Directors welcomed the opening of Chad’s first oil refinery, but expressed concern that setting fuel prices below the prevailing market level had disrupted imports and caused shortages. Noting the merits of mitigating the adverse impact of high fuel prices on the most vulnerable segments of the population, Directors cautioned that such measures should be efficient, targeted, and fiscally affordable.

While agreeing that higher-than-expected oil prices contributed to relaxing the financing constraint in the short term, Directors noted that oil price volatility and the projected medium-term decline in oil production warrant building a savings buffer, to smooth public spending, ensure adequate resources for poverty-reduction programs, and preserve debt sustainability. In this context, Directors welcomed the authorities’ plan to increase efforts to mobilize non-oil revenue, and to reduce the non-oil primary deficit to a sustainable position over the medium term.

Directors urged the authorities to improve the quality of infrastructure spending through better project selection and implementation, and by adjusting the public investment budget to the absorptive capacity of the economy. In view of the past record of optimistic revenue forecasts, Directors deemed it prudent to make a portion of the public investment program contingent on the realization of revenue plans, and encouraged the authorities to pursue a prudent nonconcessional borrowing policy.

Directors also underscored the need to promote non-oil growth and diversification in the medium term. They noted the institutional weaknesses behind the difficult business climate, in general, and financial sector vulnerabilities and underdevelopment, in particular. They encouraged the authorities to implement structural reforms that would facilitate private investment and further develop financial markets, notably by streamlining regulatory processes, simplifying the business tax system, reforming key state-owned enterprises, and enhancing confidence in the judicial system. Directors encouraged the authorities to work with other CEMAC members to strengthen the regional bank supervisor’s bank resolution powers.

Directors welcomed the authorities’ renewed interest in a staff-monitored program (SMP), which could pave the way to a financial arrangement under the Extended Credit Facility and to the completion point under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC). Directors stressed that progress on fiscal policy and public financial management would be key to reaching agreement on, and successful performance under, an SMP.

To this effect, Directors encouraged the authorities to continue their efforts to improve the quality and timeliness of economic and financial data.

Background

Chad’s internal security situation has improved since last year’s Article IV consultations, but the crisis in Libya poses risks. Over 70,000 people fleeing violence have been repatriated to or via Chad, with the help of international agencies. The domestic political situation is relatively calm, with legislative and presidential elections having passed without serious disruption, but opposition leaders boycotted the elections and alleged fraud. To accelerate non-oil growth and stem the impact of dwindling oil reserves on income, exports, and fiscal revenues, the government has been pursuing an ambitious public investment program and welcomed foreign direct investment in industrial projects.

With real GDP growth reaching 13 percent in 2010, Chad recovered strongly from the 2009 downturn. Oil production increased, as high oil prices justified additional investment to bolster extraction rates. With favorable rains and government measures to provide agricultural inputs, as well as increased cultivated area, agricultural production nearly doubled and food and consumer prices declined. Notwithstanding the increased export earnings from oil, the external current account deficit widened to 35 percent of GDP, because of the high import content of investment spending (notably, in the oil sector).

Despite some improvements, serious deficiencies in budget execution persisted. The share of spending executed with emergency procedures (“depense avant ordonnancement” – DAO) was lower in 2010 than in 2009, but still accounted for over one quarter of domestically financed discretionary spending (9.3 percent of non-oil GDP) and DAOs equivalent to 4.3 percent of non-oil GDP awaited regularization at end-2010. On the positive side, the share of contracts awarded without competitive tender fell from 85 percent in 2009 to 49 percent in 2010.

The overall fiscal position improved in 2010, reflecting higher than projected oil prices and increased non-oil tax revenue, but the underlying fiscal stance, as measured by the non-oil primary deficit (NOPD), weakened from 28 percent to 31 percent of non-oil GDP. The NOPD target established in the 2010 supplementary budget was overshot by 2½ percent of non-oil GDP, mainly due to domestically-financed public investment. The level of official reserves increased, but their ratio in months of imports of goods and services (excluding oil-sector imports) weakened somewhat. Chad’s real effective exchange rate remained broadly in line with that of other CEMAC (Central African Economic and Monetary Community) countries. Broad money increased by 25 percent, in line with nominal GDP, while credit to the economy grew 19 percent, roughly in line with nominal non-oil GDP.

Chad’s public finances and financial sector are overexposed to oil risk. Since the beginning of the oil era in 2003, Chad has pursued an expansionary and procyclical fiscal policy, straining the absorptive capacity of the economy and the public financial management capacity of the administration. Without a financial cushion in the form of government deposits, a shock like the one experienced in 2009 would imply a forced fiscal tightening, a significant investment slowdown, and increased domestic arrears, possibly including arrears to the central bank. In turn, government suppliers may be unable to service their debts, and, commercial banks’ nonperforming loans would rise. Although higher oil prices have relaxed short-term financing constraint, better public financial management and budgetary discipline are needed to make efficient use of finite oil resources.