IMF Executive Board Concludes 2015 Article IV Consultation with Gabon
On February 19, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Gabon.
Gabon’s economy is facing mounting headwinds. Economic activity benefited from a one-off boost in oil production in 2015, due to the introduction of new oil fields and productivity improvements, which are expected to help maintain overall growth around 4 percent in 2015. However, the slowdown in non-oil economy activity continued, led by construction, transport, commerce, and services. An important factor in slowing non-oil activity are falling oil prices and oil-related revenue, which is reducing aggregate demand and spurring a large fiscal consolidation.
Even so, the strains on the budget are intensifying, leading to a shift of the fiscal balance (commitment basis) from a surplus of 2.5 percent of GDP in 2014 to a deficit of 2.3 percent in 2015, a rise in public debt above the government’s self-imposed ceiling of a debt-to-GDP ratio of 35 percent, and a decline in government deposits and foreign reserves. This substantial terms-of-trade shock is also impacting the external position, which turned from a surplus of 8.3 percent of GDP in 2014 to a deficit of 1.9 percent in 2015. Consumer price inflation (CPI) has come down sharply over the past year and expected to be about zero percent in 2015.
Gabon’s economy remains heavily dependent on oil, and as such the medium-term economic outlook has deteriorated in tandem with weakening prospects for that sector. In 2016, overall growth is expected to decline to 3.2 percent, largely due to declining oil production. Ongoing, large-scale investments in the agricultural sector, especially in cash crops such as palm oil and rubber, are expected to accelerate significantly in 2017–18, could lift growth to around 5 percent in the medium term. Realization of this scenario will depend on sustained progress on Gabon’s economic diversification strategy, the Plan Stratégique Gabon Emergent (PSGE), which needs to be carefully prioritized given the tight financing constraints posed by the current juncture.
The main downside risk to the outlook remains weak fiscal adjustment to sharply lower oil prices. In the event of weaker-than-projected performance on oil revenues or government spending, the government would be forced to substantially draw down on its deposit buffer and/or significantly increase borrowing. Other risks concern a stronger-than-expected spillover of the oil price shock to non-oil economic activity (including to the financial sector), a weaker global economy, tightening international financial conditions, as well as persistent fragility at three small distressed state-owned banks.
Executive Board Assessment
Directors noted that the low oil price outlook and the secular decline in oil production continue to test Gabon’s macroeconomic resilience and weigh on the country’s medium-term growth prospects. Directors underscored the critical importance of redoubling efforts to foster economic diversification, continuing fiscal adjustment in response to the oil shock, buttressing financial sector stability, and invigorating structural reform.
Directors stressed the need for stronger efforts to ensure fiscal and external sustainability in the face of lower oil revenue. In this context, they supported the authorities’ focus on containing the public wage bill, and commended the recent elimination of diesel and petrol subsidies. They emphasized the importance of prioritizing measures to reverse the recent erosion of the revenue base by curbing tax exemptions and enhancing revenue administration. Other priorities include reducing inefficient spending in favor of productive expenditure, fostering private sector participation in infrastructure projects, and safeguarding social spending. Directors welcomed the ongoing public financial management reforms and encouraged the authorities to adopt the recommendations of recent Fund technical assistance, including strengthening treasury management.
Directors noted that while Gabon’s financial system is broadly sound, the weak financial condition of public banks needs to be addressed urgently. They underscored the need for vigilance on macro-financial linkages that could amplify the impact of the oil shock. They recommended close monitoring of nonperforming loans, given the strong links between the oil and non-oil sectors and the large role of government projects in the financial performance of Gabon’s banking sector. They also encouraged regional and national authorities to move rapidly to address troubled public banks. Directors highlighted the importance of financial deepening and economic diversification in enhancing the resilience of the financial sector.
Directors emphasized the need to continue to foster diversification and reduce Gabon’s vulnerability to oil price fluctuations. In this context, they welcomed the progress the authorities have made in developing the country’s infrastructure since embarking on their economic diversification plan in 2010. Given the reduced availability of financing, Directors encouraged reprioritizing the reform agenda. They recommended avoiding revenue-eroding tax holidays and focusing on high-impact infrastructure projects and productivity-boosting structural reforms, including strengthening education and institutions, and increasing labor market flexibility. Directors also encouraged the authorities to promote deeper intraregional integration and trade liberalization in CEMAC.
Directors called for a higher priority on improving the quality and timeliness of macroeconomic data to strengthen surveillance.
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