Chad: Fifth Review Under the Extended Credit Facility Arrangement and Financing Assurances Review—Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Chad
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International Monetary Fund. African Dept.
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Publication Date:
27 Dec 2019
eISBN:
9781513524733
Language:
English
Keywords:
ISCR; CR; ECF arrangement; audit result; CBT; Executive Board discussion; debt management; current account; oil revenue; banking sector; fiscal policy
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Fifth Review under the Extended Credit Facility Arrangement and Financing Assurances Review-Press Release; Staff Report; Staff Supplement; and Statement by the

Abstract

Fifth Review under the Extended Credit Facility Arrangement and Financing Assurances Review-Press Release; Staff Report; Staff Supplement; and Statement by the

Background

1. Since the approval of the current ECF arrangement in June 2017, progress has been made in stabilizing the economy, but challenges persist. Whereas the fiscal and debt positions have improved, economic conditions continue to be difficult. Non-oil economic recovery has remained subdued and the country continues to be exposed to security and humanitarian shocks. Chad continues to provide costly security assistance to the region through peace-keeping missions. While the authorities remain committed to the program, implementation is constrained by weak administrative capacity and fragility.

2. The security situation and social conditions remain difficult. Boko Haram continues to launch deadly attacks in the Lake Chad region. In August, President Deby declared a state of emergency in a rebel-prone province in the north and in two eastern provinces that suffered a heavy death toll in intercommunal clashes. In early September, the state of emergency was extended to January 2020. To stem the circulation of illegal arms and criminals, borders with Libya, Sudan, and Central African Republic have been under heavy military guard since end-August. Parliamentary elections, which had been announced for 2019, are expected to take place in early 2020. Presidential elections are expected in 2021. The election period could revive social tensions, which had eased with the implementation of the October 2018 agreement with trade unions.

3. The efforts by the BEAC to more strictly enforce CEMAC’s forex regulation have faced resistance from oil and gas companies. The latter expressed concerns that strict implementation of the regulation—which requires repatriation and surrendering of export proceeds within 150 days—would affect their operations and profitability. The BEAC invited companies to identify more clearly and in full transparency specific issues of concern in the regulation and will plan new rounds of technical consultations with a view to identify the flexibility that would be deemed necessary to implement the regulation to the oil and mining sectors.1

Figure 1.
Figure 1.

Chad and Neighboring Countries: Fragility Indicators, 2010–19

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Fragile States Index (Fund for Peace)1/ Index from 1 – 10 where 10 represents most fragility and 1 represents least fragility.2/ Cohesion Indicators include Security Apparatus, Factionalized Elites, and Group Grievance.3/ Economic Indicators include Economic Decline, Inequality, and Human Flight/Brain Drain.4/ Political Indicators include State Legitimacy, Public Services, and Human Rights.5/ Social Indicators include Demographic Pressures and Refugees and Internally Displaced Persons.
Figure 2.
Figure 2.

Chad: Selected Development Indicators, 1990–2018

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: World Bank Development Indicators; World Population Review; Chadian authorities; and IMF staff calculations.

Recent Developments

4. The economy is regaining momentum in 2019. Overall growth is expected to reach 3.0 percent compared to 2.4 percent in 2018. Non-oil economic growth is expected to reach 2 percent, supported by an increase in public investment, domestic arrears clearance, and the recovery of the cotton sector. Oil GDP was revised upward and is expected to grow by 7.6 percent. Inflation in September was in negative territory (-2.1 percent y/y), reflecting subdued food and transport prices, and will remain low for the remainder of the year.

Text Figure 1.
Text Figure 1.

Chad: Contribution to real GDP growth

(Percent change)

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities and IMF staff calculations.

5. Fiscal performance during the first nine months of the year was satisfactory. Non-oil revenue, including tax revenues, has been in-line with the budget. Likewise, oil revenue was in line with projections. Overall, fiscal expenditures were broadly consistent with the budget with two notable exceptions: (i) social spending fell short of projections in the third quarter with the authorities reporting difficulties disbursing allocated funds, and (ii) the wage bill slightly exceeded projections (0.1 percent of non- oil GDP) due to higher security spending, reflecting the restitution of basic salaries to the military. Deposits at the BEAC dropped during the first nine months in line with projections.

Figure 3.
Figure 3.

Chad: Fiscal Revenue Developments, 2011–19

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities and IMF staff calculations

6. Banking activity picked-up during the first eight months of the year, but vulnerabilities remain. Deposits increased by 25.7 percent and credit picked-up by 4.6 percent. BEAC refinancing declined substantially from CFAF 160.0 billion in December 2018 to CFAF 93.7 billion, reflecting an improvement in banks’ liquidity. Overdue loans,2 while still high, have dropped somewhat from 31.4 percent of total loans at end 2018 to 27 percent. Provisions increased to 56.3 percent compared to 53 percent at end 2018.

Text Figure 2.
Text Figure 2.

Chad: Credit and Deposit Growth, 2014–19

(Percent change)

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities and IMF staff calculations.

7. Chad continues to make progress on reducing external debt vulnerabilities. Outstanding external arrears fell with the signing of a debt agreement with Angola in June. Only two bilateral creditors remain with outstanding arrears— both in CFAF—Equatorial Guinea and Republic of Congo. Good faith efforts are underway and nearing completion to address outstanding arrears with Mega Bank, a foreign commercial bank. Higher revenues have lowered the debt service-to-revenue ratio, which is now forecast to reach 12.8 percent in 2019 compared to the LIC DSA benchmark vulnerability threshold of 14 percent. On the other hand, the forecast for external debt in 2019 rose by 0.5 percent of GDP.

Text Figure 3.
Text Figure 3.

Chad: Trends in External Debt, 2015–19

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities and IMF staff calculations.
Text Figure 4.
Text Figure 4.

Chad: Current Account Deficit vs Net Foreign Assets

(CFAF Billions)

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities and IMF staff calculations.

8. The current account deficit is projected to widen, but the underlying external position is improving. Several oil fields are under development or will be soon, resulting in higher imports financed by FDI. Despite the expected increase in oil exports, the current account deficit is forecast to rise to 6.2 percent of GDP in 2019 from 3.4 percent of GDP in 2018. The strong FDI inflows should allow net foreign assets to continue to climb substantially in 2019 and beyond.

9. Chad continues to contribute to the success of the regional strategy by implementing policies that support the stability of the Central African Economic and Monetary Community (CEMAC) financial and monetary arrangement, especially the recovery of the regional central bank’s (BEAC) reserves. BEAC maintained an appropriately tight monetary policy stance, which, together with ongoing fiscal consolidation efforts by CEMAC member states and a stricter implementation of the foreign exchange regulation, contributed to an overperformance of the end-June 2019 projection for net foreign assets (a regional policy assurance) by about € 800 million. Chad has also reportedly provided all the contracts and agreements with oil companies to the relevant regional institutions to help ensure adequate repatriation of export receipts. In addition, the BEAC has gradually reduced its liquidity injections and adopted a regulation to deal with banks excessively depending on BEAC’s refinancing. BEAC and COBAC have also aimed at a smoother yet effective implementation of the foreign exchange regulation.

Program Performance

10. Program performance remained broadly satisfactory.

  • All end-June quantitative performance criteria and the indicative target on social spending have been met. Payments of domestic arrears have exceeded the target. The use of emergency spending procedures (DAO) was under control, but regularization was extremely low at 20 percent, compared to a target of 70 percent (both are memo items under the program).

  • Progress on the implementation of the structural reform agenda was mixed. Out of the five SBs due by end-September, only two were met (the quarterly note on the oil sector and the semi-annual note on exemptions). The VAT taxpayer list was finalized and integrated into the computerized system in October. The restructuring and funding plans for BCC and CBT have yet to be finalized. The audit of domestic arrears is progressing, but the delay is expected to result in missing the deadline for adopting a clearance strategy (SB, end-November). The authorities are requesting to reset this SB to end-December 2019 in order to have more time to prepare the strategy.

