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Statement by Mr. Yambaye, Executive Director For Gabon, February 19, 2016

Author(s):
International Monetary Fund. African Dept.
Published Date:
March 2016
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On behalf of my Gabonese authorities, I would like to express my appreciation to management and staff for their continued support and technical assistance provided to Gabon. My authorities appreciate the candid and constructive discussions with staff during the Article IV discussions in Libreville in November 2015. They welcome staff recommendations and inputs in their economic policy agenda.

Economic activity and the country’s finances were severely affected in 2015 by the sharp decline in oil prices, despite significant fiscal adjustment that started in the second half of 2014. My authorities have continued to adapt their policy program to changing economic conditions. As I mentioned in my Buff statement on Gabon last year, my Gabonese authorities decided to slow down pace of implementation of their national development plan, Plan Stratégique Gabon Emergent (PSGE), in order to align related expenditures with the absorptive capacity of the country and the level of budgetary resources, and preserve fiscal sustainability. The 2014 budget was revised accordingly in July 2014 with notably a halving of the public investment spending, before the oil prices even begun their inexorable decline. As international oil prices declined sharply toward end-2014, the draft 2015 budget was reviewed with more conservative revenue assumptions at the time. Later, the 2015 budget was revised again, as oil prices declined further and remain much lower than projected throughout 2015, which further complicated the implementation of the PSGE.

With oil prices continuing to fall in early 2016, the authorities are taking additional measures to tighten the budget. As in the past, given the regional fixed exchange rate regime in place, my authorities intend to respond to the projected tighter resource constraint by further scaling down expenditures related to the implementation of the PSGE, while speeding up structural reforms to foster economic diversification and increase the resilience of the economy to exogenous shocks.

I. Recent economic developments

The persistent low oil prices affected negatively the macroeconomic performance in 2015. Growth is estimated at 4.0 percent in 2015, down from 4.3 percent in 2014. This slowdown came mainly from the non oil sector which was hit by the lower public demand that resulted from declining oil revenues (4.0 percent in 2015 against 5.0 percent in 2014). Oil production, however, increased from 1.8 percent in 2014 to 4.2 percent in 2015 thanks to the drilling of new wells and the application of new enhanced oil recovery techniques. Inflation has remained flat with sluggish domestic demand; the current account balance turned negative in 2015 due to lower oil export value and international reserves have declined.

Budget execution in 2015 has been prudent. Public investment spending was slowed down as both oil and non-oil revenue collection continued to underperform projections. External arrears that emerged in 2014 were settled. Large domestic arrears were also paid thus limiting their impact on economic activity and the financial sector. However, arrears payments led to a sharp deterioration of the overall fiscal balance. Public debt remains moderate at 43 percent of GDP, although it has increased in the past few years following the issuances of the two Eurobonds (US$1.5 billion and US$ 500 million) whose proceeds are being used to finance the PSGE.

Some progress has been made in the implementation of fiscal reforms. My authorities pursued the implementation of the Budgétisation par objectifs de programme (BOP) in accordance with CEMAC regional directives to strengthen public financial management. 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. These actions are in line with the 2013 PEFA recommendations. More recently, petrol and diesel subsidies were eliminated and an automatic petroleum price-setting mechanism was introduced.

The health of the financial sector is good and troubled banks are being resolved. Banks are well capitalized. The repayments of government domestic arrears kept the NPLs at a low level. My authorities are addressing the three troubled banks in cooperation with COBAC, the regional banking supervision agency. In particular, three banks, which represent 9 percent of total banking system assets, have been placed under provisional administration. The temporary administrators are tasked with delivering resolution plans to improve governance, business strategy and risk management in the banks. Asset quality in the microfinance sector is also deteriorating with the slowdown in the non-oil economy. Financial inclusion has improved in terms of physical outreach.

