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Gabon: Staff Report for the 2015 Article IV Consultation

Author(s):
International Monetary Fund. African Dept.
Published Date:
March 2016
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A Challenging Economic Environment

1. Despite progress in implementing its transformation plan, Gabon is still oil-dependent and therefore highly vulnerable to the recent oil price shock. After a decade of lackluster economic growth, in 2010 the government embarked on the Plan Stratégique Gabon Emergent (PSGE), which aims to diversify its economy by 2025.1 In its first phase (2010–14), high oil revenues funded a scaling up of public investment that helped propel overall growth to nearly 6 percent on average, led by construction and services. While there are initial promising signs of diversification, structural transformation is a gradual process, and as of 2014 oil still accounted for roughly 40 percent of GDP, 45 percent of government revenues, and nearly 85 percent of exports. The low oil price outlook and secularly declining oil production will reduce available financing for the second phase of the PSGE (2016–20). As part of the oil-dependent CEMAC monetary union, Gabon’s success in adjusting to oil price shocks also hinges on the ability of other member countries to appropriately implement fiscal adjustments and their own diversification agenda.

2. Economic activity has significantly decelerated in 2015. Statistical data through September 2015 indicate higher-than-expected oil production (thanks to the introduction of new wells and performance improvements), mining (manganese), and agriculture (due to a large, ongoing international agribusiness joint venture). However, the sharp fall in oil prices has prompted the government to slow capital spending, and oil companies to rein in operating and development expenditures. This reduced domestic demand led to significant contractions in large non-oil sectors, including construction, transportation, commerce, and services. At the same time, broad money and credit to the economy are contracting.

3. Despite significant fiscal adjustment since the second half of 2014 and delays in the implementation of the capital spending, fiscal buffers are contracting rapidly. Since 2012, public debt has more than doubled from 20 to 43 percent of GDP (above the 35 percent indicative ceiling of the government), in part due to US$1.5 billion and US$500 million Eurobond issuances in December 2013 and June 2015, respectively.2 About two-thirds of the increase in the debt-to-GDP ratio since 2014 is due to the depreciation of the CFA franc and the decline in the oil GDP deflator. Moreover, between December 2014 and October 2015, government deposits at the BEAC (net of Eurobond receipts) declined by 57 percent, and gross international reserves by 30 percent. Foreign financing has become increasingly costly, as rating agencies have downgraded the sovereign debt of oil exporters, including Gabon, contributing to a significant increase in spreads in recent months (Figure 1).

Figure 1.Gabon: 2013 Eurobond Issuance

(in percent)

Source: Bloomberg.

4. Presidential and parliamentary elections are expected in the second half of 2016. No official election dates have been announced, but the process of electoral list revision began in January 2016. Opposition parties boycotted the 2009 parliamentary elections, and the governing Parti Démocratique Gabonais won 113 of the 120 seats in the National Assembly. The run-up to the elections is likely to be accompanied by heightened social and political tensions. As a result, some politically tough economic policy decisions may be delayed.

A Deteriorated Outlook, and Risks are Rising

5. The growth outlook has deteriorated (Figure 2). In light of a weak performance during the first nine months of the year, the forecast of 2015 GDP growth has been revised down from 4.4 percent to 4.0 percent, driven by a slowdown in non-oil activity (5.8 to 4.0 percent). Inflation is expected to be around zero percent in 2015, much lower than in 2014. Continued weakness in the oil sector is expected to weigh on prospects for oil exploration and government revenue, leading to a further deceleration of overall growth in 2016 to 3.2 percent. A pick-up of growth is expected in 2017–18 as large-scale palm oil and rubber production by Olam International ramps up. However, the negative outlook for the oil sector has led to a downward revision of the overall medium-term growth rate to around 4.5 percent per annum, a decline of more than one percentage point since the 2014 Article IV consultation.

Figure 2.Gabon: Selected Economic Indicators

Sources: IMF and Gabonese Authorities.

6. The main downside risk to the outlook remains insufficient fiscal adjustment to lower oil prices (Risk Assessment Matrix, Annex I). As seen in Text Table 1, if government spending items were to grow in line with non-oil GDP, or oil prices remain at US$5 per barrel below the current baseline of the IMF’s World Economic Outlook3, the government would be forced to deplete available deposits, and significantly increase borrowing and arrears. At the same time, slower global growth and tighter international financing conditions will entail additional headwinds to the Gabonese economy. Ancillary risks concern a stronger-than-expected spillover of the oil price shock to non-oil economic activity (including to the financial sector), as well as persistent fragility at three small distressed state-owned banks, one of which recently experienced severe liquidity problems prompting government intervention.

Text Table 1.Alternative Macroeconomic Scenarios (2014–21)
20142015201620172018201920202021
Baseline (Adjustment) Scenario
Non-Oil Fiscal Primary Balance (% of GDP)−12.4−13.5−10.3−8.9−7.6−6.3−5.2−4.1
Overall Fiscal Balance (% of GDP)2.5−2.3−5.8−4.8−4.0−2.9−2.3−1.6
Government Deposits (% of non-oil GDP)11.09.36.24.95.46.26.56.7
Public Debt (% of GDP)32.243.050.149.950.550.349.347.9
International Reserves (US$ billion)2.72.11.61.41.41.51.61.8
Current Account Balance (% of GDP)8.3−1.9−9.0−7.4−5.8−4.7−3.9−3.2
No-Fiscal Adjustment Scenario 1/
Non-Oil Fiscal Primary Balance (% of GDP)−12.4−13.5−11.7−11.6−11.4−11.1−10.8−10.5
Overall Fiscal Balance (% of GDP)2.5−2.3−6.8−6.9−7.0−6.9−7.1−7.3
Government Deposits (% of non-oil GDP)11.07.93.53.22.92.72.42.2
Public Debt (% of GDP)32.242.050.150.654.456.959.662.5
International Reserves (US$ billion)2.72.11.51.31.21.11.11.1
Current Account Balance (% of GDP)8.3−1.9−9.4−8.1−6.8−6.0−5.5−4.9
Lower Oil Price Scenario 2/
Non-Oil Fiscal Primary Balance (% of GDP)−12.4−13.5−10.2−8.9−7.6−6.3−5.2−4.1
Overall Fiscal Balance (% of GDP)2.5−2.3−6.8−5.7−4.8−3.7−3.0−2.3
Government Deposits (% of non-oil GDP)11.09.35.04.54.13.83.53.2
Public Debt (% of GDP)32.243.050.150.652.752.051.049.4
International Reserves (US$ billion)2.72.11.51.41.21.11.11.2
Current Account Balance (% of GDP)8.3−1.9−11.1−9.0−7.3−6.0−5.1−4.2
Source: IMF Staff calculations.

No fiscal adjustment scenario assumes that government spending continues to grow in line with non-oil GDP growth, whereas the baseline scenario assumes a gradual decline in all spending headline items as a share of non-oil GDP. It is assumed that the government finances its deficits first through its available deposits at the central bank and borrows afterwards.

Oil Price Scenario assumes that oil prices remain US$ 5 below projections in the World Economic Outlook. It is assumed that the government finances its deficits first through its available deposits at the central bank and borrows afterwards.

Source: IMF Staff calculations.

No fiscal adjustment scenario assumes that government spending continues to grow in line with non-oil GDP growth, whereas the baseline scenario assumes a gradual decline in all spending headline items as a share of non-oil GDP. It is assumed that the government finances its deficits first through its available deposits at the central bank and borrows afterwards.

Oil Price Scenario assumes that oil prices remain US$ 5 below projections in the World Economic Outlook. It is assumed that the government finances its deficits first through its available deposits at the central bank and borrows afterwards.

7. Several risk scenarios would require further fiscal tightening and, therefore, spending prioritization (Annex I). Such would be the case if oil prices or non-oil revenues are lower than projected, as well as scenarios that demand unexpected additional spending due to regional insecurity or political turmoil. If the oil price shock or existing problems in public banks were to significantly affect banking stability, the national and regional authorities would need to take decisive action through the relevant supervisory and regulatory institutions to strengthen compromised banks (through restructuring and recapitalization if needed), and minimize contagion risk.