11. Performance at end-September was satisfactory. All but one end September IT were met. The social spending target was missed as a result of difficulties in executing goods and services due procurement procedures. The use of DAO was under control at 16 percent, but regularization was at 40 percent, well below the 75 percent target.

Text Table 1.

Chad: Quantitative indicators for end-September 2019

(In billions of CFAF; cumulative from the beginning of the year, except where otherwise indicated)1

article image
Sources: Chadian authorities; and IMF staff estimations

Quantitative indicators and adjustors are defined in the TMU.

To be respected continuously.

Text Table 2.

Chad: Structural Benchmarks up to end-October 2019

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Sources: Chadian authorities; and IMF staff.

Outlook and Risks

12. Under current policies, the medium-term outlook is expected to improve. Non-oil growth is projected to gradually increase and plateau at 4 percent starting 2021, with stronger contributions from cotton and livestock production beginning next year. Oil production is expected to increase as a result of new extraction technologies. Inflation is projected to remain below 3 percent. Continuing fiscal consolidation will result in steady narrowing of the non-oil primary balance and a gradual reduction in public debt. The current account deficit is forecast to remain above 6 percent of GDP through 2024, driven by FDI-related imports.

13. Nevertheless, risks to the outlook remain tilted to the downside. Near-term risks continue to stem from domestic developments, particularly a worsening of the security situation, loosening of fiscal discipline—especially in the run-up to the forthcoming parliamentary elections— and a deterioration in the position of public banks. Oil and gas companies could retaliate against the BEAC’s forex repatriation enforcement by cutting down on their investments. High turnover among mid- and high-level officials within ministries continues to complicate policymaking. Externally, lower than projected donor support could result in a financing gap. On the upside, the recent pickup in oil prices, if sustained, could improve the fiscal position.

14. The authorities broadly agreed with staff views on the outlook and risks. They concurred with staff projections. However, they saw scope for higher oil revenues thanks to higher oil production and profit tax. They agreed with staff on the risks to the banking sector as well as the prevalent debt vulnerabilities. However, they see a need for higher spending on wages and public investment to address the country’s deteriorating security and development needs.

Policy Discussions

Policy discussions for the fifth review focused on measures to (i) safeguard fiscal consolidation efforts in order to keep the debt trajectory on a sustainable path, (ii) swiftly address weak public banks, and (iii) advance the structural reform agenda.

A. Fiscal Consolidation Remains Essential

15. The fiscal deficit for 2019 remains in line with the target agreed at the time of the fourth review. The overall balance will slightly deteriorate (0.1 percent of non-oil GDP) as a result of lower oil revenues. The underlying non-oil primary balance (NOPB)3 remains at 4.2 percent of non-oil GDP. Meeting this target will require continued efforts to strengthen domestic revenue mobilization and contain spending, particularly the wage bill. Efforts should be redoubled to meet the social spending target.

Figure 4.
Figure 4.

Chad: Recent Economic Developments, 2012–19

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities; and IMF staff calculations.1/ Oil revenue is net of operational costs linked to government participation in oil companies, and transportation cost.
Text Table 3.

Chad: Non-oil primary balance

(% non-oil GDP)

article image

16. Emphasis should continue to be on strengthening domestic revenue mobilization to meet the end-year target. The impact of lower oil prices compared to the budget reference price (US$64 vs. US$72) will be offset by higher oil profit tax payment by the main oil operator.4 The authorities should continue to strengthen non-oil revenue collection, building on the measures identified at the time of the fourth review as well as the recently introduced measures on the VAT regarding the enforcement of the 15 percent penalty rate for non-compliant companies. The new VAT measures are expected to have a positive impact on revenues starting in the last quarter of 2019.

17. Expenditures are expected to be broadly in line with the 2019 budget. The authorities are committed to meet their spending target for the year, except for the wage bill, which is expected to be slightly higher (0.2 percent of non-oil GDP) following the restitution of the basic salary to the military. They argued that the worsening security situation combined with the drastic cuts in the military salaries in 2017 was impacting soldiers’ morale. To make this increase budget neutral, the authorities agreed to offset it by reducing goods and services. Staff encouraged the authorities to accelerate the execution of social spending, especially in health and education. They also emphasized the importance of limiting the use of DAO and increase its regularization, in line with targets. Staff and the authorities also agreed that unused election spending should be saved and rolled into the 2020 budget.

18. The authorities remain committed to maintaining their consolidation efforts in 2020. The budget to be submitted to the National Assembly (prior action) will target a NOPB of -4.9 percent of non-oil GDP, 1.1 percent higher than the target agreed at the time of the fourth review as it includes transfers to the national electricity company (SNE). These transfers, an off-budget transaction in the past, will be transparently reflected in the 2020 budget both on the revenue and expenditure sides, and will have no impact on the overall balance. The latter will significantly improve to 3.0 percent of non-oil GDP, as a result of higher oil revenues. Given this favorable development, staff emphasized the importance of fiscal restraint, especially during an election year, since Chad remains at high risk of external and overall debt distress under the DSA completed at the time of the Fourth Review.

19. Revenue will significantly increase in 2020. Oil revenue will receive a sizeable boost (+2.7 percent of non-oil GDP) mainly as a result of a significant increase in profit tax payment by the main oil operator. The revenue counterpart to the SNE transfers will also contribute to the increase (about one percent of non-oil GDP). Non-oil revenues are also expected to increase (+0.5 percent of non-oil GDP) as a result of new measures related to streamlining tax exemptions, enhancing tax and customs administration, and reforming VAT.

20. Excluding the SNE transfers, expenditures in 2020 would have been lower compared to the fourth review projections. The wage bill will drop by 0.2 percent of non-oil GDP, despite accommodating the new hires approved in the 2019 budget as well as the salary increase to the military. Goods and services are also expected to be lower. SNE transfers will increase expenditures by one percent of non-oil GDP. Like 2019, the authorities committed to an envelope for social spending of 34 percent of primary spending (excluding transfers to the electricity company). Staff encouraged the authorities to continue to repay domestic arrears, and step-up the repayment in case of an oil revenue windfall.

Text Figure 5.
Text Figure 5.

Wage Bills in CEMAC, 2017–19

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities and IMF staff calculations.

21. The introduction of a new oil price and production smoothing mechanism represents a step forward in addressing the procyclicality of fiscal policy (Box 1). The authorities agree that the volatility of oil prices and the procyclical fiscal policy conducted in the past have hampered economic activity. With support from the World Bank they are preparing a smoothing mechanism, which will allow them to gradually build buffers. The new mechanism, which is in line with the Fund’s advice at the time of the last Article IV,5 will help avoid pro-cyclical policies and bolster Chad’s capacity to service its debt. Appropriate legislation was adopted on November 15 by the National Assembly and the mechanism will be operational in the context of the 2020 budget, with expected savings of at least CFAF 10 billion.

Text Figure 6.
Text Figure 6.

Chad: Wage Bill, 2017–19

(CFAF billions)

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities and IMF staff calculations.
Text Figure 7.
Text Figure 7.

Chad: Procyclicality of Fiscal Policy

(CFAF billions)

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities and IMF staff calculations.

Authorities’ Views

22. The authorities reiterated their commitment to pursue their consolidation efforts. They argued that oil profit tax from the main oil operator will be much higher than budgeted by at least a third but agreed with staff to maintain a conservative projection. They also would have liked to have a higher wage bill (+0.2 percent of non-oil GDP) and higher domestic investment (+0.2 percent of non-oil GDP) but agreed to maintain them at reasonable levels in line with the agreement at the time of the fourth review. They, however, indicated that at the time of the sixth review, if the oil profit tax—which is expected to be paid around April based on 2019 actual profits—is higher, they would like to increase domestic investments to address their large infrastructure and social needs.

New Oil Price and Production Smoothing Mechanism (Lissage)

In order to stabilize public expenditures in the face of oil revenue volatility, the authorities have devised an oil price and production smoothing mechanism. Starting 2020 the mechanism sets aside oil revenues until it reaches CFAF 40 billion (0.8 percent of non-oil GDP). The funds are then available to cushion budget shortfalls when oil revenue comes in more than 10 percent below budgeted amounts. Such shortfalls roughly correspond to oil price reductions greater than US$5/bbl.

