Public Information Notice No. 02/50

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

May 3, 2002

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

Background

Since the severe financial crisis of 1998, Gabon has made considerable progress in putting public finances on a sound footing, reducing government indebtedness, and regularizing relations with external and domestic creditors. Fiscal and structural reform efforts continued during 2001 under the government's program supported by an 18-month Stand-by Arrangement, approved on October 23, 2000. After the conclusion of the first and the second quarterly reviews in July 2001, remaining program reviews could not be concluded, owing mainly to fiscal underperformance and delays in structural reforms (notably in the governance area).

Non-oil economic activity in Gabon rose by 4 percent in 2001, following a severe contraction in 1999 and a moderate recovery in 2000. Private investment picked up as confidence strengthened further, helped by substantial repayments of government domestic debt. Services, agriculture, and wood processing were the main sectors contributing to growth. Oil production fell to 13 million tons (from 13.5 million tons in 2000); this drop was significantly less than anticipated, as high oil prices rendered exploitation of marginal fields profitable. Overall real GDP growth is estimated at 1½ percent in 2001; and consumer price inflation remained subdued, at 1 percent during the 12-month period ending December 2001.

Helped by high oil prices, the external current account balance improved from a deficit of 8.8 percent of GDP in 1999 to a surplus of 3.2 percent in 2000, before turning to a deficit of 1 percent of GDP in 2001, mainly on account of lower oil exports and higher external interest.

During 2000-01, Gabon made significant progress in improving public finances, with the primary fiscal surplus averaging some 17 percent of GDP. However, fiscal performance in 2001 fell short of the government's objective, owing mainly to weaknesses in non-oil revenue collection, unbudgeted support for public enterprises, and a relaxation of expenditure controls, in particular, toward the end of the year. As a result, unprogrammed use of bank credit by the government amounted to 4 percent of GDP in 2001, contributing to a substantial drop in Gabon's net foreign assets. This development largely reversed the progress made on both accounts in 2000, when the government was able to save a large part of the windfall oil revenue.

There was progress in several structural reform areas, notably in expenditure management (with the introduction of a new integrated budget information system), the regulatory framework (with the adoption of the new labor code in late 2000 and the new forestry code in 2001), as well as civil service reform and governance (with the preparation of several key texts). However, delays were recorded in the privatization of public enterprises (in the agro-industry, telecommunications, and air transport sectors) and the adoption of the draft anticorruption laws and the Code of Ethics for civil servants. Further-more, the audits of the oil companies have not been completed and the initiation of the civil service reform is awaiting the adoption of the relevant texts.

A rescheduling agreement (on nonconcessional terms), reached with Paris Club creditors in December 2000, allowed the consolidation of debt service in arrears equivalent to about 12 percent of GDP. Nevertheless, Gabon's external debt service burden will continue to claim some 40 percent of government revenue in 2002 and beyond.

Gabon's challenges in the medium-term are the projected rapid decline in oil production and the continued high external debt service burden. Prospects for sustained growth and poverty reduction depend on the development of the nonoil sector. This objective will require significant efforts to mobilize domestic savings, enhanced access to foreign financing, and further improvements in the environment for private sector activity.

Executive Board Assessment

Executive Directors noted that the authorities had continued their efforts in the past year to put public finances on a sound footing, reduce public debt, and instill in creditors and the private sector confidence in government policies. Directors expressed concern about the fiscal slippages relative to the program and the delays in governance-related structural reforms. They regretted that many objectives of the program could not be attained as planned, and that most of the reviews under the stand-by arrangement were not completed, although a few Directors thought that the program might have been over-ambitious.

Directors recognized that the authorities had made impressive efforts to move the economy toward the path of medium-term sustainability, to re-establish good relations with creditors, and to embark on the elaboration of a nationally-initiated, UNDP-assisted poverty reduction strategy. The authorities' success in effecting a rapid turnaround from a large fiscal deficit in previous years to a large primary surplus in 2001, which had enabled the reduction of government debt, was particularly noteworthy. Nevertheless, many Directors noted that Gabon had started from a low base in respect of structural reform, fiscal transparency and accountability, and governance. While they welcomed the recent indications by the authorities that these weaknesses would be addressed, they expressed concern that a number of important measures relating to structural reforms, administrative capacity improvements, and measures relating to strengthening of governance were behind schedule. Directors expressed particular concern at the delays in adopting the anti-corruption laws, and called on the authorities to press forward resolutely with governance reforms.