Policy Discussions: Containing the Impact of the Oil Price Shock

8. The principal theme of the 2015 Article IV consultations was the impact of lower oil prices on the economy, especially on the budget and the financial sector. Another key issue was how to reassess and reprioritize the PSGE so that it can be sustainably financed. Staff also assessed progress on other important issues and recommendations discussed during the 2014 Article IV consultations, including on the PSGE, structural reforms, and economic data shortcomings (see Annex II). As indicated in Annex II, there has been an improvement in the implementation of previous Article IV recommendations.

A. Fully Adjusting to a New Oil Price Outlook

9. The continued drawdown of fiscal buffers increases the risks to fiscal sustainability and the adequate financing of needed investment (Figure 3). While there was a slowdown in the execution of the 2015 budget (only 62 percent of budgeted capital spending was executed by September), non-oil revenue was lower than in 2014 and the government repaid large domestic arrears and temporary external arrears.4 Financing pressures likely persisted in the last quarter considering the expected acceleration in spending. Taking into account these developments and the 2015 amended budget, the staff projects a fiscal deficit on a commitment basis of 3½ percent and on a cash basis of 9 percent of non-oil GDP (including large reimbursements of VAT-related and other arrears).

Figure 3.Gabon: Fiscal Indicators

Sources: IMF and Gabonese Authorities.

10. Staff welcomes the authorities’ aim to continue fiscal consolidation, as outlined in the 2016 budget draft and in the Medium Term Fiscal Framework (MTFF), but has substantial reservations on the underlying assumptions.5 While the assumed US$42 per barrel of Gabonese oil was conservative when the budget was prepared, the acceleration of the decline in international oil prices suggests there is a need to amend the budget accordingly. Furthermore, the 2016 initial budget optimistically assumes a 20 percent increase in non-oil revenues relative to the authorities’ 2015 projection. It also proposes a small 3.5 percent increase in current spending, which will be politically difficult in an election environment and crowds out much-needed productive public investment by including two stadia to host the 2017 African Cup of Nations, which account for 15 percent of total capital spending.6 The 2016–18 MTFF proposes spending paths that imply a freeze in current spending in nominal terms and a reduction in capital spending by 8 percent between 2015 and 2018. Under these assumptions the government expects that the overall fiscal deficit would gradually decline and reach a small surplus in 2018.

11. The staff baseline scenario proposes a more substantial adjustment to preserve fiscal sustainability. Staff proposes that the non-oil revenue base be widened over time with the elimination of overly generous tax exemptions; wages and salaries would grow at 2 percent per year in nominal terms throughout the period; and other main current spending items and capital spending grow in nominal terms but at a rate significantly below non-oil GDP growth (Figure 4). Under those assumptions, a debt sustainability analysis (DSA) shows Gabon’s projected debt level peaking at 50.1 percent of GDP in 2016, and decline slowly from 2019. That said, shocks considered in the DSA could lead to much higher debt-to-GDP ratios, and a growth shock could propel debt significantly above the CEMAC ceiling (70 percent of GDP) by 2021. Given the large proportion of US dollar-denominated debt, exchange rate fluctuations constitute a significant risk to Gabon’s external debt sustainability7.

Figure 4.Gabon: Medium Term Outlook, 2015–21

Sources: IMF and Gabonese Authorities.

12. The outsized and still growing wage bill is a major threat to fiscal sustainability. The wage bill grew by 70 percent between 2010 and 2015 (an 11 percent average growth rate per year), mainly due to a 30 percent increase in the number of public servants, the conversion of temporary workers to permanent status, and the introduction of an ill-designed performance incentive system in 2014 that was later converted into base pay in 2015. After this period of very high growth, in 2015 the wage bill accounted for 34 percent of total government spending and was equivalent to 38 percent of total revenue. As seen in Figure 5, by 2015 the wage bill was equivalent to 9 percent of GDP and to 60 percent of non-oil revenue; and the growth rates of these ratios in recent years have been high in the subregion.

Figure 5.SSA Oil Producers’ Wage Bill (2007–15)

Source: IMF Staff estimates

13. Staff commends the authorities for the implementation of major reforms to public financial management. The main axis of these reforms is the implementation of the budgétisation par objectifs de programme (BOP), which aims to better align the budget process with public policy objectives, gauge performance, and increase decentralization and accountability. As part of the BOP, the authorities have aligned budget execution and public spending principles with CEMAC directives, significantly computerized the expenditure chain, started decentralizing budgetary execution, and adopted a single account at the BEAC, among other important measures.

14. Adjusting to the unfavorable oil price outlook while ensuring the financing of the government’s diversification plan requires a wide range of strong measures. The authorities need to:

  • Foster non-oil revenues by widening the tax base, mainly by reducing tax exemptions and improving tax administration. In a fiscally-challenging environment, it is hard to justify the recent elimination of taxes and fees for over 171 products as part of the so-called “policies against high living costs”, and the prohibition of importation of vehicles over three years old, which represent a revenue loss of 0.7 percent of GDP in 2015. A review of these policies is urgently needed, especially in the context of rapidly rising real public wages. More generally, staff recommends a thorough review and reform of the tax policy regime.
  • Prepare a revised budget for 2016, given the worsening growth and oil price outlook, to preempt unfavorable public debt dynamics and avoid the accumulation of arrears.
  • Further enhance tax administration, drawing on extensive IMF and AFRITAC technical assistance by implementing measures such as formalizing the collaboration between tax and customs directorates, moving the collection of customs revenues from the Treasury to the customs department, modernizing customs drawback system, and adopting a risk-based approach to VAT reimbursements.
  • There is also a critical need to curb inefficient and/or poorly targeted current spending, while protecting social spending. Most importantly, the public wage bill needs to grow below inflation in the medium term.
  • With public investment considerably lower than in recent years, private sector participation for infrastructure construction should be encouraged by accelerating development of an appropriate Public Private Partnership (PPP) framework. Key projects under the PSGE should be reviewed and reprioritized while minimizing projects with limited long-term economic payoff such as sports infrastructure.8
  • Staff recommends anchoring medium-term fiscal policy by targeting a steady reduction in the debt to non-oil GDP ratio through a progressive strengthening of the nonoil primary deficit, which would allow the authorities to rebuild fiscal buffers. Throughout the adjustment, and financing permitting, annual reductions in the non-oil primary deficit should not exceed 2 percent of non-oil GDP so as to limit the negative fiscal impulse.
  • The implementation of the BOP should continue, taking into account recent recommendations by IMF technical assistance, emphasizing measures to improve treasury management and to avoid further accumulation of arrears, especially external arrears.

Authorities’ views

15. Amidst a worsened economic outlook, the authorities underlined that they are firmly committed to implementing measures in line with staff recommendations. To this end, as a major sign of their commitment, they eliminated petrol and diesel subsidies on February 1, 2016, and introduced an automatic fuel-pricing mechanism. Now their major concern is the need to reduce the outsized wage bill. In addition to recently undertaken measures (incentives for early retirement, recruitment freezes, and the elimination of an inefficient incentive system), a major civil service reform is being designed with assistance from the World Bank. Potential measures could include improvements in human resource management such as merit-based recruitments and promotions. The government also aims to continue reducing tax exemptions, although it noted that not all tax incentives—especially those enshrined in law—can be easily eliminated. The authorities are studying the possibility of partly reversing the recent restriction on second-hand vehicle imports, and the World Bank is assisting them on the rationalization of the tax exemption regime. In view of continued declines in the oil price, the authorities indicated that they would limit expenditure in line with cash flow constraints, and prepare a revised 2016 budget with a lower oil price assumption. The authorities welcomed staff’s recommended public financial management reforms, and reiterated their commitment to proceed with BOP reforms.