Structural reforms to foster economic diversification in the context of the PSGE are also advancing well. The implementation of projects launched since 2010 to upgrade infrastructure in the transport and energy sectors and to develop agri-business is proceeding well. Furthermore, as indicated earlier, in order to forcefully address unemployment and poverty, my authorities launched in 2014 several initiatives that aim, among others, at promoting income-generating activities, developing human capital and improving the social conditions of the most vulnerable segments of the population. In particular, an agricultural program, Programme GRAINE, developed in partnership with a Singapore-based multinational corporation, was launched to promote the development of agriculture through the provision of a multiform assistance to producers organized in cooperatives. The implementation of this program is accelerating. Through this program, my authorities expect to increase individual empowerment and tackle rural exodus while improving land use planning and contributing to economic diversification.

Significant progress was made towards addressing data weaknesses. The timeliness of the fiscal, monetary and price data provided to the IMF has improved. The 2013 Demographic census has been finalized. Work is underway with the assistance of the World Bank for the production of quarterly national accounts data. A national system of statistics has been established and a national agency for statistics has been created

II. Policies for 2016 and beyond

Gabon is undeniably facing a challenging economic environment. The country’s medium term growth outlook has deteriorated, with dimmer prospects of an oil price recovery in the near term. GDP growth will decline further in 2016, driven by a continued slowdown of the non-oil sector as a result of a constrained public demand. Inflation is expected to remain well below the related regional convergence criterion.

To address the downside risks, my authorities concur that a reprioritization of the investment program is needed. As noted above, they will streamline the PSGE notably by focusing on projects with greater long term socio-economic returns and on improving the business environment. These include, as staff note, the road corridors that connect growth poles identified in the PSGE, the agro-industrial projects and the rehabilitation of the railway line which is key to the transportation of the production of the mining and wood industries to the port. These projects will remove obstacles to private sector development while boosting non-oil growth in 2017 and beyond.

The fiscal program for 2016 and the medium term envisages the adoption of several revenue-enhancing and expenditure-reducing measures to reduce fiscal vulnerabilities stemming from oil price developments, improve medium-term fiscal sustainability and put debt dynamics on a sustainable path. In particular, the 2016–18 MTFF assumes a freeze in current spending and a reduction in capital spending of 8 percent between 2015 and 2018.

Moreover, my authorities are now seeking to contain the growth of the wage bill. They have taken several measures, in that regard, including incentives for early retirement, recruitment freezes, and the elimination of an inefficient incentive system. With the assistance of the World Bank, they will continue the development of the civil service reform that will overhaul the existing framework from recruitment to administration to compensation.

As regard fiscal reforms, my authorities agree with staff, notably, on the need to enhance tax administration and reduce tax exemption. They will pursue the BOP reforms, taking into account the recent recommendations of IMF technical assistance. Tax exemptions will also be reviewed with the assistance of the World Bank. However, all tax exemptions cannot be eliminated for contractual and legal reasons. Nevertheless, a first step would be to eliminate tax exemptions with no legal basis and not to grant new ones. Existing tax exemptions will not be renewed at expiration.

As regards the tax on non-bank wire transfers, my authorities remain of the view that it does not affect cash transfers and is consistent with proposals in the international arena to tax capital flows. Furthermore, the removal of this tax still remains a politically sensitive issue as the proceeds of this tax go to the health insurance fund.

Given the increased vulnerability of the financial sector to macroeconomic shocks according to the stress tests performed in the 2015 FSAP for CEMAC, my authorities are committed to strengthen the sector’s stability and pursue greater financial inclusion and deepening. They are determined to carry out the resolution of the troubled banks. They will particularly focus their efforts on a successful restructuring of the Post Bank because of its extensive rural branch network which has contributed to improve financial inclusion. My authorities recognize that further progress is needed to deepen the financial sector. In this regard they intend to further reduce barriers to financial services and financial deepening, in particular through setting-up of a credit registry and adopting new technology innovations in the banking sector. They will continue to monitor closely the microfinance sector to preserve its soundness.

In conclusion, in spite of the major shock to the economy brought about by the significant fall in oil prices, Gabon is pursuing its fiscal consolidation efforts in a determined way so as to preserve fiscal sustainability, while also ensuring that the measures implemented do not have too much of a negative impact on economic growth. In this regard, they will continue to implement steadfastly measures that will reduce the fiscal deficit, and focus the investment program on projects with positive long-term spillovers.

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