In light of the depletion of oil resources in the medium term and the resulting fall in government revenues, Directors stressed that prospects for growth and poverty reduction in the medium term depend critically upon the extent to which the non-oil sector will replace oil and the government sector as the engine for growth. Significant efforts are needed to mobilize domestic and foreign savings and to create investment incentives for the private sector, including through the creation of a more business-friendly environment, and improved governance. Directors urged the authorities to fully implement the forestry reform and adapt national laws to the OHADA Uniform Acts, to alleviate the burden on private business of price controls and quasi-fiscal levies, and to reform the judicial system.

Directors highlighted the high external debt service payments that will face Gabon in 2002 and the next few years and were concerned about the recent buildup in arrears to bilateral creditors. They stressed the importance of alleviating the debt constraint by spreading amortization obligations over a longer period. In this regard, they emphasized the importance of continuing fiscal consolidation and seeking rescheduling of debt-of which much was on non-concessional terms-from bilateral creditors.

Directors welcomed the improvement in public finances over the past three years, reflected in the large primary surpluses recorded in 2000-01, and the resulting significant reduction in government debt, but regretted the shortcomings in fiscal program implementation in 2001. In that connection, oil revenue had exceeded the program target by only a small amount even though both oil prices and production volumes had been significantly higher than anticipated, and no oil receipts had been deposited in the Fund for Future Generations. The large unforeseen transfers to public enterprises and outflows from treasury accounts were also a cause of concern. Directors stressed the importance of strengthening expenditure control and enhancing program monitoring.

Directors encouraged the authorities to adopt without delay a revised budget for 2002 that is financeable and consistent with a poverty reduction strategy. They emphasized the importance of directing government spending toward social and physical infrastructure, containing the wage bill, and proceeding with the civil service reform. Directors stressed the need to increase non-oil revenue, in particular through efficient new tax measures with regard to domestic petroleum consumption and improved customs administration. Directors urged the authorities to improve the transparency of oil revenue collection, and to set aside part of oil revenues in the Fund for Future Generations. The prompt completion of the financial audits of all oil companies, and the undertaking of such audits on an annual basis, will be essential.

Directors welcomed the progress made in 2001 in public expenditure management, including the design and gradual implementation of the integrated budget information system (CRYSTAL). Directors noted that the present system did not cover most treasury accounts, including the so-called special funds, and was suspended earlier this year because of technical difficulties. They urged the authorities to implement fully the budget information system, and welcomed the authorities' confirmation of their commitment to transparent monitoring of the budget execution.

Directors advised the authorities to renew the momentum of the privatization process, as a crucial component of private sector development, and to avoid the drain on budgetary resources originating in unanticipated payments in support of the remaining state enterprises. Regarding the state-owned airline, they welcomed the authorities' decision to seek the conversion of the frozen contract to purchase new planes into a lease contract, and urged them to vigorously pursue their plans to privatize the company.

Directors welcomed the authorities' intention to further improve the supervision of the financial sector, taking into account the recommendations of the recent Financial System Stability Assessment, and of the importance of effectively deterring money laundering and the financing of terrorism. They also encouraged the authorities to vigorously pursue reform of the social security system.

Directors noted that Gabon needs to correct deficiencies in its data provision to the Fund. They welcomed the authorities' recent decision to participate in the GDDS.

Directors urged the authorities to formulate and implement a new economic program embodying renewed fiscal and structural reform momentum that could obtain the support of the international community. They stressed that some of the main elements of such a program should be adoption of a revised 2002 budget consistent with fiscal sustainability and poverty reduction, and implementation of measures to strengthen governance. A few Directors stressed that it would be important that a new program be realistic and achievable, and noted that the recent decision of the Fund to streamline conditionality could be of great relevance in the future relationship between Gabon and the Fund.