B. Addressing the Financial Sector’s Vulnerability to Macroeconomic Shocks and Weak Bank Governance

16. The government has started addressing Gabon’s public banks’ deep-seated structural problems. The problems culminated in the temporary closure of Poste Bank’s branches in mid-October 2015. To stabilize the bank, the government replaced its CEO, injected liquidity, provided a blanket deposit guarantee, and imposed a limit on individual depositors’ withdrawals. Furthermore, with the intervention of the regional supervisor (COBAC), all three public banks now have temporary administrators in place with a mission to propose restructuring plans within six months. Although the three public banks are relatively small (total assets of 3 percent of GDP and 9 percent of total banking system assets (Table 7)) and have limited links to the rest of the banking system, tackling their current situation is crucial to preserve financial stability and foster deepening and inclusion, especially in the rural areas where Poste Bank is well-established. 9

Table 1.Gabon: Selected Economic and Financial Indicators, 2013–21
201320142015201620172018201920202021
Est.Est.Prel. Est.Proj.
(Annual percent change, unless otherwise indicated)
Real sector
GDP at constant prices5.64.34.03.24.54.74.95.04.9
Oil−2.21.84.2−5.7−4.70.00.10.00.1
of which: primary oil−5.3−0.37.9−7.4−6.9−0.6−0.5−0.6−0.6
Non-oil7.85.04.05.46.65.65.85.85.7
GDP deflator−6.2−0.9−9.3−6.34.84.03.42.82.6
Oil−7.8−6.3−24.6−26.212.07.45.83.63.0
Primary Oil−9.4−6.4−32.4−42.121.312.08.74.82.0
Consumer prices
Yearly average0.54.50.12.52.52.52.52.52.5
End of period3.31.70.12.52.52.52.52.52.5
External sector
Exports, f.o.b.−8.1−8.5−25.9−33.111.910.89.17.86.0
Imports, f.o.b.4.92.4−9.2−20.75.54.95.45.74.0
Terms of trade (deterioration= − )−2.8−8.4−41.2−35.618.19.36.83.3−0.1
Central government finance
Total revenue−0.6−10.4−22.9−12.511.810.610.49.18.5
Oil revenue−12.2−23.0−31.4−49.614.411.48.14.21.5
Total expenditure−1.2−14.6−4.72.47.26.45.46.05.4
(Percent of GDP, unless otherwise indicated)
Non-oil primary balance (in non-oil GDP)−20.3−12.4−13.5−10.3−8.9−7.6−6.3−5.2−4.1
Overall balance (commitment basis)1.82.5−2.3−5.8−4.8−4.0−2.9−2.3−1.6
Overall balance (cash basis)0.2−1.1−6.2−6.8−4.8−4.0−2.9−2.3−1.6
Overall balance (cash basis, percent of non-oil GDP ) 0.4−1.7−9.0−8.8−6.2−5.1−3.7−2.9−2.0
Net domestic financing−10.40.14.44.01.4−0.3−0.6−0.2−0.3
Net external financing10.01.64.64.84.85.34.43.12.3
External public debt (including to the Fund)23.527.335.641.241.342.142.141.440.2
Total public debt29.232.243.050.149.950.550.349.347.9
of which: statutory advances from BEAC3.02.94.04.13.83.53.23.02.8
(Percent Change, unless otherwise indicated)
Money and credit
Credit to the economy23.6−2.0−5.33.15.16.49.89.910.1
Broad money6.11.6−1.1−0.50.81.11.92.13.2
Velocity ratio of NOGDP over broad money2.42.52.72.93.23.53.74.04.2
(Percent of GDP, unless otherwise indicated)
Gross national savings41.243.035.428.229.030.431.932.531.4
Gross fixed investment29.334.837.237.236.536.236.636.534.6
of which: private18.728.030.930.329.629.529.929.828.0
public10.66.76.36.96.96.86.76.66.6
Current account balance11.98.3−1.9−9.0−7.4−5.8−4.7−3.9−3.2
(CFA francs billion, unless otherwise indicated)
Memorandum items
Nominal GDP8,6918,9888,4838,2018,9849,78310,60911,44812,317
Nominal non-oil GDP5,1195,5815,8046,3376,9967,6468,3479,1029,899
National Currency per U.S. Dollar (Average)494494592............
Oil Prices (WEO, U.S. Dollar/BBL)1049651303640434546
Sources: Gabonese authorities and IMF staff estimates and projections.
Sources: Gabonese authorities and IMF staff estimates and projections.
Table 2.Gabon: Central Government Operations, 2013–21
2013201420152016

Draft

Budget
2016

Staff
20172018201920202021
Est.Est.Prel. Est.Proj.
(Billion of CFA francs)
Total revenue and grants2,6222,3491,8111,9501,5851,7721,9602,1632,3612,562
Revenue2,6222,3491,8111,9501,5851,7721,9602,1632,3612,562
Oil revenue1,3441,035709601358409456493514521
Non-oil revenue1,2781,3141,1021,3491,2271,3631,5041,6701,8482,041
Tax revenue1,2131,1781,0321,2621,1581,2891,4271,5861,7551,940
Taxes on income, profits, and capital gains343382393559445494536587639693
Domestic taxes on goods and services280286176255205235267303344389
Value-added tax213217147216170199231268310357
Other67692939353636353431
Taxes on international trade and transactions401360344408376417456500546597
Import tariffs389342339385370409447488532578
Export taxes12185236810121518
Other non-oil taxes18915011940132143168196226261
Non-tax revenue6513670876974778592101
Grants0000000000
Total expenditure and net lending2,4682,1202,0102,1132,0592,2062,3462,4742,6242,765
Current expenditure1,4191,4771,4761,5291,4901,5901,6861,7661,8661,956
Wages and salaries553691728732732747762777793809
Goods and services239265252247268288306328351374
Interest payments152111125180181222258275301314
Domestic22172438404649515348
Foreign13094102142141176210224247266
Transfers and subsidies476410370370309334360386422459
of which: oil subsidies2201398083135677
Capital expenditure925606533584568616661708758809
Domestically financed65535033220286108110152196242
Foreign financed271256201382482508551556562567
Net lending−991200000000
Road Fund (FER) and special funds2232520000000
Overall balance (commitment basis)154229−198−163−474−434−387−311−263−203
Change in arrears−134−326−325−81−8100000
Domestic arrears payments−134−327−325−81−8100000
External arrears (interest only)00.300000000
Overall balance (cash basis)20−97−523−244−555−434−387−311−263−203
Total financing−2097523244555434387311263203
Foreign borrowing (net)51490265183304335408365283230
Drawings271256201382482508551556562567
Amortization−481−185−232−199−179−288−143−192−279−338
Exceptional financing (Eurobonds)7250296001150000
Domestic borrowing (net)−53472586125199−21−54−20−27
Banking system−3193820414220149−71−104−70−77
Monetary authorities−331631544215149−71−104−70−77
Deposit money banks11−26501005000000
Non-bank sector−215−3154−81505050505050
Financing gap0000000000
Memorandum item:
Gross government deposits in BEAC740.0614.6542.5500.4391.5342.6413.8517.5587.5664.4
of which: readily available deposits543.0411.0425.8n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Statutory advances from BEAC257.5257.5339.5439.5339.5339.5339.5339.5339.5339.5
Non-oil primary balance excluding capital transfers (NOPD)−1,039−695−782−584−650−621−584−529−476−410
as percent of non-oil GDP−20.3−12.4−13.5−10.1−10.3−8.9−7.6−6.3−5.2−4.1
Non-oil GDP at market prices5,1195,5815,8045,8046,3376,9967,6468,3479,1029,899
Source: Gabonese authorities and IMF staff estimates and projections.
Source: Gabonese authorities and IMF staff estimates and projections.
Table 3.Gabon: Central Government Operations, 2013–21
2013201420152016

