Directors emphasized that, as oil reserves dwindle, sustained fiscal consolidation, while addressing Gabon’s substantial development needs, is crucial. Annual budgets need to be linked to longer-term policies and to making progress toward fiscal sustainability. Capital spending should be anchored in a realistic multiyear investment plan and a credible medium-term fiscal strategy to safeguard macroeconomic stability. A number of Directors saw scope in the short term for accelerating fiscal consolidation, while at the same time scaling up infrastructure and health and education investment. A few other Directors saw merit in a more gradual adjustment.

Directors welcomed the authorities’ intention to strengthen public financial management to improve the quality of spending and release resources for growth-enhancing spending and social outlays. Reforms to refocus public investment on key infrastructure and social projects and to strengthen the appraisal, selection, and monitoring of projects are a priority. Directors also stressed the importance of enhanced transparency and accountability in the management of resources from the country’s extractive sector, in particular with respect to the new funds under consideration.

Directors noted the staff’s assessment that the real effective exchange rate appears broadly in line with fundamentals. At the same time, they encouraged the authorities to step up efforts to enhance external competitiveness. To address the poor performance of the non-oil sector, structural reforms are needed to improve the business climate, build basic infrastructure, enhance health and education services, and increase labor market flexibility.

Directors underlined that limited access to financial services remains a serious obstacle to private sector development. They considered that priority should be given to improving the institutional and regulatory environment, in particular for small and medium enterprises. Directors advised the authorities to eliminate as soon as possible the tax on wire transfers, which gives rise to an exchange restriction under Article VIII.

Directors encouraged the authorities to further improve the quality of economic and financial data, making use of technical assistance from the Fund and donors.

Background

Gabon is recovering from the financial crisis. Low prices and weak demand for commodities shrank the fiscal and current account surpluses in 2009 and turned growth moderately negative. Real Gross Domestic Product is estimated to increase to 5.7 percent in 2010 and remain broadly at that level in 2011, reflecting public investment and a rebound in mining. Average annual inflation is projected to remain subdued. The non-oil primary deficit will deteriorate significantly, reflecting the increase in government investment and the fall in non-oil revenues.

Economic activity is projected to remain robust in 2011, supported by mining, wood processing, and public investment. Inflation is forecast to pick up, mostly driven by higher food and energy prices. The foremost risk to the economic outlook is a decline in oil and manganese prices, because these commodities accounted for about 90 percent of total exports of goods and 45 percent of nominal GDP on average during the last decade.

To improve the quality of spending and release resources for growth-enhancing spending and social outlays, the government is strengthening public financial management. Reforms to enhance the business environment for private sector promotion focus on abolishing burdensome regulations involving lengthy procedures. Also, to facilitate access to financial services, work is ongoing to finalize the microfinance medium-term strategy.

Looking ahead, the government aims to transform Gabon into an emerging economy through diversification away from oil and promotion of a business friendly environment.