Public Information Notice No. 06/64

Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Gabon

June 13, 2006

On June 5, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Gabon.¹

Background

In 2005, economic growth picked up to 3 percent while inflation remained low. Non-oil growth reached 4 ½ percent, led by rising timber processing, manganese production, and the services sector. Meanwhile, buoyant international oil prices continued to stimulate investment and exploration in the oil sector. As a result, both the balance of payments and the fiscal accounts registered large surpluses, allowing a reduction in external debt to 39 percent of GDP at end-2005.

The presidential elections in late 2005 were accompanied by large fiscal slippages. The non-oil primary deficit reached 12 percent of non-oil GDP, compared with a target of 8½ percent in the government's supplementary budget. The bulk of the slippages reflected additional non-interest current expenditure, lower recovery of tax arrears, and a larger impact of personal income tax exemptions than originally anticipated.

The structural reform agenda stalled in the second half of 2005. In particular, the restructuring and privatization of Air Gabon and Gabon Télécom experienced significant delays. After a strong start in 2004, delays continued to plague the reforms of the forestry sector, reflected in the persistence of large forestry tax arrears and uncertainty regarding the future allocation of forestry permits. However, reforms in the natural resources sector were boosted by the publication of Gabon's first report under the Extractive Industries Transparency Initiative in December 2005. A tender for 51 percent of Gabon Télécom was finally launched in early December with the aim of completing the sale by mid-2006. The government announced the liquidation of Air Gabon in February 2006 and the creation of a new airline, Air Gabon International, in which Royal Air Maroc will hold majority stake.

Looking ahead, the critical challenge facing Gabon is to seize the opportunity provided by high oil prices to place macroeconomic policies on a long-term sustainable path while fostering economic diversification and preparing Gabon for the post-oil era.

Executive Board Assessment

Directors welcomed the acceleration in economic activity and the authorities' success in restoring macroeconomic stability in 2004-05, with the support of a Stand-By Arrangement. Directors noted that Gabon's key policy challenge is to strike a judicious balance between preparing for the inevitable exhaustion of oil reserves by raising public savings and dealing with continued pressures for public spending. They emphasized that the current high levels of oil prices provide an opportunity to lower debt to manageable levels, thereby reducing a major source of Gabon's vulnerability to shocks, while addressing the country's pressing social and infrastructural needs.

Directors underlined that fiscal discipline is critical for macroeconomic stability and expressed concern about the large fiscal slippages that occurred in late-2005. Most Directors called for a front-loaded tightening in 2006 through a reversal of the recent fiscal slippages to facilitate rapid progress toward a sustainable medium-term fiscal position. They also pointed out that costly implicit subsidies on petroleum products that benefited primarily higher-income households were growing rapidly, and encouraged the authorities to reflect these subsidies fully in the government budget, and embark on a gradual adjustment of retail prices toward import parity levels with well-targeted assistance to the poor. Some Directors saw merit in a more gradual approach to fiscal adjustment, but emphasized the need to maintain discipline and keep the non-oil deficit on a declining path.

Directors underlined the importance of strengthening public expenditure management to avoid a recurrence of unplanned spending and raise the quality of public investment. In this context, they urged the authorities to implement the recommendations of the recent fiscal transparency ROSC as soon as possible, including a more effective prioritization of the public investment program, strengthening budget execution and monitoring, improving the transparency of the budget—notably of oil revenue—and enhancing the efficiency of the tax system by broadening the non-oil revenue base. Directors also called for an urgent agreement among CEMAC (Communauté Économique et Monétaire de l'Afrique Centrale) stakeholders on an appropriate level of remuneration of international reserves.

Directors commended the authorities for their Growth and Poverty Reduction Strategy Paper, which represents an important step toward promoting economic diversification and reducing poverty. They underscored the need to make the strategy operational by formulating concrete poverty-reducing programs and to accelerate the structural reform agenda to stimulate higher growth. In this context, Directors emphasized the importance of improving the investment climate to foster private sector development, pointing to the need to address legal and regulatory uncertainty, rigid labor markets, and continued weaknesses in governance. Directors also noted that economic diversification will require a deepening of financial intermediation and improved access to financial services, including to micro-financing. They also urged the authorities to conclude expeditiously the privatization of Air Gabon and Gabon Télécom, which will contribute to strengthening the productivity of Gabon's economy. Directors underscored that it will be important to ensure that the successor airline to Air Gabon no longer represents a drain on public resources.

Directors welcomed the progress made in strengthening governance and increasing transparency, notably through the publication of Gabon's first Extractive Industries Transparency Initiative (EITI) report. At the same time, they emphasized that there remains substantial scope for further progress. Directors attached particular importance to improving access to information, including through the regular publication of timely and accurate economic statistics and the broader dissemination of government reports. They underscored that the work of the National Commission Against Illicit Enrichment should be accelerated, including in the area of investigations. Directors also considered that work on the EITI needs to continue, with the objective of making the next report more comprehensive. They encouraged the authorities to resume reforms in the forestry sector, notably by ensuring that its financing remains within the government budget and dealing decisively with the holders of forestry permits that have tax arrears.

Directors noted that further trade liberalization would contribute to improving Gabon's competitiveness and result in welfare gains. They urged the authorities to take a lead role in regional discussions within the CEMAC to foster progress in this area, notably in the reduction of the relatively high common external tariff.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.