Public Information Notice No. 05/55

Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Gabon

April 26, 2005

On March 28, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Gabon.¹

Background

Since 2003, the Gabonese economy has recovered sharply from the financial imbalances of the early years of the decade. The government introduced a far-reaching program of economic and structural reforms. Aided by high oil prices and external debt rescheduling, the external position strengthened markedly. This in turn contributed to a sharp improvement in the fiscal accounts, helped also by better tax administration and expenditure discipline.

GDP growth is estimated to have reached 1½ percent in 2004. Non-oil growth of 2¼ percent benefited from rising output in manganese mining and timber processing, while activity in construction, electricity, and cement production picked up in the second half of the year, spurred by the acceleration in the execution of public investment. Meanwhile inflation declined to ½ percent, reflecting wage moderation and the monetary discipline imposed by the fixed exchange rate regime. The external position remained strong, with the current account surplus reaching 10½ percent of GDP and external debt falling by 13 percentage points of GDP to under 50 percent of GDP at end-2004. The real exchange rate depreciated slightly in 2004, and competitiveness is estimated to have remained relatively strong, not least as a result of wage moderation.

The fiscal stance in 2004 remained tight. The overall budget surplus was maintained at 7½ percent of GDP, while the non-oil primary deficit fell by ½ percentage point to 7¾ percent of non-oil GDP in 2004, reflecting both an improvement in non-oil revenue and expenditure restraint, notably on wages and salaries. High oil prices resulted in significant oil windfall revenue, which was used primarily to reduce foreign and domestic debt and increase deposits in the Fund for Future Generations.

Structural reforms in recent years have aimed at improving the management of public resources and promoting private investment and economic diversification. The government has launched a comprehensive reform of the forestry sector, simplifying forestry taxation, improving transparency in the allocation of forestry permits, and announcing the elimination of the monopoly on the export of logs of the timber marketing board effective 2006. Progress has been made in the privatization and restructuring of public enterprises, reducing their drag on the public finances. Steps were taken to strengthen the public procurement process, with the objective of raising the quality of public spending. A diagnostic study of the constraints facing the investment climate is helping the Government formulate a reform program in this area. Steps are already underway to strengthen governance and transparency following the release of the first report of National Commission Against Illicit Enrichment and the formation of the Government Working Group to implement adherence to the Extractive Industries Transparency Initiative.

Looking ahead, the critical challenge facing Gabon is managing the transition from an economy highly dependent on oil—accounting for 45 percent of GDP, 80 percent of exports, and over half of government revenue in 2004—to a diversified economy that harnesses private sector initiative and makes progress in poverty reduction. Compounding the difficulty of this task is Gabon's still-high level of external debt and its vulnerability to swings in oil prices.

Executive Board Assessment

Executive Directors commended the Gabonese authorities for the progress in macroeconomic stabilization and the successful initiation of structural reforms under Gabon's economic program. These policies, aided by higher oil revenues, have resulted in positive growth, low inflation, and a significant strengthening of the fiscal and external positions. Nevertheless, Directors underscored that, with prospects for the oil sector continuing to decline, a high external debt burden, and widespread levels of poverty, Gabon faces a dual challenge going forward: first, to consolidate and extend the gains of macroeconomic stabilization in order to ensure a durable basis for future growth; and second, to reinforce the ongoing structural reform process so as to establish the foundations for the diversification of the Gabonese economy, raise the growth rate of the non-oil sector, and vigorously address poverty reduction efforts.

Directors welcomed the government's decision to save the 2004 oil revenue windfall. Directors noted that, by continuing to apply the bulk of the oil revenue windfall to paying down government debt, Gabon can set in motion a virtuous cycle that significantly reduces the weight of debt service on the public finances and the vulnerability of the economy to swings in oil prices. They urged the authorities to seize this opportunity to address the legacy of past fiscal slippages and to place the public finances on a much sounder footing.

Directors welcomed the successful execution of the 2004 budget, which reduced the non-oil primary deficit by raising non-oil revenue and, in particular, by controlling expenditure. They considered that the 2005 budget is rightly ambitious in targeting a further reduction in the non-oil primary deficit. In ensuring its successful implementation, Directors underscored the importance of steadfast implementation, notably through a strict control of the government wage bill, the cornerstone of fiscal discipline in Gabon. Strengthening the finances of the social security funds and local governments was regarded as another key component of expenditure restraint.

Directors noted several fiscal risks in 2005. Notably, they regretted that the new civil service law is delayed. While compensatory measures can help to maintain spending discipline in the short term, Directors urged the authorities to make progress in improving structural control of the wage bill. In this regard, several Directors urged the authorities to accelerate the review of the law and ensure its early implementation. The importance of wage restraint for boosting competitiveness in the non-oil sector was also noted. Directors expressed concern at the reliance on administrative revenue measures and encouraged the authorities to remain vigilant and ensure that the hard-won fiscal discipline, which is essential for Gabon's medium-term sustainability, is not jeopardized.

Directors welcomed progress in preparing a Poverty Reduction Strategy Paper (PRSP), which is an opportunity for the government to strengthen its strategy for economic development and poverty reduction. They underscored that a high-quality PRSP, which is well anchored in a carefully costed and prioritized public expenditure framework, will raise the quality of public expenditure and provide a solid foundation for a medium-term expenditure program. Directors noted that this requires progress in budget preparation and execution, as well as in maintaining sound public accounting practices and further improving public sector transparency.

Directors underscored that a vigorous implementation of the structural reform agenda is essential to stimulate higher private sector-led non-oil growth and to accelerate economic diversification. They noted that competitiveness remains satisfactory, but the high costs of labor, transport, and utilities represent a drag on private investment. Directors welcomed the authorities' intention to implement the recommendations of the Foreign Investment Advisory Services in order to strengthen the business environment. Directors attached particular importance to reinforcing governance and transparency, developing micro-finance institutions, and making progress in the privatization program. Directors also saw scope to strengthen the legal and regulatory framework, especially its consistent application.

Directors noted the progress made in the area of governance and transparency, notably the publication of the first report of the National Commission Against Illicit Enrichment. They encouraged the authorities to ensure that the Commission has the means to exercise its functions and that all concerned public officials comply with its rules. Directors welcomed Gabon's decision to adhere to the Extractive Industries Transparency Initiative (EITI), which will strengthen transparency and accountability in a critical sector of the economy, and supported the authorities' request for a report by IMF staff on fiscal transparency with a focus on resource revenue transparency.

Directors welcomed the progress in reforming the forestry sector. They expressed support for the authorities' decision to eliminate the export monopoly of the timber marketing board and restructure the company, so that it can operate in a fully competitive environment. Directors underscored the importance of persevering with the reform process, notably by pursuing sustainable forestry development, introducing pilot auctions for forestry concessions, and establishing greater overall transparency in forestry management.

Directors noted that cross-border integration represents an opportunity for Gabon to seize the benefits of a larger regional market. They urged the authorities to implement its regional commitments, notably by dismantling the significant non-tariff barriers that remain in place.