As a baseline, CFAF 10 billion will be automatically paid into a special treasury account each year. Further, if oil revenue in any given year is higher than budgeted, 20 percent of such difference would be paid into the special account, up to a maximum of CFAF 10 billion per year. The likelihood of attaining surplus oil revenue and the attendant deposits in the smoothing account is boosted by using conservative assumptions on both price ($3 below the World Economic Outlook (WEO) price) and production (10 percent below forecast) as the budgeted benchmark.

If oil revenue does dip more than 10 percent below budgeted oil revenues, the smoothing mechanism may be used to finance expenditure budgeted in a given fiscal year, subject to amounts available in the fund. However, the funds may not be used for non-budgeted items or to extinguish debts.

This mechanism differs from the CEMAC “reference balance” that targets a floor for the overall balance of-1.5 percent of GDP. The reference balance is defined as the overall balance minus 20 percent of oil revenues relative to GDP and 80 percent of the difference between oil revenues and their average relative to GDP over the previous three years.

Overall, both mechanisms aim to provide fiscal policy buffers in dealing with shocks. However, according to the authorities, they differ in that the new mechanism indicates that accumulated resources must be saved to stabilize government spending in case of a shock. Whereas, under the CEMAC rule, savings are not explicitly required, as surplus oil revenue can be used for debt repayment or arrears clearance.

B. Maintaining Debt on a Downward Trajectory

23. Significant fiscal effort remains essential to maintain debt on a downward trajectory. Fiscal space must be preserved for domestic debt repayment and arrears clearance. Creating fiscal space through higher non-oil revenue will help improve the sustainability of debt service capacity. Higher than anticipated oil revenues in 2020 are expected to facilitate implementation of the new domestic arrears’ clearance strategy. The authorities will aim to limit domestic debt rollover to 85 percent of securities in 2020 as part of a broader push to improve bank liquidity and reduce domestic debt. Extending the maturity of the current domestic debt profile will reduce rollover risk and could moderate repayment needs.

Text Figure 8.
Text Figure 8.

Chad: Domestic Debt, 2014–19

(CFAF billion)

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities, BEAC and IMF staff.

24. Adhering to the zero-limit on non-concessional borrowing by resisting pressure to pursue commercial loans during the current program will provide a critical anchor to external debt sustainability. Chad remains at high risk of external debt distress. Further efforts are needed to identify projects that have significant economic and development yield that could attract investors with alternative financing arrangements that would not undermine debt sustainability.

25. Debt management must improve to make Chad’s debt capacity more robust. In Chad, low capacity, low resources, and poor coordination among responsible entities leaves a high level of operational risk in debt management. Risk of errors, omissions, unintentional arrears, and loss of key personnel underly the debt management process. This should be urgently addressed through (i) reforming the roles and structures of debt management, (ii) improving communication among responsible entities, and (iii) augmenting the resources applied to debt management. External debt management, while suffering from the above risks, has been well served by the dedicated escrow account and monthly debt management coordination meetings.

Authorities’ Views

26. The authorities remain committed to aggressively reducing domestic and external debt vulnerabilities. They anticipate growth dividends from reducing the domestic debt overhang. The assessment of high risk of debt distress remains a point of frustration, given significant progress made under the program to restructure external debt and clear external arrears. Development needs are extremely high and concessional financing is quite limited. The authorities feel the returns to modest non-concessional borrowing far exceed any ensuing increase in risk of debt distress.

C. Stepping Up Structural Reforms and Improving Governance

27. Streamlining exemptions and strengthening tax administration should remain a priority. Staff underscored the need to adjust and eliminate inefficient exemptions, which are not in line with existing legislation, based on the 2017 audit of the 47 exemption agreements. They also agreed with staff on the need to reduce the scope for discretionary extension of exemptions, particularly in the oil sector and refining activities, and prepare a strategy for granting new exemptions (MEFP ¶25). Drawing on IMF technical assistance, the authorities plan to allocate new resources (building and software) to tax directorates in charge of large and medium firms (SB, April 2020).

28. Efforts to bolster the VAT administration are critical. VAT proceeds in Chad are among the lowest in Africa. The authorities are making progress in implementing their VAT action plan. The list of VAT tax payers has been published and integrated in the computerized system and a 15 percent penalty rate is being applied on non-compliant taxpayers. The authorities have also published the list of authorized firms eligible for VAT retention. Staff underscored the importance of setting-up a VAT refund mechanism at the BEAC by allocating 5 percent of VAT revenue to the dedicated account.

29. PFM reforms will improve public sector efficiency and accountability and rebuild fiscal buffers. Staff and the authorities agreed on the need to continue to press ahead with PFM reforms. The new PFM strategy, which will be implemented in 2020, should help improve budgeting procedures, which lack basic forecasting and coordination between agencies. Recognizing the persistent problem posed by the use of DAO (MEFP ¶28), the authorities will issue a decree by year-end to reduce the ceiling on its use. Once the audits on domestic arrears is finalized, they plan to adopt a strategy to clear them. Steps will be taken to improve cash management, including implementing a treasury single account (TSA), starting with a census of all the government’s accounts in commercial banks. They also plan to modernize their procurement system (MEFP ¶33).

30. The authorities remain committed to improving governance, but efforts are hampered by capacity constraints. They acknowledged the importance of good governance for private sector development and intend to continue working to implement the United Nations Convention against Corruption (UNCAC). They emphasized that their efforts to reduce tax exemptions, strengthen tax administration, and modernize procurement should help reduce vulnerabilities to corruption. They indicated that with the support of the UN, an assessment of the country’s penal code will be done to make sure that it is in line with the convention. They agreed to establish a legislative framework for asset declaration,6 either by adopting stand-alone implementing legislation or by including the necessary provisions in future anti-corruption legislation. Implementation of the AML/CFT framework at the national level is led by the National Agency for Financial Investigation (ANIF). While operational since 2009, the ANIF is in dire need of human resources and greater coordination with regional institutions involved in AML/CFT, particularly the COBAC.

Authorities’ Views

31. The authorities recognize the importance of fiscal reform and good governance as key elements to revive the private sector and reduce the scope for corruption. They agree with staff that streamlining exemptions and strengthening VAT administration will help further mobilize domestic revenues. They are determined to strengthen the PFM framework. With respect to arrears, given the limited resources available, they will seek to identify the necessary concessional financing to clear them. They are also committed to adopting implementing legislation for the asset declaration regime, in consultation with international donors.

D. Safeguarding the Banking Sector

32. The tight sovereign-bank nexus and the high dependence on oil has been a challenge for the banking sector. The large accumulation of domestic arrears and sharp increase in domestic debt following the recent crisis has led to the build-up of vulnerabilities especially in the two large public banks -which represent around 45 percent of total asset of the banking sector-through the deterioration of their liquidity position and asset portfolio quality. This tight sovereign bank nexus exposes banks and the government to risks. Authorities agree that banks should continue to properly classify their loans and provision them adequately in line with existing banking regulations. They are also making efforts to ease bank liquidity pressures by lowering rollover of domestic debt. Payment of domestic arrears would also help in this regard.

33. Despite some delays, the authorities are making progress in their reform strategy of the two public banks (BCC and CBT). Building on the June audit reports of the two banks, restructuring and funding plans are expected to be adopted by end-November (prior action). To that effect, the authorities will be allocating in the 2020 budget CFAF 3 billion for the recapitalization of one of the two banks and CFAF 9 billion to repay outstanding credit to both banks (MEFP ¶35). In addition, the government is committed to address all the weaknesses identified in the audit, in particular the governance structure of the banks. To ensure proper implementation of the restructuring and funding plans, performance-based contracts will be signed with the management of the two banks (SB, March 2020).

Text Figure 9.
Text Figure 9.

Chad: Financial Inclusion Indicators, 2011–17

Citation: IMF Staff Country Reports 2019, 399; 10.5089/9781513524733.002.A001

Sources: Chadian authorities, BEAC, and IMF staff.

