8.1
Net external financing	2.4	-2.0	-3.4	-3.9	-3.9	-4.2	-2.7
Financing gap	0.0	0.0	0.0	0.0	0.0	0.0	0.0
External current account balance (including official transfers)	10.3	19.5	18.4	16.9	16.7	14.7	12.8
External public debt (including the Fund)	49.8	39.1	32.5	27.6	21.3	16.2	13.3
Total gross public debt	76.9	57.1	44.1	36.7	27.5	20.4	16.6
Sources: Gabonese authorities and IMF staff estimates and projections. 1 The augmented balance includes restructuring costs for public enterprises that are being privatized or liquidated, which are classified below the line.