Draft

Budget
2016

Staff
20172018201920202021
Est.Est.Prel. Est.Proj.
(Percent of non-oil GDP)
Total revenue and grants51.242.131.230.825.025.325.625.925.925.9
Revenue51.242.131.230.825.025.325.625.925.925.9
Oil revenue26.318.512.29.55.65.86.05.95.65.3
Non-oil revenue25.023.619.021.319.419.519.720.020.320.6
Tax revenue23.721.117.819.918.318.418.719.019.319.6
Taxes on income, profits, and capital gains6.76.96.88.87.07.17.07.07.07.0
Domestic taxes on goods and services5.55.13.04.03.23.43.53.63.83.9
Taxes on international trade and transactions7.86.45.96.45.96.06.06.06.06.0
Other non-oil taxes3.72.72.00.62.12.12.22.32.52.6
Non-tax revenue1.32.41.21.41.11.11.01.01.01.0
Total expenditure and net lending48.238.034.633.332.531.530.729.628.827.9
Current expenditure27.726.525.424.123.522.722.021.220.519.8
Wages and salaries10.812.412.511.611.610.710.09.38.78.2
Goods and services4.74.74.33.94.24.14.03.93.93.8
Interest payments3.02.02.22.82.93.23.43.33.33.2
Transfers and subsidies9.37.36.45.84.94.84.74.64.64.6
of which: oil subsidies4.32.51.41.30.00.00.10.10.10.1
Capital expenditure18.110.99.29.29.08.88.68.58.38.2
Domestically financed12.86.35.73.21.41.51.41.82.22.4
Foreign financed5.34.63.56.07.67.37.26.76.25.7
Net lending−1.90.20.00.00.00.00.00.00.00.0
Road Fund (FER) and special funds4.40.50.00.00.00.00.00.00.00.0
Overall balance (commitment basis)3.04.1−3.4−2.6−7.5−6.2−5.1−3.7−2.9−2.0
Change in arrears−2.6−5.8−5.6−1.3−1.30.00.00.00.00.0
Overall balance (cash basis)0.4−1.7−9.0−3.9−8.8−6.2−5.1−3.7−2.9−2.0
Total financing−0.41.79.03.98.86.25.13.72.92.0
Foreign borrowing (net)10.01.64.62.94.84.85.34.43.12.3
Drawings5.34.63.56.07.67.37.26.76.25.7
Amortization−9.4−3.3−4.0−3.1−2.8−4.1−1.9−2.3−3.1−3.4
Exceptional financing (Eurobonds)14.20.05.10.00.01.60.00.00.00.0
Domestic borrowing (net)−10.40.14.41.04.01.4−0.3−0.6−0.2−0.3
Banking system−6.20.73.52.23.20.7−0.9−1.2−0.8−0.8
Non-bank sector−4.2−0.60.9−1.30.80.70.70.60.50.5
(Billion of CFA francs, unless otherwise indicated)
Total revenue and grants2,6222,3491,8111,9501,5851,7721,9602,1632,3612,562
Total expenditure and net lending2,4682,1202,0102,1132,0592,2062,3462,4742,6242,765
Overall balance154229−198−163−474−434−387−311−263−203
Memorandum items:
Gross government deposits in BEAC (percent of GDP)8.57.26.05.14.03.23.64.24.44.7
of which: readily available deposits6.24.84.7n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Overall balance (percent of GDP)1.82.5−2.3−2.0−5.8−4.8−4.0−2.9−2.3−1.6
Non-oil primary balance excluding capital transfers−1,039−695−782−650−650−621−584−529−476−410
As percent of non-oil GDP−20.3−12.4−13.5−10.3−10.3−8.9−7.6−6.3−5.2−4.1
Oil revenues (percent of oil GDP)37.630.426.519.219.220.621.321.821.921.5
Basic balance (percent of GDP)4.95.40.02.70.10.81.72.32.63.0
Public debt (percent of GDP)29.232.243.0n.a.50.149.950.550.349.347.9
External debt (percent of GDP)23.527.335.6n.a.41.241.342.142.141.440.2
Domestic debt (percent of GDP)5.84.97.4n.a.8.88.78.48.17.97.7
of which: statutory advances from BEAC (% of GDP)3.02.94.0n.a.4.13.83.53.23.02.8
Non-oil GDP at market prices5,1195,5815,8046,3376,3376,9967,6468,3479,1029,899
Sources: Gabonese authorities and IMF staff estimates and projections.
Sources: Gabonese authorities and IMF staff estimates and projections.
Table 4.Gabon: Monetary Survey and Central Bank Accounts, 2013–21
201320142015201620172018201920202021
Est.Est.Prel. Est.Proj.
(Billion of CFA francs, unless otherwise indicated)
Net foreign assets142413141188881835855914933892
Net domestic assets732878980127613391343132513541468
Domestic credit99911331272152915671576159316321777
Claims on central government (net)−250−1505426924016138−79−108
Claims on public agencies (net)−124−21−21−21−21−21−21−21−21
Claims on nongovernment137313041239128013481436157617311905
Other items (net)−268−256−293−253−229−233−268−278−308
Broad money (M2)215721922168215721742198224022872360
Currency348402324376379383390399411
Deposits180917891843178117951815184918881949
(Annual change as percent of Broad Money)
Net foreign assets15.6−5.1−5.7−14.1−2.10.92.70.8−1.8
Net domestic assets−8.96.74.713.72.90.2−0.81.24.9
Domestic credit−6.16.16.411.91.80.40.81.76.1
Claims on general government (net)−15.44.59.410.0−1.3−3.6−5.5−5.1−1.2
Claims on nongovernment13.5−3.1−3.01.93.14.06.26.87.4
Other items (net)−4.34.70.00.00.00.00.00.00.0
Memorandum items:(Annual percent change)
Broad money (M2)6.11.6−1.1−0.50.81.11.92.13.2
Reserve money (RM)−32.65.31.5−8.1−11.8−9.8−9.8−1.51.9
Credit to the economy23.6−2.0−5.33.15.16.49.89.910.1
Credit to the private sector (in percent of non-oil GDP)25.122.620.619.418.518.018.118.218.5
Broad money (in percent of overall GDP)24.824.425.626.324.222.521.120.019.2
Government non-cash deposits in BEAC (billion CFA francs)205.0n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Sources: Gabonese authorities and IMF staff estimates and projections.
Sources: Gabonese authorities and IMF staff estimates and projections.
Table 5.Gabon: Balance of Payments, 2013–21
201320142015201620172018201920202021
Est.Est.Prel. Est.Proj.
(Billions of CFAF)
Current account1,034743−157−740−665−571−500−450−394
Goods (net)2,9912,5241,5348019901,1861,3521,4931,617
Export of goods (fob)4,9484,5283,3542,2452,5122,7833,0353,2733,468
Hydrocarbons4,1983,8002,5651,4681,6421,8141,9492,0242,051
Timber185234266303352408470564677
Manganese442391399332358380411451494
Other123103125142160181205233246
Import of goods (fob)−1,957−2,004−1,820−1,443−1,522−1,597−1,683−1,779−1,851
Petroleum sector−583−616−416−238−266−294−316−310−305
Other−1,374−1,388−1,404−1,206−1,256−1,303−1,367−1,469−1,546
Services (net)−969−1,161−1,113−935−967−989−1,048−1,094−1,114
Exports295298291253261271284302342
Imports−1,265−1,460−1,403−1,188−1,229−1,260−1,332−1,396−1,456
Income (net)−842−468−433−470−548−626−658−710−756
Current transfers (net)−146−152−146−136−140−143−146−139−141
Capital account000000000
Financial account−430−83732516519573544310493
Direct investment (net)381500369417448470479528578
Portfolio investments (net)000000000
Other investment assets and liabilities (net)−811−1,337−337997110365−9−85
Medium- and long-term transactions41624217260285351303215156
Short term transactions−1,227−1,362−554−162−214−249−238−224−242
Errors and Omissions−35200000000
Overall balance252−94−125−224−1462446999
Financing−25294125224146−2−44−69−99
Change in net foreign assets−25294125224146−2−44−69−99
Use of IMF credit and loans (net)000000000
Memorandum items:
(Percent of GDP)
Current account11.98.3−1.9−9.0−7.4−5.8−4.7−3.9−3.2
Oil27.722.815.24.35.05.55.65.44.9
Non-oil−15.8−14.5−17.0−13.3−12.4−11.3−10.3−9.3−8.1
Exports of goods and services60.353.743.030.530.931.231.331.230.9
Imports of goods and services−37.1−38.5−38.0−32.1−30.6−29.2−28.4−27.7−26.9
Capital and financial accounts−2.4−4.60.23.83.53.55.14.54.0
Foreign Direct Investment4.45.64.35.15.04.84.54.64.7
Overall balance1.4−0.5−0.9−1.7−1.00.00.40.60.8
(Billions of CFAF, unless otherwise indicated)
Gross official reserves imputed to Gabon1436.11347.31222.2998.1851.7853.9898.1974.21081.6
Sources: Gabonese authorities and IMF staff estimates and projections.
Sources: Gabonese authorities and IMF staff estimates and projections.
Table 6.Gabon: Financial Soundness Indicators for the Banking Sector, 2010–15(Percent)
201020112012201320142015
Q1Q2Q3Q4M2
Capital
Regulatory capital to risk-weighted assets1, 224.712.910.912.312.011.810.79.411.6
Capital to assets11.09.28.39.28.19.87.29.19.2
Asset quality
Non-performing loans (gross) to total loans (gross)3.22.82.52.72.72.88.14.14.4
Non-performing loans less provisions to total capital1.4−3.3−1.7−0.3−0.6−1.029.90.28.3
Earnings and profitability
Return on assets315.524.823.319.6−-15.2−-21.5−-
Return on equity2.32.21.91.6−-1.3−-1.7−-
Liquidity
Liquid assets to total assets25.320.922.720.017.417.816.219.019.3
Ratio of liquid assets to short-term liabilities158.5185.7283.1220.2186.8201.1209.6194.0176.8
Total deposits to total (noninterbank) loans114.7122.6115.9108.6114.5106.0109.4105.5110.4
Source: Banking Commission of Central Africa (COBAC).