34. Further efforts are needed to improve financial inclusion through mobile banking and microfinance. The stability of the banking sector would benefit from more stable resources through higher deposits. Yet, only 9 percent of the population in Chad has a bank account. Mobile banking has the potential to enhance financial access, but challenges include poor network connections, especially in remote areas, and the population’s low literacy rate. Following the 2018 revised CEMAC regulation for microfinance,7 several institutions faced difficulties and had to either shut down or restructure.

Authorities’ Views

35. The authorities are mindful of the vulnerabilities in the banking system. They agree with the need to swiftly address the vulnerabilities stemming from the two large public banks. They recognize the potential for mobile banking and view the digitalization of the economy as a mean to develop this sector. Regarding the regulatory system of the microfinance sector, they requested additional support from the COBAC.

Program Modalities

36. Financing needs for 2019 and 2020 are covered (Text Table 4). The IMF, along with multilateral and bilateral partners, is expected to cover the country’s financing gap for the remainder of this year and 2020. Despite downside risks to the outlook, Chad’s capacity to repay the Fund is expected to remain adequate (Table 10).

Text Table 4.

Chad: Financing Gap under Program and Sources of Financing

(US$ million)

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Disbursment from the AfDB in 2018 includes US$ 65 million planned for 2017 but disbursed in January 2018.

Table 1.

Chad: Selected Economic and Financial Indicators, 2017–23

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Sources; Chadian authorities: and IMF staff estimates and projections.

2017 oil GDP growth was revised to reflect final 2016 and 2017 oil GDP data. It also reflects oil production used for local consumption.

2017 inflation rate reflects the authorities’ data using the year 2014 as a base year.

WEO projections for Brent crude oil price.

Chadian oil price is Brent price minus quality discount

Changes as a percent of broad money stock at the beginning of period.

Central government, including government-guaranteed debt

oil revenues for 2013 includes receipts associed with Government oil cargo originaly planned for 2017.

Total revenue excluding grants and oil revenue, minus total expenditure excluding net interest payment? and foreign-financed investment.

The CEMAC reference fiscal balance is calculated as the overall fiscal balance minus the savings from oil revenue, which is the sum of 20 percent of oil revenue of the current year and 80 percent of the oil revenue in excess of the average oil revenues in the previous three years.

Table 2.

Chad: Fiscal Operations of the Central Government, 2017–23

(In billions of CFAF, unless otherwise indicated)

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Sources; Chadian authorities; and IMF staff estimates and projections.

Net of cash calls and transportation costs linked to the oil public enterprise (SHT) participation in private oil companies.

Includes subsidies to the electricity company starting from 2020.

Includes projects financed by the BDEAC, but the corresponding loans (in CFAF) are counted as domestic financing.

Total revenue, less grants and oil revenue, minus total expenditures, less interest payments and foreign financed investment.

Difference between committed and cash expenditure, and errors and omissions.

Recognized arrears, as registered by the Treasury in the "restes á payer" table.

Other arrears include unrecognized arrears, the total of which will be specified after the audit of arrears, and the clearance in 2018 of CFAF 54 billion of arrears of the then public company Coton Tchad owed to domestic banks.

Bilateral or multilateral loans in CFAF (e.g. BDEAC, loan from Cameroon in 2016).

27 billion in 2016 include arrears to China, cleared through an agreement in April 2017.

All debt to BEAC was consolidated and rescheduled in September 2017 into long term securities.

Table 3.

Chad: Fiscal Operations of the Central Government, 2017–23

(Percent of non-oil GDP, unless otherwise indicated)

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Sources: Chadian authorities; and IMF staff estimates and projections.

Net of cash calls and transportation costs linked to the oil public enterprise (SHT) participation in private oil companies.

includes subsidies to the electricity company starting from 2020.

Includes projects financed by the BDEAC, but the corresponding loans (in CFAF) are counted as domestic financing.

Total revenue, less grants and oil revenue, minus total expenditures, less interest payments and foreign financed investment.

Difference between committed and cash expenditure.

Recognized arrears., as registered by the Treasury in the "rentes á payer" table.

Other arrears include unrecognized arrears, the total of which will be specified after the audit of arrears, and the clearance in 201S of CFAF 54 billion of arrears of the then public company Coton Tchad owed to domestic banks.

27 billion in 2016’include arrears to China, cleared through an agreement in April 2017.

All debt to BEAC was consolidated and rescheduled in September 2017 into long term securities.

Table 4.

Chad: Balance of Payments, 2017–23

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Sources: Chadian authorities; and IMF staff estimates and projections.
Table 5.

Chad: Monetary Survey, 2017–23

(In billions of CFAF)

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Sources: Chadian authorities; and IMF staff estimates and projections.

2018 data does not include December 2018 IMF disbursement which showed up in the Treasury account on February 2019.

Include statutory and exceptional advances.

Table 6.

Chad: Financial Soundness Indicators, 2011–19

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Sources: IMF Financial Soundness Indicators; COBAC.
Table 7.

Chad: Quantitative Performance Criteria (QPC) and Indicative Targets (IT)* Under the ECF Arrangement

(In billions of CFAF, unless otherwise indicated)

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Sources: Chadian authorities; and IMF Staff. *The adjustors for the QPCs and IT are defined in paragraph 23 of the TMU. 1. NOPB: Non-oil revenue less grants, minus domestically financed primary expenditure (ie. expenditure, less net interest payments and foreign financed investment). 2. Customs revenue as given by the Treasury in the Table "Situation des Regies financières". 3. Includes net financing from Treasury bills / bonds and domestic banks direct loans net of amortization, see Technical memorandum of understanding. 4. As given in the PNG. 5. Stock of verified arrears, as given in the Table "Restes à payer". 6. Applies continuously. 7. Applies continuously. 8. Expenditure of Ministries in charge of social sectors, as recommended by the World Bank in the absence of a budgetary functional classification. An adjustor will be defined in case of expenditure cuts, which will ensure an increase of the share of poverty-reducing social spending in the total of primary current expenditure (see TMU for details). 9. DAO is defined as all expenditures which do not go through the standard spending procedure. Regularization of DAO consists in recording the expenditure in the correspondent line of the budget. This will be done within 45 days after the end of the quarter. 10. DAO is defined as all expenditures which do not go through the standard spending procedure. Regularization of DAO consists in recording the expenditure in the correspondent line of the budget. This will be done within 45 days after the end of the quarter. 11. External concessional borrowing (US$ million) 12. Oil Revenue is the sum of direct receipt and the sale revenue of government oil net of operating and transportation 13. Budget grants.
Table 8.

Chad: Structural Benchmarks and Prior Actions for the Program 2019–20

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Table 9.

Chad: Schedule of Disbursement Under the ECF Arrangement

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Source: IMF Staff estimates and projections.
Table 10.

Chad: Indicators of Capacity to Repay the Fund, 2019–33

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Source: IMF staff estimates and projections.

Total external debt service includes IMF repurchases and repayments.

37. Staff and the authorities reached understandings on policy measures underpinning the remainder of the arrangement. The end-March ITs were revised in line with the updated macroframework. Three prior action (PAs) were set related to the submission of 2020 budget, adoption of restructuring and funding plans of the two public banks, and finalization of domestic arrears audit. The last two PAs are to address two missed SBs for end-September. The authorities are requesting to reset the end-November SB on the arrears clearance strategy to end-December 2019. Two new SBs were added to the reform agenda for next year. These consist of signing performance contracts with the management of the two public banks and allocating resources to tax directorates.

38. The BEAC has provided an updated policy assurance on end-December 2019 and end-June 2020 NFAs in support of CEMAC countries’ Fund-supported programs. In its updated letter of policy support, the BEAC presented a revised NFA projections reflecting in part the strong performance through mid-2019. BEAC also reiterated its commitment to implement an adequately tight monetary policy, together with member states implementing fiscal adjustment agreed in the context of IMF-supported programs, to achieve the NFA projections. The regional assurances on regional NFAs are critical for the success of Chad’s program and will help bolster the region’s external sustainability. The BEAC also continues to implement the remaining recommendations of the 2017 safeguards assessment.

