Public Information Notice No. 02/15

Public Information Notice: IMF Concludes 2001 Article IV Consultation with Chad

February 25, 2002

On January 16, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chad.¹

Background

A three-year arrangement under the PRGF was approved for Chad on January 7, 2000 in an amount equivalent to SDR 36.4 million (65 percent of quota). At the time of the second review, on May 16, 2001, this amount was augmented by SDR 5.6 million (10 percent of quota) to address emergency food import needs. At the same time, Chad reached its decision point under the Enhanced HIPC Initiative, which entailed a debt relief of about US$170 million in net present value (NPV) terms. In June 2001, the Paris Club provided a flow debt rescheduling of Chad's external debt on Cologne terms.

Overall, the Chadian economy had a reasonably good year in 2001. Fiscal policies followed a broadly prudent path, progress in structural reforms was close to programmed, and past slippages in transparency and governance were corrected. These achievements were made against the backdrop of a worsening environment, including weak agricultural production following extreme weather conditions, a shortfall in external financing, and a recent sharp decline in the world market price of cotton, Chad's main export commodity. Notwithstanding the overall progress, advances in certain areas have been slower than programmed. Revenue collection, in particular, weakened in the second half of the year.

Real GDP growth picked up significantly in 2001, reaching an estimated 8.9 percent, after only 0.6 percent in 2000, mainly because of the acceleration of the construction of the Chad-Cameroon pipeline. Consumer prices increased by 14 percent on average in the year ended October 2001, reflecting mainly the impact of food shortages, but prices started declining in the last quarter of the year as food supplies improved. Overall, Chad managed to maintain much of its gains in external competitiveness following the devaluation of the CFA franc in 1994. The external current account deficit (excluding official transfers) widened from 16 percent of GDP in 2000 to an estimated 42 percent in 2001, owing to higher imports related to the investment in the energy sector. A large part of the current account deficit was financed by foreign direct investment. Net official foreign exchange reserves increased in the third quarter to reach CFAF 18 billion, partially reversing a decline in the first half of the year. The financial sector's health remained good, with all but one bank complying with the main prudential ratios at end-June 2001.

The primary current fiscal deficit (excluding spending on elections and on food emergency) reached about 0.6 percent of GDP at end-September 2001, somewhat less than programmed, despite a shortfall in revenues. The structure of expenditure was somewhat unfavorable, with defense spending slightly higher than envisaged as a result of increased rebel activity in the North, and expenditure on social sectors lower than programmed. Against the backdrop of the shortfall in external financing, the government accumulated some payments arrears.

Structural reforms proceeded broadly as programmed. A series of fiscal structural measures were completed, aiming at enhancing revenue collection (such measures related to the value-added tax administration, the computerization of the customs database, and the assignment of tax identification numbers to all economic agents) and strengthening public expenditure management (this included the streamlining of the expenditure circuit, the preparation of public expenditure reviews for the health and education sectors, and the closure of a number of inactive government bank accounts). Privatization, as well as the reform of the civil service, the procurement system, and the cotton sector also advanced as scheduled. Governance improved considerably: in addition to the completion of the audit of the use of the oil bonus, the preparation of the international audit of the customs as well as that of the five largest public procurement contracts proceeded as scheduled.

Executive Board Assessment

Executive Directors noted that overall economic performance has improved considerably in 2001 against the backdrop of a worsening external environment, and economic growth has picked up significantly, boosted by the acceleration of the Doba oil field and pipeline project and ongoing structural reforms. Directors welcomed the prospect that growth will continue to be strong in 2002 and beyond, while stressing that this prospect highlights even more the critical importance of ensuring that policies will be tailored toward integrating the rapidly developing oil sector into the rest of the economy, and that broad-based structural reforms continue. They were encouraged that strong growth, combined with continued poverty reducing measures, would start to make a dent in poverty in the not too distant future. Directors observed, however, that the growth prospects were somewhat dampened in the short term by a decline in the world market price of cotton, Chad's main export commodity.

Directors welcomed the authorities' commitment to prudent fiscal policies, while tailoring the 2002 budget toward poverty reduction. They highlighted, however, that the recent weakening in revenue performance could compromise the attainment of the poverty reducing objectives. While adverse price developments in the world cotton market and the tax-exempt status of the oil part of the economy have contributed to this disappointing performance, Directors agreed that administrative weaknesses have also played an important role. Accordingly, they urged the authorities to implement without delay the revenue measures included in the 2002 budget, in particular, the measures aimed at improving customs collection and at stemming tax evasion. A number of Directors also cautioned against the proliferation of tax exemptions and incentives. Directors agreed that, in addition to building on the recent improvements in expenditure management, the focus should now be on the initiation of a medium-term expenditure framework. They hoped that Chad would receive a more certain and better coordinated flow of bilateral financial assistance. Directors welcomed the authorities' decision to set up a contingency mechanism for the eventuality of a shortfall in budget resources. The authorities were also encouraged to make further progress toward creating an environment in which arrears are no longer permitted.

Directors commended the authorities on their improved transparency and governance record and saw the completion of the audit on the use of the oil bonus according to international standards as a major step in this regard. They urged the authorities to complete steadfastly the audits of the customs administration and of the five largest procurement contracts, and to follow up on the findings of the recent audit of the use of the oil bonus.

Directors encouraged the authorities to make the audits available to the public. They looked forward to an early adoption of the government's own national governance strategy.

Directors noted the early progress made toward achieving the completion point triggers under the enhanced HIPC Initiative, as evidenced by improvements in a number of social indicators. Looking ahead, they emphasized the need for continued structural reforms aimed at effectively managing the oil revenue flows, developing the non-oil sectors of the economy, and completing the reform and liberalization of the cotton sector. Some Directors suggested the authorities to consider the establishment of an oil stabilization fund.

Although Chad's trade integration has advanced well, Directors regretted that macroeconomic convergence with other members of the CEMAC monetary zone has not progressed in recent years. They welcomed in this regard the authorities' commitment to policy convergence by 2004 according to a predetermined schedule. Directors noted favorably that Chad's exchange system remains free from restrictions on payments and transfers for current transactions.

Directors were encouraged by the progress made in the preparation of the PRSP, and they particularly commended the authorities for the broad-based participatory process. To facilitate the timely finalization of the PRSP, they recommended that the collaboration between government institutions and the steering committee overseeing the PRSP process be strengthened in areas where the former's specific technical expertise is required.

Directors expressed concern that, despite progress in recent years, Chad's statistical database continues to suffer from major weaknesses. They urged the authorities to implement the measures identified in the context of Fund technical assistance to improve the quality and timeliness of macroeconomic data. They agreed that Chad could benefit from increased technical assistance to substantially enhance its administrative capacity.