Current year profits are excluded from the definition of regulatory capital, following the Basel I capital accord guidelines. General provisions are included in Tier 2 capital up to an amount equal to 1.25% of risk-weighted assets.

The risk-weighted assets are estimated using the following risk weights: 0% - cash reserves in domestic and foreign currency and claims on the central bank; 100% - all other assets.

Current year profits are excluded from the definition of capital (i.e., shareholders’ funds).

Source: Banking Commission of Central Africa (COBAC).

Current year profits are excluded from the definition of regulatory capital, following the Basel I capital accord guidelines. General provisions are included in Tier 2 capital up to an amount equal to 1.25% of risk-weighted assets.

The risk-weighted assets are estimated using the following risk weights: 0% - cash reserves in domestic and foreign currency and claims on the central bank; 100% - all other assets.

Current year profits are excluded from the definition of capital (i.e., shareholders’ funds).

Table 7.Gabon: Stress Test Results: Macroeconomic Shocks
Prior to ShockAfter Macroeconomic Shock2
Banking groupsNo. of banks1% of banks

observing the

solvency ratio
% of banks

observing the

liquidity ratio
% of banks

observing the

solvency ratio
% of banks

observing the

liquidity ratio
Gabon978674422
All CEMAC Banks4982826127
Bank with capital in CEMAC1242672533
Bank with capital in SSA1794826524
Bank with capital outside CEMAC and SSA2095908025
Source: 2015 IMF’s FSAP.

The data for one domestic Gabonese bank were not fully available.

A 30 percent increase in doubtful loans in the sectors of extractive industries, construction and public works, transport and telecommunications, government departments, and households. A decline of 25 percent in deposits for non-financial enterprises, 50 percent for the public sector, and 10 percent for financial institutions and other sectors. A 30 percent increase in accounts receivable in the sectors of extractive industries, construction and public works, transport and telecommunications, government departments, and households. Two levels of deterioration as regards meeting the convergence criteria.

Source: 2015 IMF’s FSAP.

The data for one domestic Gabonese bank were not fully available.

A 30 percent increase in doubtful loans in the sectors of extractive industries, construction and public works, transport and telecommunications, government departments, and households. A decline of 25 percent in deposits for non-financial enterprises, 50 percent for the public sector, and 10 percent for financial institutions and other sectors. A 30 percent increase in accounts receivable in the sectors of extractive industries, construction and public works, transport and telecommunications, government departments, and households. Two levels of deterioration as regards meeting the convergence criteria.

17. Gabon’s financial system is generally sound on aggregate levels, but it has shown significant sensitivity to macroeconomic shocks. Aggregate bank capital and liquidity levels appear adequate. Nonetheless, a stress test performed in the 2015 FSAP for CEMAC revealed Gabon is the second most vulnerable country in the sub-region to credit and liquidity shocks (Table 5 and 6). Gabon’s non-performing loan ratio surged from 2.8 percent in June 2012 to 8.4 percent in November 2014 in part due to government arrears, before subsiding to about 4 percent in February 2015.10 This illustrates the financial sector’s vulnerability to developments in the oil sector through the government channel (Figure 6).

Figure 6.Gabon: Recent developments in the financial sector’s assets quality

Source: COBAC and IMF staff estimates

Note: NPLs ratio stands for Non-performing loans to total gross loans; MFI stands for microfinancial institution.

18. Analysis indicates a significant causal link between oil price shocks and financial sector fragility (see accompanying SIP).11 This vulnerability has manifested as liquidity tensions in some commercial banks following the ongoing oil price shock, which forced them to resort to their parent companies or tap BEAC refinancing. The worsening growth and fiscal outlook is likely to increase NPLs significantly. The microfinance sector12 also experienced a sharp deterioration in asset quality in recent years, with NPLs rising from 14.6 percent in 2011 to 24.1 percent of gross loans in 2015. Although the underlying causes are unclear, the situation poses a serious threat to financial inclusion.

19. Staff noted that financial inclusion has improved in recent years, but there has been little impact on financial deepening. Physical outreach, as measured by the number of bank branches and ATMs per head, has substantially improved since 2004, bypassing frontier markets but remaining substantially below emerging markets levels (Figure 7). However, access to financial services is concentrated in a few urban areas and financial deepening, as measured by deposit- and loan-to-GDP ratios, is low at approximately a third of frontier markets averages and a quarter of emerging markets averages.13 A lack of information on potential borrowers’ credit history, high collateral requirements, and high lending rates are the main hurdles to credit supply.

Figure 7.Gabon: Financial Development and Inclusion

Sources: Financial Access Survey, IMF and IMF staff calculations.

20. Staff recommended decisive measures to safeguard the stability and development of the financial sector. Key actions recommended are:

  • Swiftly resolve pressing governance issues at the state-owned banks. Available options for bank resolution (restructuring or winding-down) should be assessed through careful cost-benefit analysis. Prior to injecting additional funds to restore regulatory capital, the government should ensure fundamental changes to banks’ business models, risk management, and governance.
  • Accelerate the PSGE economic diversification agenda to strengthen the financial sector’s resilience to macroeconomic shocks by allowing the banking sector to better diversify its lending portfolio.
  • Promote financial deepening and inclusion, by improving SMEs’ access to financial services; creating credit bureaus and upgrading the operations of land and commercial registries; streamlining procedures for recording and enforcing guarantees; and strengthening creditor rights enforcement.

Authorities’ views

21. The authorities acknowledged the urgency to solve the deep-seated governance issues, while noting the limited systemic risk posed by state-owned banks. They underscored that important decisions had been taken by the COBAC, notably the appointment temporary administrators with the mandate to deliver timely resolution plans. They indicated that Post Bank is the most serious case and they prefer to pursue a restructuring because its extensive rural branch network provides a strong platform for improving financial inclusion. A prerequisite for the bank’s resolution would be a clear separation of operations of the post office (La Poste) and Poste Bank. For all public banks, they reassured staff that sound governance, business strategy, and risk management will be established prior to any commitment of government funds. On financial deepening, the authorities indicated their intent to further reduce barriers to finance, in particular through setting-up a credit registry and adopting new technology innovations in the banking sector.

C. Promoting Non-oil Growth under Tighter Budget Constraints

22. The recent decline in oil prices is proving a stark reminder of Gabon’s oil dependence, underscoring the need to foster non-oil growth and employment. Econometric evidence presented in the 2015 CEMAC regional consultation staff report shows that shocks like the recent decline in oil prices could lead to negative non-oil GDP growth in Gabon, with effects from both fiscal pro-cyclicality and from direct linkages between the oil and non-oil economies. The current strong fiscal response of the authorities and increased non-oil production is expected to soften the impact during the current oil price slump. Still, the ongoing deceleration and vulnerable fiscal outlook highlights the importance of the authorities’ PSGE, which seeks better stewardship of natural resources, infrastructure and human resource development, and moving up along the value chain.

23. The authorities have been able to attract foreign non-oil investment, but partly relying on costly schemes. As part of the PSGE, the government has appropriately allocated a portion of the oil windfall to strength the country’s transport and energy infrastructure. The authorities have embarked on a major rehabilitation of the Trans-gabonais railway line with the support of the IFC. This should significantly remove bottlenecks for wood-related and mineral exports. Gabon has also partnered with Olam International in one of the largest agri-business investments currently underway in sub-Saharan Africa. The government has provided a land bank to Olam of 300,000 hectares, of which over one-sixth is already under oil palm and rubber cultivation. To date, Olam’s foreign direct investment in Gabon has totaled US$1.5 billion, including plantations and the development of the Special Economic Zone and port capacity. Further impetus is expected to come from the GRAINE14 program, a joint venture of Olam and the government to address food security and rural income issues in Gabon. These investments will increase both cash crop and subsistence farming, boosting real growth by one percentage point, although the tradeoff is government financing for related infrastructure and foregone revenue in the form of a long tax holiday.