Staff Appraisal

39. Chad continues to face a challenging environment. The country remains exposed to security and humanitarian shocks, while weak administrative capacity and fragility continue to constraint its policymaking. Despite these challenges, the authorities continue to be committed to the program.

40. Economic activity is recovering, and the outlook is favorable. Arrears clearance and domestic debt repayment will further stimulate economic activity. The expected boost in oil production as a result of new technologies is welcome but should not deter important reforms to promote non-oil activity. Such reforms, while difficult at times, will also increase resilience and ensure sustainable and broad-based growth.

41. Prudent fiscal policy has been essential in putting public finances on a sustainable path and should be maintained in the run-up to the elections. Emphasis should continue on mobilizing domestic revenues. Widening the tax base by streamlining exemptions and enforcing the new VAT measures will be essential. The wage bill, one of the highest in the CEMAC region, should remain under control. Efforts should be stepped-up to meet the end-year social expenditure target. DAO use should be contained, and its regularization needs to be accelerated.

42. Domestic arrears continue to be an impediment to economic activity. The audit needs to be finalized as soon as possible and the clearance strategy should be swiftly prepared and implemented beginning 2020. This will significantly contribute in addressing banking vulnerabilities and supporting economic recovery. Oil windfalls should be used to help accelerate arrears repayment.

43. Public debt has decreased, but vulnerabilities remain. It is critical to maintain aggressive plans for reducing domestic debt, including issuing longer maturities to reduce rollover risk. Maintaining a zero limit for non-concessional borrowing under the current program will further strengthen the debt position. Considering NCB in the future will be contingent on an updated DSA and the quality and criticality of potential projects for which concessional financing is not available.

44. Sustained efforts are needed to safeguard banking sector stability. Adopting restructuring and funding plans for the two state banks is essential to contain vulnerabilities. Signature of performance-based contracts will ensure successful execution of these plans. Limiting domestic debt rollover will help ease liquidity pressure. Enforcing proper loan classification and adequate provision is essential.

45. The reform momentum should persist. The new PFM strategy is welcome, and its implementation will help modernize the management of public finances. Implementation of a TSA will be critical to help contain the emergence of new arrears. Addressing governance weaknesses is essential for private sector development and reducing the scope for corruption.

46. Risks to the program remain high but are manageable with a strong commitment from the authorities. Maintaining fiscal discipline and staying the course with the reform agenda will help contain fiscal risks, enhance economic efficiency, and improve governance. These in turn will pave the way for private sector-led growth and economic diversification. Continued dialogue with the Fund and provision of capacity development by the IMF and other development partners will reinforce implementation capacity.

47. While Chad is one of the smaller economies in the CEMAC region, it continues to implement strong policies that support the regional stability. Strong implementation of agreed fiscal consolidation path by the four countries already with Fund-supported programs and the possible approval of new IMF-supported programs with Equatorial Guinea and CAR would support a further recovery in BEAC net foreign asset position.

48. Based on Chad’s performance under the program and the adequate implementation of the regional policy assurance by the BEAC, staff supports the authorities’ request for the completion of the fifth review and financing assurances review. Staff proposes that completion of the sixth review be conditional on the implementation of critical policy assurances on NFAs at the union level, as established in the December 2019 union-wide background paper.

Appendix I. Letter of Intent

N’Djamena, November 26, 2019

Madame Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, DC, USA

Dear Madame Georgieva,

We continue to make progress on a comprehensive economic and financial reform program, supported by an arrangement under the Extended Credit Facility (ECF) approved by the IMF Executive Board on June 30, 2017. We are grateful to the IMF for its continued support.

Despite a still-difficult socio-economic situation and security challenges, our economy continues its recovering trend, albeit at a still-slow pace. Our economic reform strategy remains focused on stabilizing the economy and supporting the resumption of growth, especially in the non-oil sector. The gradual improvement in the fiscal position owing to strengthened non-oil revenue mobilization and greater oil revenue transparency, as well as improved public financial management will create fiscal space for higher investment and social spending, the clearance of domestic arrears, and the repayment of domestic debt. This should help reinforce financial sector stability and boost the non-oil economy, while supporting current improvements in debt dynamics.

Our actions ensured that all end-June quantitative performance criteria (PCs) and the indicative target (IT) on social spending were all met. All ITs for end-September were also met with the exception of the one on social spending, which was missed by a small margin. We remain strongly committed to implementing the structural reforms program, notwithstanding the recorded delays. Of the five structural benchmarks (SBs) for the period through end-September, two were met, and three were not met (one was implemented with delay). Finally, as a result of the delay in completing the audit of domestic arrears, we are requesting to reset the end-November SB regarding the strategy for clearing these arrears to end-December 2019.

We will continue to implement policies that are consistent with maintaining regional external stability. To this end, we will continue to support the efforts of the BEAC and COBAC to improve compliance with the new foreign exchange regulations, which requires notably the repatriation of export proceeds, including oil revenues.

Based on satisfactory implementation of the program, the government requests that the Executive Board of the IMF approves the completion of the fifth review under the ECF-supported program.

We are confident that the policies set out in the attached Memorandum of Economic and Financial Policies (MEFP) will enable us to achieve the program objectives. We stand ready to take any measure that may prove necessary. We will consult with IMF staff on the adoption of any additional measures in advance of revisions to the policies contained in the MEFP, in accordance with Fund policies on such consultations. To facilitate program monitoring and assessment, the government undertakes to provide all necessary information to IMF staff on a regular basis and in a timely manner, pursuant to the attached Technical Memorandum of Understanding (TMU).

In closing, in keeping with our longstanding commitment to transparency, the government agrees to the publication of the staff report for the fifth review, this letter of intent, as well as the attached MEFP and TMU, on the IMF website.

Very truly yours,

/s/

Tahir Hamid Nguilin

Minister of Finance and Budget

Attachments:

  • I. Memorandum of Economic and Financial Policies (MEFP)

  • II. Technical Memorandum of Understanding (TMU)

Attachment I. Memorandum of Economic and Financial Policies November 2019

1. This memorandum is an update and supplement to that of June 2019. It lays out the specific elements of the government’s reform strategy under the ECF arrangement. It describes recent economic developments, the government’s efforts to implement policies agreed to under the existing program supported by the current arrangement, macroeconomic prospects and the government’s policy and reform agenda, particularly for the rest of 2019 and for 2020.

2. We remain committed to pursuing ambitious reforms of the Chadian economy, notably related to fiscal adjustment and the financial sector. We will undertake all necessary actions to continue our fiscal consolidation efforts with the aim of reducing public debt to a sustainable level. We will double our efforts to address weaknesses in the banking sector. Finally, we will persevere with structural reforms, notably in information technology (IT) and governance.

Recent Developments, Outlooks, and Risks

A. Recent Developments

3. Economic activity has shown signs of a modest recovery since 2018, although at a slower pace than initially anticipated. After a sharp decline in 2017 due to technical problems in the oil sector, oil production rebounded in 2018 and is expected to expand by 3 percent in 2019. Non-oil economic growth turned positive in 2018, with growth estimated at 0.5 percent. It is projected to grow 2 percent in 2019 – driven by public investment, the clearance of domestic arrears and the recovery of the cotton sector. Reflecting subdued food and transportation prices, average inflation decelerated in 2019 with end-year projected at 1 percent, down from 4 percent in 2018.

4. Fiscal developments in the first nine months of 2019 have been encouraging. Non-oil revenue mobilization has been in-line with the budget. Performance of non-oil tax revenue was satisfactory. Despite stronger production than expected, oil revenue was slightly below program projections. Overall, fiscal expenditures were broadly consistent with the budget with two notable exceptions. Social spending fell short of projections in the third quarter. The wage bill, initially budgeted, slightly exceeded projections due to higher security spending, reflecting the restitution of salary to the military.