24. There is substantial room to implement more cost-efficient reforms to attract additional investment. The focus should be on improving the business climate, especially considering that Gabon’s standing in the World Bank’s Doing Business report and in other rankings is very low, below comparator countries (Figure 8 and 9), as well as undertaking additional horizontal structural reforms aimed at reducing factor costs.

Figure 8.Gabon: Global Competitiveness Index Comparison, 2015–16

(Ranking; 140=last place

Sources: World Economic Forum and IMF staff calculations.

Figure 9.Gabon: Business Environment and Governance

Sources: Doing Business, 2016; World Bank’s Worldwide Governance Indicators (WGI), 2014, (average of control of corruption, government effectiveness, rule of law, regulatory quality, political stability and voice and accountability); Economist Intelligence Unit (EIU); and IMF staff calculations.

UMIC= Upper-middle income country; SSA= Sub-Saharan Africa; WGI= Worldwide Governance Indicators.

SSA oil exporters = Angola, Cameroon, Chad, Congo, Rep. of, Equatorial Guinea, Gabon, Nigeria.

25. With the oil price shock weighing on private sector activity, PSGE growth and diversification objectives need to be protected and structural reforms accelerated. In the present tight budgetary context, the authorities should aim to maximize the return on limited resources.

  • Investor tax incentives should be avoided, as these undermine revenue generation and are unlikely to trigger a self-sustaining process of economic diversification.
  • Investment should be reprioritized to focus on transport and energy projects with potential growth spillovers.
  • In the same vein, priority should be on horizontal structural reforms aimed at raising economic competitiveness and productivity, notably in the areas of education, infrastructure, and institutions.
  • Even prior to adopting a road map for Phase 2 of the PSGE, business climate reform should be accelerated, notably improving labor market legislation15, strengthening anti-corruption efforts and the AML/CFT framework, and cutting red tape, as recommended in an action plan developed with the IFC.
  • Deeper regional integration in CEMAC and more trade openness of the region would facilitate economic diversification in Gabon. Gabon should take a lead role in taking the necessary regional reforms forward. Similarly, Gabon should review its investment program against projects already underway in neighboring countries to ensure that possible synergies at the regional level are fully exploited.

Authorities’ views

26. The authorities concurred that in a tight budgetary environment the investment program should focus on projects with long-term spillovers. The completion of corridors connecting growth poles, the continued development of SEZs, and the setting up of an investment promotion agency would help improve the business climate and boost FDI and exports in the near term. The authorities place great store in agro-industrial projects to boost non-oil growth. They underscored the catalytic role they expect from the redevelopment of the Trans-gabonais railway line which would ease transportation bottlenecks faced by the mining and wood industries. They noted that sports infrastructure projects would generate immediate employment as well as foster local development. Nevertheless, the road map being prepared for the second phase of the PGSE would focus on social transformation, including administrative reform, employment training, and health infrastructure.

D. Ensuring External Sustainability and Improving Competitiveness

27. Gabon’s external sustainability has deteriorated significantly due to the oil price shock. The current account balance is projected to drop sharply from a surplus of 8.3 percent of GDP in 2014 to a deficit of 1.9 percent in 2015, then slowly recover but remain negative over the medium term. The recovery is predicated on the development of non-oil exports, which are projected to increase by 64 percent between 2014 and 2020 (mainly manganese and processed wood). The current account balance prospects, however, are vulnerable to spillovers from China, where rebalancing has reduced demand for commodity imports.

28. Official external reserves appear adequate, but downward pressure has intensified since the oil price shock. Although Gabon’s contribution to reserves at the BEAC is among the highest in the CEMAC region, the principle of reserves pooling implies that Gabon’s external sustainability hinges on the sustainability of the CEMAC region where overall reserves have declined even more dramatically (Figure 10). The BEAC recently adopted extraordinary measures to help countries cope with the oil price shock, through a 50-basis-point discount rate cut to 2.45 percent in July 2015 and a 52.4 percent increase in regional statutory advances in August 2015. 16 By end-2015, all countries had substantially drawn down on their deposits at the BEAC, and, except Cameroon and Gabon, they exhausted their available advances.17

Figure 10.CEMAC and Gabon: BEAC Reserve Coverage

(Months of prospective imports)

Sources: BEAC and IMF staff estimations.

29. Model-based approaches strongly suggest that the real effective exchange rate (REER) is overvalued by 3 to 16 percent. Despite the stability of Gabon’s REER, both the Bems and Carvalho (2009) and Araujo et al. (2013) methodologies point to an overvaluation of the exchange rate, ranging from about 3 to 16 percent (Annex I).

30. Given the significant real exchange rate overvaluation, staff recommended addressing competitiveness issues through:

  • Fiscal consolidation and structural reforms to promote exports diversification. The implementation of reforms under the PSGE should be continued, with increased focus on projects with the highest socio-economic returns and on improving the business climate. More horizontal reforms that better adapt education and training to the needs of the economy should also be embraced.
  • Successful lobbying by Gabon to promote more efficient regional integration, trade, and implementation of regional policies that would help reduce external vulnerabilities notably by: (i) increasing the level of international reserves through the full repatriation of reserves by member states and more ambitious fiscal consolidation policies across member states; (ii) continuing the removal of barriers to regional trade (simplifying customs procedures and restoring fully the common external tariff; implementing the rules of origin; and creating common merchandise standards).
  • Advocating greater coordination between regional and national authorities in the areas of regional governance, business climate, taxation and public investment.18 This would ensure a greater efficiency in public investment, improve the attractiveness of the region to investors, and help relax pressures on the current account.

E. Addressing Data Weaknesses and Fund Jurisdictional Issues

31. There remain serious weaknesses in data comprehensiveness, availability, and quality in Gabon. As described in the 2014 Article IV staff report, the main weaknesses include: (i) balance of payments inconsistencies; (ii) untimely financial soundness indicators; (iii) non-comprehensive fiscal statements; and (iv) scarce basic social indicators. Ratings agencies cite data weaknesses as a factor negatively affecting Gabon’s sovereign debt ratings.

32. The authorities have made progress in addressing some of the shortcomings. Notably, the government issued the law establishing a national system of statistics and adopted a decree creating the National Agency for Statistics, and Demographic, Economic, and Social Studies. In addition, the 2013 demographic census has been finalized (estimating total population at 1.8 million) and through IMF technical assistance they are working toward the production of quarterly national accounts data. The authorities have also significantly improved the timeliness of the fiscal, monetary, and price data provided to the IMF.

33. Staff encourages the authorities to redouble their efforts to strengthen their statistics services. Special attention should be given to the quality of the data and to producing high frequency indicators.

  • Improving the quality of the data is a major requisite for the proper design and monitoring of the PSGE and to improve Gabon’s access to international financial markets.
  • The elaboration and publication of high frequency indicators is needed to improve economic surveillance, as well as the incorporation of more analytical elements to the Note de Conjoncture (a report published quarterly by the Ministry of the Economy).

34. Fund jurisdictional issues: As noted in previous Article IV staff reports, Gabon maintains a 1.5 percent tax on wire transfers abroad that is not consistent with Gabon’s obligations under Article VIII, Section 2(a) of the Articles of Agreement. The proceeds of this tax are used to fund Gabon’s health insurance scheme. The authorities note that they have exempted a number of transactions from this tax (notably, all interbank transfers), but do not propose eliminating the tax.

Authorities’ views

35. The authorities indicated that they are strongly committed to improving statistical systems, as well as data quality and timeliness. To this end, the government is negotiating a loan with the World Bank to support the national statistical development strategy. Its key components include; (i) institutional reforms; (ii) human resource development; (iii) enhancement of quality and timeliness of statistics; and (iv) improvement of warehousing and dissemination of statistics.

Staff Appraisal

36. The recent collapse in oil prices represents major terms-of-trade shock for Gabon, demanding an equally exceptional policy reaction from the authorities. As part of a monetary union with a currency pegged to the euro, efforts should center on adjusting government finances to the new oil price outlook. Besides helping preserve internal and external macroeconomic balances, fiscal adjustment is also a prerequisite to ensure proper financing of the authorities’ non-oil economic growth strategy. The magnitude of the terms-of-trade shock also requires careful monitoring of its likely negative impact on the financial sector. While implementing these measures the authorities also need to maintain focus on long-term reform efforts such as the improvement of its statistics system. Given its prominent role in the CEMAC, Gabon should play a key role as a champion for reform.