5. Net government domestic financing has been broadly in line with program targets. Net domestic financing from banks was broadly in line with projections, with an average roll-over rate of roughly 87 percent versus the program target of 85 percent for the year as a whole. Government deposits at the BEAC decreased by CFAF 112 billion during the first nine months of the year, in line with projections. The government made additional progress in clearing domestic arrears identified at the Treasury (RAP). During the first nine months of 2019, the stock of domestic arrears was further reduced by CFAF 41 billion.

6. The government made progress in clearing arrears to external creditors and has continued to pay external debt obligations in a timely manner. Obligations are being paid in line with the May 2018 agreement-in-principle with the Libyan Foreign Bank. In mid-July, an agreement was signed with Angola on the repayment of the February 2017 debt. Discussions are underway to address outstanding arrears with Libya, Equatorial Guinea, the Republic of Congo and Mega Bank (an external commercial bank). The government remains confident that measures, including the allocation of funds for external debt payment in an escrow account and monthly meetings of external debt service stakeholders (including the IMF resident representative as an observer), will ensure the nonrecurrence of external arrears.

7. Banking sector activity increased and liquidity and portfolio quality improved, but vulnerabilities persist. Compared to end-2018, bank activity picked up with deposits increasing by 25.7 percent and credit by 4.6 percent through end-August 2019. Nonperforming loans to total loans, while still high, dropped to 27 percent at end-August from 31.4 percent at end-December 2018. Banking sector liquidity continued to improve and BEAC refinancing declined from CFAF 160.0 billion in December 2018 to CFAF 93.7 billion in August 2019.

8. The security situation remains difficult. Boko Haram has continued to launch deadly attacks on the Lake Chad region, both on villagers and military forces. In response, regional forces, including that of Chad, have remained engaged in a strong campaign against the group. The conflict has sent more regional refugees to Chad and aggravated humanitarian needs. In August, to stem insecurity and the circulation of illegal arms and criminals, a state of emergency was declared in three provinces and the borders with Libya, Sudan and Central African Republic were placed under heavy military guard. Security concerns have continued to necessitate an increase in security spending.

9. Social tensions have moderated. The social situation improved thanks to the implementation of the October 2018 agreement with public sector trade unions. Parliamentary elections, which had been announced for 2019, will take place in early 2020.

B. Program Implementation

10. We continue to be determined to implement our program. All performance criteria (PC) and the indicative target for end-June 2019 were met.

  • The ceiling on the non-oil primary balance (NOPB) was met as the deficit stood at CFAF 122 billion compared to the quantitative performance criterion of CFAF 125 billion. This result was achieved primarily because of the government’s efforts to mobilize government revenue.

  • The floor on customs revenue was exceeded (CFAF 72 billion versus a target of CFAF 50 billion). Despite still weak economic activity and imports, the government strengthened its customs collection efforts.

  • The criterion on net domestic government financing from the BEAC was met with a large margin. This reflects mainly higher government revenue mobilization.

  • The criterion on net domestic government financing excluding the BEAC was met, primarily as the roll-over of T-bills and T-bonds was broadly in line with the program objective of 85 percent.

  • The performance criterion on the stock of domestic payment arrears was met. The stock of domestic arrears was reduced to CFAF 130 billion against a target of CFAF 140 billion.

  • The continuous zero ceiling on new external arrears of the government and non-financial public enterprises has been met since the third ECF review.

  • The zero ceiling on contracting or guaranteeing new non-concessional external debt by the government and non-financial public enterprises was met as the government continues to resist pressures to access non-concessional financing.

  • The indicative target on poverty-reducing social spending was reached for the first time, after being missed during all previous reviews.

11. While the use of emergency spending procedures (“dépenses avant ordonnancement”, or DAO) was under control, in line with the budget implementation decree of January 2019, the regularization of DAO was low at 20 percent at end-June compared to a target of 70 percent. The authorities are committed to accelerate the regularization speed to meet the end-year target.

12. Performance at end-September 2019 remained broadly in line with the program. The non-oil primary deficit remained below the program ceiling. Custom revenue was met as the government sustained efforts to improve custom administration and limit fraud. The indicative target (IT) on net domestic financing from the BEAC was met as the draw down on government deposits was lower than anticipated. The IT on net domestic financing from banks was also met as the roll-over of securities remained consistent with program objectives. The IT on the stock of domestic payment arrears was met as domestic arrears were reduced by roughly CFAF 41 billion in the first nine months against a program target of CFAF 40 billion. Although the IT on poverty-reducing social spending was missed—CFAF 168 million against CFAF 177 million—the government is committed to increase social spending in the fourth quarter and the committee put in place in June 2019 to monitor social spending will ensure the end-December 2019 target is met. The use of DAO was under control (16 percent), while regularization remained weak despite some improvement in the third quarter.

13. Despite delays, we remain committed to the implementation of the structural reform agenda. Of the five structural benchmarks for the period through end-September, only two were met; and of the rest, one was implemented with delay.

  • (i) The structural benchmark on the publication of the oil sector note was met, as the government continues to publish quarterly notes on the oil sector, in line with the template agreed with IMF staff.

  • (ii) The publication (measure expected by end-July) of the first semi-annual note which lists all new exemptions (including renewal and extension of exemptions) was met.

  • (iii) The creation and publication of the VAT taxpayer list, its integration in the computerized system of the customs department, and the application of a customs penalty rate of 15 percent was met in early October.

  • (iv) The restructuring plan was pending adoption by the board of directors of BCC before the end-September target date; its funding plan is under preparation. Restructuring and funding plans have not yet been adopted by the board of directors of CBT.

  • (v) The audit of remaining domestic arrears (measure expected for end-September) will be completed at end-November (prior action).

14. We have made good progress on other structural benchmarks. The government has requested technical assistance from a merchant bank to develop an arrears clearance strategy, expected to be adopted by end-December, delayed by a month due to the additional time needed to complete the ‘arrears’ audit. Furthermore, decree 1607 of September 30th set up a technical committee responsible for tax exemptions, which should help meet the end-February 2020 structural benchmark: “To complete the implementation of the recommendations of the audit of the 47 exemption agreements with a view to removing or modifying those that do not comply with the legal texts or that have not been correctly executed."

15. The BEAC and COBAC have pursued the implementation of their policy commitments. The BEAC continues to implement the remaining recommendations of the 2017 safeguards assessment. BEAC’s full transition to IFRS for FY 2019 is progressing broadly as planned, and efforts are being stepped up to accelerate the revisions to the secondary legal instruments for alignment with the BEAC Charter.

Economic and Financial Policies for the Remainder of The Program

C. Outlook and Risks

16. The medium-term outlook is favorable. Non-oil growth is projected to increase to 4 percent. Oil production is expected to increase as a result of new technologies. Inflation will remain around 3 percent. The fiscal deficit is expected to gradually narrow and help improve the debt position. These positive prospects are dependent on the realization of planned investments, particularly in the oil sector, the maintenance of social peace, as well as security and climate shocks.

D. Fiscal Policy in 2019 and 2020

17. For 2019, we remain committed to a NOPB target of 4.9 percent of non-oil GDP. Policies in the fourth quarter will essentially be geared at mobilizing non-oil revenue and containing spending. On the revenue side, the government will put greater emphasis on strengthening non-oil revenue collection, particularly in the customs and tax area, and reducing smuggling. The new VAT measures are expected to have a positive impact on revenues starting the last quarter of 2019. With regard to expenditure, the wage bill is expected to reach CFAF 357 billion against a budgeted amount of CFAF 350 billion due to security spending (restitution of basic salary to the military) which was partially offset by saving from the rationalization of the payroll, including the removal of ghost workers and undue benefits and the audit of diplomas and lower interest payments, and postponement of some investment projects. In addition, goods and services will be cut to offset the increase in the wage bill. The government is committed to allocate adequate resources to social sectors to meet the end of year target and to limit the use of DAO and increase its regularization in line with the targets. The NOPB will be adjusted to take into account the unused 2019 budget allocations for the legislative elections. The unused balance will be allocated for 2020. On the financing side, an amount of CFAF 60 billion will be cleared.