37. Given medium-term projections that put the international oil price at less than half of its pre-2015 levels, the government needs to make additional efforts to cut spending while judiciously increasing non-oil revenues and protecting social spending. The authorities are taking significant steps to this end, especially with their efforts to rein in the outsized wage bill. Staff welcomes the recent elimination of all diesel and petrol subsidies, and the introduction of an automatic fuel-pricing mechanism. However, there is urgent need to reverse recent measures that erode the revenue base (tax and fee exemptions to control the cost of living and restrictions on imported used vehicles), avoid clearly inefficient spending such as sports infrastructure, foster PPP participation for infrastructure development, and protect social spending. Given considerable changes in underlying macroeconomic conditions since the draft 2016 budget was prepared, staff believes an early revision to the budget is warranted to avoid escalating fiscal imbalances and increase policy credibility.

38. Ongoing public finance management reforms would contribute to fiscal adjustment. The ongoing implementation of the BOP is an important step to address the major public finance management weaknesses that were identified in the 2013 Public Expenditure and Financial Accountability (PEFA) performance assessment. Results are already showing up, but recent recommendations by IMF technical assistance need to be taken into account, while emphasizing measures to improve treasury management and to avoid further accumulation of arrears, especially external ones.

39. The massive terms-of-trade shock requires the government to carefully monitor macrofinancial linkages that could amplify its economic impact. The regional and national authorities need to aggressively address currently troubled public banks. In addition, and considering the dominance of oil and government activities to bank creditors, the entire banking system needs to be closely monitored, focusing on the likely increase in NPLs. The financial sector’s resilience to macroeconomic shocks needs to be enhanced, by promoting economic diversification which would foster the diversification of the banking sector’s lending portfolio. At the same time, the authorities should not lose track of their long-term goals to promote financial deepening and inclusion.

40. Fiscal adjustment should take into account the evident need to foster Gabon’s economic diversification and reduce its vulnerability to oil price fluctuations. In the present tight budgetary context, the authorities should aim to maximize the return on limited resources and avoid incentives for investors, while focusing spending on infrastructure development, prioritizing horizontal, productivity-boosting structural reforms, notably in the areas of education, infrastructure, institutions, labor flexibility, bureaucratic procedures, anti-corruption, and AML/CFT. Gabon could also advocate for CEMAC external trade liberalization, as well as deeper intraregional integration. Such productivity enhancing measures are also needed to address current real exchange rate overvaluation.

41. Staff commends the authorities for their efforts to address major weaknesses in economic statistics, while noting that they are still a major hindrance on economic surveillance. The negative impact of weak statistics on Gabon’s sovereign debt rating is noteworthy. Ongoing measures to improve the quality and timeliness of high-frequency macroeconomic indicators and social indicators are crucial, but work is also needed to improve the very weak balance of payments and financial stability statistics. Staff encourages the authorities to implement measures under the forthcoming World Bank-supported statistics reforms.

42. Gabon maintains a tax on wire transfers, which is inconsistent with its obligations under Article VIII. Staff does not recommend approval of this restriction.

43. Staff recommends that the next Article IV consultation with Gabon be held on the standard 12-month consultation cycle.

Table 8.Gabon: Profitability and Size of Banks, 2013
Assets

(Percent of GDP)
Assets

(Percent of total assets)
Publicly owned banks2.99.5
Private banks28.090.5
Source: COBAC and IMF staff calculations.
Source: COBAC and IMF staff calculations.
Table 9.Gabon: Millennium Development Goals
199019952000200520092012
Goal 1: Eradicate extreme poverty and hunger
Employment to population ratio, 15+, total (%)6060606162..
Employment to population ratio, ages 15-24, total (%)4041403938..
Malnutrition prevalence, weight for age (% of children under 5)....9....6
Goal 2: Achieve universal primary education
Primary completion rate, total (% of relevant age group)70687269..88
Total enrollment, primary (% net)..9282....96
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliaments (%)13..8917..
Ratio of female to male primary enrollment (%)1009910099..100
Ratio of female to male secondary enrollment (%)868286....110
Ratio of female to male tertiary enrollment (%)42..54......
Share of women employed in the nonagricultural sector (% of total nonagricultural employment)..29.3........
Goal 4: Reduce child mortality
Immunization, measles (% of children ages 12-23 months)765755555574
Mortality rate, infant (per 1,000 live births)686563595543
Mortality rate, under-5 (per 1,000)938988827565
Goal 5: Improve maternal health
Adolescent fertility rate (births per 1,000 women ages 15-19)..1301169786114
Births attended by skilled health staff (% of total)....86....89
Contraceptive prevalence (% of women ages 15-49)....33....31
Maternal mortality ratio (modeled estimate, per 100,000 live births)260250260260260316
Pregnant women receiving prenatal care (%)....94....95
Unmet need for contraception (% of married women ages 15-49)....28....27
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Children with fever receiving antimalarial drugs (% of children under age 5 with fever)..........26
Condom use, population ages 15-24, female (% of females ages 15-24)..........60
Condom use, population ages 15-24, male (% of males ages 15-24)..........78
Incidence of tuberculosis (per 100,000 people)153155248326502428
Prevalence of HIV, female (% ages 15-24)........3.52.4
Prevalence of HIV, male (% ages 15-24)........1.40.4
Prevalence of HIV, total (% of population ages 15-49)0.93.15.25.45.21.5
Tuberculosis case detection rate (%, all forms)656673564171
Goal 7: Ensure environmental sustainability
CO2 emissions (kg per PPP $ of GDP)00000..
CO2 emissions (metric tons per capita)54112..
Forest area (% of land area)85.4..85.485.485.485.4
Improved sanitation facilities (% of population with access)..3636333338
Improved water source (% of population with access)..8485868789
Marine protected areas (% of territorial waters)001772
Net ODA received per capita (current US$)14113294452..
Goal 8: Develop a global partnership for development
Debt service (PPG and IMF only, % of exports, excluding workers’ remittances)51593....
Internet users (per 100 people)0.00.01.24.96.78.6
Mobile cellular subscriptions (per 100 people)00105493180
Telephone lines (per 100 people)233321
Fertility rate, total (births per woman)554434
Source: Authorities and World Development Indicators
Source: Authorities and World Development Indicators
Annex I. Gabon: Risk Assessment Matrix1
Nature/Source of RiskLikelihoodExpected Impact on EconomyPolicy Responses
Domestic Risks
Insufficient adjustment of current spending.MH. Loose current spending would force debt-financing and/or cuts in needed public investment and social spending.Tighten fiscal policy, while shielding social spending and prioritizing financing of the PSGE.
Political turmoil due to upcoming elections.LH. Social turmoil would affect economic activity and government finances in an already tight fiscal situation.Restrain fiscal policy, while properly financing security activities and shielding social spending.
Financial turmoil due to difficulties in three public banks, especially severe liquidity problems in Post-BankMM. Turmoil motivated by generalized public distrust in banks, fueled by inadequate remedial actions could affect needed credit to several sectors.Take decisive action to strengthen financial situation of public banks, most urgently Post-Bank. Will likely involve restructuring and recapitalization.
Failure of full materialization of the diversification strategy due to insufficient fiscal space and structural reforms.MH. Investment and growth would remain hampered by a poor business environment and over-reliance on a public sector-led growth model.Implement structural reforms to enhance competitiveness.
Loose fiscal and monetary policies in CEMAC, and regional institutional reform stalled.MH. Continued loss of foreign exchange reserves. Regional integration and cooperation would remain limited.Further tighten fiscal and monetary policy. Advocate for deeper regional institutional reforms.
External Risks
Persistently low energy pricesHH. Lower oil exports would sharply reduce government revenue and lead to increased public debt levels. Financing for infrastructure would be curtailed.Restrain fiscal policy, while shielding social spending and prioritizing financing of the PSGE.
Increased volatility in energy pricesMH. Increased volatility in oil prices due to uncertainty on the persistence of the oil shock could depress exploration activity and weaken long-term prospect for the oil sector.Implement structural reforms to enhance competitiveness.
Sharp asset price adjustment and decompression of credit spreadsHH. Financing of projected fiscal deficits would become more difficult and more costly.Restrain fiscal policy (shielding social spending and prioritizing financing of the PSGE). Implement structural reforms to lower country risk.
Structurally weak growth in key advanced and emerging economies, including China.MM. Demand for non-oil exports and FDI would be reduced, and would negatively impact efforts of diversification.Implement structural reforms to enhance competitiveness.
Heightened risk of fragmentation/state failure/security dislocation in some countries in AfricaMH. Spread of regional political instability would affect economic activity and government finances in an already tight fiscal situation.Restrain fiscal policy, while properly financing security activities and shielding social spending.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Annex II. Traction of Past IMF Recommendations

1. Gabon’s track record in implementing the recommendations of the previous Article IV consultation has improved substantially (see Table 1). The government eliminated some tax exemptions, reduced wage bill growth, eliminated subsidies to diesel and petrol, and liberalized fuel importation. On the other hand, several products have been added to the list of tax exemptions. Public finance management (PFM) reforms as part of the BOP reform should improve the quality of investment. An investment promotion agency has been set up to improve the business climate, important initial steps have been taken to improve economic statistics, and the government is taking action to strengthen weak public banks.