18. For 2020, we will target a NOPB of 4.9 percent of non-oil GDP to continue our consolidation efforts and to keep the debt level sustainable. The government commits to submit to the National Assembly a projected 2020 budget in line with the parameters of the IMF program (prior action). Oil revenues are expected to significantly increase as the largest oil producer has started to pay corporate tax revenue in 2019, which should increase over the medium-term with the continued pick up in oil production and prices. Strengthening non-oil revenue mobilization remains a major element of the government program. We will aim to increase non-oil tax revenue from 8.2 percent of non-oil GDP in 2019 to 8.7 percent of non-oil GDP in 2020 by implementing the following measures: (i) a better monitoring of VAT taxpayers and the application of a 15 percent penalty on nonregistered importers; (ii) the reduction of tax exemptions; (iii) greater “bancarisation” of revenue mobilization;; (iv) improving the collection of income tax, by widening its base; and (v) allocating new resources (building and software) to tax directorates in charge of large and medium taxpayers.

19. We will maintain control of the wage bill by improving payroll management. The Government intends to keep the wage bill at a sustainable level to meet the country’s large development and social spending needs. The 2019 wage bill mandated the recruitment of civil servants, including customs agents, teachers, judges, and doctors. This will increase the wage bill to CFAF 368 billion. The government commits to taking corrective measures to control the wage bill should it exceed the budgeted amount.

20. We will exert all our efforts to increase social spending and priority investment. In view of the large spending needs, the budget builds on a stronger prioritization of spending, with particular emphasis placed on ensuring that allocations to the social sectors reach at least 34 percent of total primary spending (excluding transfers to the electricity company), and that investment increases by 10 percent relative to the expected outcome in 2019 in line with the National Development Plan (PND).

21. For the 2020 budget, domestic bank financing will be based on reduced rolling over of maturing treasury bills and bonds. The government intends to help improve the liquidity situation of local banks, in support of the restructuring and financing plans for the two public banks. The rollover rate will be capped at 85 percent on average for the year, or a net repayment of at least 15 percent of maturing treasuries. Additional resources will also be used to further reduce domestic debt consistent with the program. In view of the improved government repayment record, the government will negotiate with banks an increase of treasury maturities to reduce the cost of domestic financing. The government plans to participate in the recapitalization of the two public banks under their restructuring and financing plans, including with CFAF 3 billion allocated to CBT through the issuance of Treasury bills and bonds.

22. Domestic arrears clearance remains a high priority under our program. The government firmly believes that the payment of audited arrears is key to the recovery of the non-oil sector. The payment of domestic arrears planned for 2020 and the medium term will be in line with the forthcoming arrears’ clearance strategy, based on the independent audit to be completed shortly, including the finalization of the second stage initiated in early July 2019 (prior action). More domestic arrears payments than programmed will be possible if additional resources allow to do so.

23. The government is committed to refrain from contracting or guaranteeing new non-concessional external loans. To avoid the heavy burden of non-concessional external borrowing, the government will continue to ensure that all external financing agreements, both for project and budget support, are concessional (have at least 35 percent grant element, see TMU) and are consistent with debt sustainability. All draft loan agreements will continue to be submitted for prior approval to the National Commission for Debt Analysis (CONAD), which is supported by the technical and financial analysis of the Technical Team for Debt Sustainability Analysis (ETAVID). In this context, the government will continue efforts to strengthen debt management with donor assistance and will initiate a review of the IMF and World Bank debt sustainability analysis.

E. Regional Context

24. The BEAC has provided an updated policy assurance on end-December 2019 and end-June 2020 NFAs in support of CEMAC countries’ Fund-supported programs. In its updated letter of policy support, the BEAC presented a revised NFA projection reflecting in part the strong performance through mid-2019. BEAC also reiterated its commitment to implement an adequately tight monetary policy, together with member states implementing fiscal adjustment agreed in the context of IMF-supported programs, to achieve the NFA projections. The regional assurances on regional NFAs are critical for the success of Chad’s program and will help bolster the region’s external sustainability.

F. Tax and Customs Reforms and Policies

25. We will continue to improve the base and structure of oil and non-oil tax revenues.

  • Tax and customs exemptions. The government is determined not to automatically renew expiring exemptions on existing activities nor to extend existing exemptions particularly in the oil sector (including oil refining), but also in construction and hospitality industries. This will ensure a reliable source of income for the government. In addition, the government is committed to assess systematically the fiscal impact of all new requests for exemptions through a technical commission set up to that effect. The government will publish on a semiannual basis a list of all new exemptions (including renewal and extension of exemptions) on the Ministry of Finance website (existing structural benchmark) and will aim to start publishing its analysis of the fiscal impact of these exemptions in early 2020. The government continues to follow up on the recommendations of the audit of 47 tax conventions. It will complete the implementation of the recommendations made by the auditors by end-February 2020 to remove or amend exemptions not in line with legal texts or that have not been implemented correctly (existing structural benchmark). In early October, tax payers benefitting from tax exemptions were given up to end-December 2019 to confirm with the technical committee on tax exemptions that they are in line with requirements under the 2019 budget law.

  • Non-oil revenues. The government understands that revenue from the VAT, which stands at about 1 percent of non-oil GDP are critical to the improvement of revenue mobilization. The time-bound plan to strengthen the VAT regime adopted in December 2018 includes among others measures to set-up a VAT refund mechanism and reduce VAT exemptions. The government has published the list of companies allowed to withhold VAT, a measure that is expected to make VAT collection transparent and increase revenues. Measures implemented in January 2018 requiring taxes to be paid through the banking system (“bancarisation des recettes”) have demonstrated promise in reducing leakages. The government is committed to allocate 5% of VAT revenue to the dedicated account with the BEAC for VAT refunds.

26. We will also take administrative measures to improve tax and customs collection performance.

  • Customs revenues. We aim to increase efficiency and improve compliance through greater computerization of customs operations. The expected migration to new software (ASYCUDA World) will improve customs procedures and in particular will (i) allow more accurate application of duties; (ii) shrink the abuse of customs exemptions; (iii) strengthen integration of customs and taxation departments to improve VAT collection; (iv) facilitate the interconnections with the custom offices in Cameroon, Niger and Sudan; and (v) set the stage for transition to a single window system.

  • Non-oil taxes. We also plan to re-organize key elements of the tax directorate drawing on IMF TA recommendations to strengthen tax and customs administrations. In addition, the Directorate in charge of land and property tax has begun a new survey of potentially taxable properties, starting in N’Djamena, which will improve the ability to apply the taxes effectively. To support reforms in the tax administration, new resources (building and software) will be allocated to tax directorates in charge of large and medium firms, in line with the recommendation of the July IMF technical assistance report on tax administration (structural benchmark, April 2020). Tax and customs reforms will benefit from the assistance of the recently posted IMF resident advisor for revenue administration.

G. Structural Reforms on Public Financial Management

27. The government reaffirms that achieving the objectives of its economic program depends on sound and transparent public financial management (PFM). The government emphasizes the recent progress made in terms of budget execution, monitoring, and reporting, as well as the integration of CEMAC directives within the Chadian legislation. The government intends to continue the strong collaboration with its development partners to further improve PFM under the new PFM reform strategy developed in May 2019 with the assistance of the IMF and the World Bank. The government looks for further TA missions and long-term resident experts within the Ministry of Finance and Budget. The government will seek to establish a policy dialogue framework with donors providing budget support, to harmonize conditionality for the release of budget support and improve the effectiveness of technical assistance.

28. We renew our determination to improve the expenditure chain.

  • The government is committed to reducing the use of emergency spending procedures DAO, which intensified in the past two years. The government will also regularize DAO as soon as possible after they occur to limit the risks of over-spending and the accumulation of arrears. For 2020, the limit on the DAO rate will be reduced to 20 percent.