Table 1.Status of Implementation of Key Recommendations from the 2014 Article IV Consultation
RecommendationStatus
Reducing tax exemptions and exonerationsPartly done, but new products added to list of exempted products as part of the “policies against expensive living costs”.
Greater control of wage billPartly done; implemented reforms that curbed wage bill growth.
Phase out of fuel subsidiesDone; fuel importation was liberalized in 2015 and remaining petrol and diesel subsidies have been removed.
Improve quality of investmentInitial steps taken; public finance reforms being implemented.
Improve business climateInitial steps taken; investment promotion agency being set up.
Address financial situation of weak public banksInitial steps taken; notably the government appointed temporary administrators.
Improve economic statistics for surveillanceInitial steps taken; creation of national statistics agency, population census adopted, more timely data supply to the Fund, preliminary work towards high frequency indicators.
Sources: 2014 Article IV staff report on Gabon and information from the authorities.
Sources: 2014 Article IV staff report on Gabon and information from the authorities.
Annex III. External Assessment

Protracted oil-price shock and secularly declining oil production continue to hamper Gabon’s external position as evidenced by recent trends in global trade shares. The Bems and Carvalho (2009) and Araujo et al. (2013) methodologies suggest that the real effective exchange rate (REER) is overvalued by 3 to 16 percent. This result is predicated on the sharp decline in the current account balance following the recent commodity price shock, notwithstanding the decline in the REER over the past year on account of the strong dollar.

1. Gabon’s real effective exchange rate has declined since last 2014, after a long period of relative stability compared to CEMAC countries. The downward pressures are attributable to the US dollar appreciation against the euro, to which the CFA franc is pegged, and low domestic inflation. Gabon’s consumer price index, after averaging 4½ percent in 2014—owing to high level of international commodity prices—subsequently embarked on a downward trend through 2015, and is expected to remain low in the medium term.

2. Results from the methodology of Bems and Carvalho1 point to real exchange rate overvaluation of about 8 to 16 percent, assuming that trade balance elasticity relative to the real effective exchange rate is -0.6. The norms from this first methodology, derived under the permanent income hypothesis and with no account for future returns on public investment, are significantly above Gabon’s medium term current account path, given the current context of public investment scaling-up.

3. The methodology of Araujo et al. (2013) is more appropriate in the current context to take into account the significant public investment in Gabon, and also suggests that the effective real effective exchange rate is overvalued. This methodology solves for a current account norm resulting from a welfare maximization problem in which productive investment needs may be financed by contracting external debt to be repaid with income flows from oil resources windfalls. The model takes into account many frictions common to developing countries, and suggests an overvaluation of 3 and 7 percent under cost overrun assumptions of 60 and 40 percent, respectively. Higher cost overruns lead to relatively higher investment needs and imply a lower current account balance norm.

Gabon: Real Effective Exchange Rate and Current Account Projections and Norms

(2010=100 and percent of GDP)

Sources: IMF staff estimates and projections.

Gabon: External Stability Assessment, 20211
Bems and CarvalhoAraujo et al.Araujo et al
Constant real

annuity
Constant real per

capita annuity
Cost overrun of

60 percent
Cost overrun of

40 percent
MT trade balance norm (Percent of GDP)1.56.1−1.21.0
Underlying trade balance (Percent of GDP)−3.2−3.2−3.2−3.2
Trade balance elasticity 20.60.60.60.6
Overvaluation (Percent)8.016.03.47.2
Source: IMF staff estimates.

Based on Bems and Carvalho (2009) and on Araujo et al. (2013).

Trade elasticity is estimated assuming exports volume and imports volume elasticities equal to zero (Hakura and Billmeier, 2008).

Source: IMF staff estimates.

Based on Bems and Carvalho (2009) and on Araujo et al. (2013).

Trade elasticity is estimated assuming exports volume and imports volume elasticities equal to zero (Hakura and Billmeier, 2008).

4. The evolution of Gabon’s share in global trade has coincided with oil price fluctuations, pointing to significant external sector vulnerabilities. The country’s high reliance on the oil sector has been demonstrated during recent oil-price slump episodes. During the 2008 oil-price shock, Gabon’s exports share dropped to 0.04 percent from 0.05 percent. Starting from 2012, Gabon’s share of global trade also shrunk as a result of secularly declining oil production, exacerbated in 2014 by the unfolding oil-price slump. The apparent vulnerability of Gabon’s external sector stems from the weak diversification of its exports, with oil representing 84 percent of total exports in 2014 and 76 percent in 2015. The value of non-oil exports has somehow stagnated during past years, reinforcing the need for structural reforms to increase manganese, wood, and other exports. In particular, these reforms could target the weak productivity and structural bottlenecks that hinder competitiveness and amplify Gabon’s external vulnerability (see Sections C and D of the staff report).

CEMAC: Exports share

(Percent of World Exports)

Gabon: Exports composition

(Billions of CFAF)

Sources: IMF staff calculations

1The 2014 Article IV staff report provides more information on the PSGE.
2Of the US$1.5 billion, US$610 million was issued for liability management operations.
3Under this assumption the oil price would average US$25 per barrel in 2016.
4The authorities project end-2015 domestic arrears at CFAF 162 billion.
5Since the CFA franc is pegged to the euro, fiscal policy is the main policy mechanism to adjust to the terms-of-trade shock.
6Note that only 55 percent of planned improvements to the main road corridors have been finalized.
7About half of Gabon’s public debt is denominated in US dollars, with Eurobonds accounting for most of it. The authorities continue to rely on the US dollar-denominated Eurobonds considering them their only feasible alternative to obtain large amounts of new budget financing.
8Most studies show that investment in major international sporting events has relatively limited long-term economic returns (see a complete review of this issue in “Is it Worth it?” Finance and Development, March 2010).
9The preferred options should be restructuring and recapitalization to preserve the value of the branch network.
10Most recent observation provided by the authorities during the Article IV mission.
11A 40 percent oil-price shock (roughly the magnitude of the fall between June 2014 and December 2014) leads on average, to a 40 percent deterioration in asset quality across oil exporters. Such shock is transmitted through the government and the economic activity channels, and its magnitude depends on existing institutional frameworks, fiscal and financial buffers, and developments in the oil and non-oil sectors.
12The microfinancial sector, which consists of 10 institutions, has experienced a rapid increase in deposit and lending activities in recent years, with a deceleration in 2013 and contraction in 2014.
13Financial access and deepening in Gabon and CEMAC remain below emerging and frontier markets levels, even when measured in terms of non-oil GDP.
14Gabonaise des Réalisations Agricoles des Nationaux Engagés.
15Gabon fares better than the average of comparator countries (Figure 8) on the Global Competitiveness Index for labor market efficiency (68 of 140 countries), but several aspects need to be improved. While redundancy costs have been considerably reduced lately, there is a relatively high level of female participation, Gabon is relatively poor performer on some survey-based measures of labor market efficiency such as managerial proficiency (ranked 91) and on linking pay to productivity (ranked 114).
16The overall increase in statutory advance was granted through the restoration of the statutory advances ceiling to 20 percent of the previous fiscal year’s domestic revenue for each member state and a resetting of the reference year to 2014 from 2008.
17As of November 2015, Gabon had used up CFAF 340 billion out of CFAF 453 billion (ceiling).
18The management of public investment projects should be improved through the creation of monitoring committees within the CEMAC Commission for major national and regional projects, focusing on projects that generate growth, with a more pronounced role for the regional development bank, the BDEAC, in supporting regional development projects.
1The Araujo et al. (2013) methodology estimations were prepared by Nathalie Gonzalez.

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