  • More broadly, the expenditure chain should be better applied under a secure information system. The four phases of the expenditure chain (commitment, validation, authorization of payment order, and cash payment) are now implemented and monitored through the computerized system (CID). The CID has, however, shown weaknesses, while the payroll information system (SIGASPE) and the manual treatment of information at the Treasury, entail great risks. Moreover, accounting statements continue to be issued with delays, which hinders proper expenditure monitoring. The Ministry of Finance and Budget has therefore decided to revamp the information system by acquiring and implementing the integrated financial management system (IFMS) used in Rwanda. The IFMS aims at achieving effective, accountable and transparent Public Finance Management, through an integrated computerization of government-wide financial transactions by various entities. The system will be operational in 2020 with the help of Rwandan experts. Under this framework, the government aims to more consistently implement the expenditure chain with a view to improving effective absorption of budgeted allocations, particularly for social sectors.

29. We will implement the new PFM strategy to modernize the management of public finances. The new strategy takes account of the 2017 PEFA conclusions, CEMAC reforms and recommendations of various TA missions by donors. Following a validation workshop by all concerned government bodies, the strategy will be adopted by the government and monitoring bodies will be established by decree, before it can be implemented starting from 2020. The new strategy should help improve budgeting procedures and strengthen forecasting and coordination between agencies.

30. We will adopt a clearance strategy for the entire stock of verified arrears (Reset structural benchmark, end-December 2019). The strategy will explicitly explain the factors for prioritizing the clearance of arrears. The government is committed to prioritize the payments on the basis of their economic and social impact, and the expected effect on the banking sector. It will establish clear modalities for repayment. It will also include a credible plan to finance the clearance including external and domestic financing consistent with reducing debt vulnerabilities and improving financial stability. A key component of the strategy is public communication and outreach, which will help the strategy succeed in rebuilding confidence of the private sector by reducing key sources of uncertainty regarding the repayment of arrears. The government believes that support from Chad’s external development partners will be critical to clear the arrears.

31. We continue to work towards a more efficient cash management system to avoid the emergence of new arrears. The Cash Plan Committee is in charge of cash flow forecasts and management, monitoring the current Treasury account at the BEAC, and centralizing public accounting operations, cash flow and public debt. A cash management plan, including monthly forecasts of revenue and main expenditure (notably the wage bill, and domestic and external debt service) has been developed. Moving forward, efforts would focus on refining the monthly cash flow plan—which would be included within the budget (in line with the CEMAC Directive) and updated on a semi-annual basis—and on strengthening the responsiveness of the Committee to update revenue and expenditure forecasts. Steps will also be taken to establish a single treasury account (TSA), starting with a census of all accounts in commercial banks that could be covered by the TSA.

32. Strengthening public debt reporting and monitoring capacity remains an important objective of our reform agenda. The government is aware of the need to update the debt management information technology (IT) system. To further improve public debt management, the government intends to adopt a medium-term debt strategy and strengthen debt monitoring. The Minister of Finance and Budget will issue an order to facilitate the functioning of CONAD and remains committed to providing resources to facilitate execution of CONAD’s functions. It will also seek follow-up TA support to improve debt management, including strengthening debt management institutions and providing adequate human and material resources. Meanwhile, the government will continue to publish the annual public debt management report and will incorporate a section to elaborate on the short- to medium-term debt management strategy and a risk analysis. In addition, with a view to ensure that external debt service is paid on time, the Ministry of Finance and Budget will ensure that payments are in line with the mechanism under the escrow account and all the relevant officials meet on a monthly basis to take stock of previous payments and plan for forthcoming ones.

33. We intend to improve the efficiency of public procurement management. To this end, it plans to strengthen the capacity of the Public Procurement Regulatory Authority. The current procurement code will be revised by May 2020 to remove constraints that have limited absorption, including raising the threshold and simplifying the approval process. The General Directorate of Control of Public Procurement will continue to publish a quarterly bulletin.

34. Starting 2020, we will be reflecting in the budget the transfers to the National Electricity Company (SNE). The state transfer to SNE in terms of supply of diesel and electricity produced by SRN (up to 10 MW) is provided through SHT. In particular, SHT sells up to 4 million barrels of crude oil a year to SRN from the royalties-in-kind of the State at the selling price of $46.85 / barrel. SRN then provides a portion of the refined product to SNE. In 2018, the state transfer to SNE amounted to CFAF 47 billion, and CFAF 52 billion in 2020.

H. Banking Sector Reforms

35. Despite the registered delays, we are committed to strengthen the financial position of the two large public banks. Efforts to address arrears, along with more payment of debt owed to national banks on due dates, are expected to help ease pressures on the banking sector. Concerning the two large public banks, the government began to implement the needed reforms to address vulnerabilities. Based on the audit reports for CBT and BCC by external consultants completed at end-June, restructuring and funding plans were shared with the BEAC, COBAC and IMF staff. While those plans were adopted by the board of directors of BCC, they were subject to review for CBT at COBAC’s request. Updated plans are expected to be adopted by end-November 2019 (prior action). In the 2020 budget, the government will allocate amounts of CFAF 3 billion (CFAF 250 million per month) and CFAF 6 billion (CFAF 500 million per month) to repay outstanding credits for BCC and CBT, respectively. In addition, the government is committed to address all weaknesses identified, in particular improving the governance structure of the two public banks. To ensure the banks implement the restructuring and funding plans approved by their boards of directors, the goals of the restructuring plans will feed into performance-based contracts in consultation with IMF staff which will be signed with the management of CBT and BCC (structural benchmark, March 2020). In the interim, banks will continue to properly classify their loans and provision adequately in line with existing banking regulations. They will also work to improve their liquidity positions.

36. We believe that financial inclusion is an important multipronged initiative. The government is aware of the importance of access of Chadians to financial services and will strengthen financial inclusion by encouraging the creation of microfinance institutions, “ bancarisation” of state operations, the opening of accounts by greater numbers, and promoting the use of modern payment methods through mobile money. The government is also committed to mitigating inefficiencies of existing initiatives.

I. Improving Governance and Transparency

37. Improving governance is a key element of our strategy to revive the private sector. In this regard, the government is committed to implementing the United Nations Convention against Corruption (UNCAC), which was ratified by the National Assembly in 2017. The government will seek support from the UN to assess the extent to which its present penal code is in line with the convention and seek to strengthen it where necessary to advance the fight against corruption. Notably, the government is committed to identifying areas to improve the effective implementation of the legislation criminalizing acts of corruption in line with the UNCAC. The constitution includes a requirement for the President of the Republic, ministers, along with certain “public figures” and “agents of the state” to declare their assets, but the rate of compliance is very low. This is partly due to the absence of the implementing legislation necessary to define all aspects of the asset declaration. The government is preparing legislation that aims for strong implementation of the asset declaration obligations set forth in the Constitution, but the drafting is facing capacity constraints. Responsibilities of anti-corruption bodies (IGF, IGE and the Chamber of Accounts) will be clearly delineated, adequate resources will be provided to anti-corruption activity, and anti-corruption staff will be selected under a merit-based system and will need to meet stringent ethics standards or face stiff penalties. The government is committed to supporting the activities of the National Agency for Financial Investigation (ANIF), including by augmenting its human resources.

38. We are committed to continue its effort to improve transparency and oversight of the oil sector. In early May, the EITI completed Chad’s assessment under the 2016 standards. The EITI board’s recommendations will be implemented. The government has made significant progress in disclosing contracts and licenses in the petroleum sector with support from the World Bank. It has published certified and verified annual financial reports for 2017–2018 for the SHT (Société des Hydrocarbures du Tchad) holding and its subsidiaries.

39. Improving the business environment is of critical importance to revive private sector activity. The government recognizes that a stable regulatory environment, even-handed and consistent rule of law and efficient government services provide the backbone of Chad’s business environment. A regional business climate conference hosted by the government and the World Bank expected at the end of November 2019 will help develop successful ideas for improving the business climate.

Monitoring the Implementation of the Program

40. To monitor the implementation of measures and attainment of objectives under the program, the government will continue to rely on the Negotiation Committee based in the Ministry of Finance and Budget. The Committee is in constant communication with IMF staff in Washington and its Resident Representative in Chad.

41. The program will be monitored through bi–annual reviews by the IMF Executive Board on the basis of performance criteria, indicative targets, and structural benchmarks (Tables 1 and 2 attached). The indicators are outlined in the attached Technical Memorandum of Understanding (TMU). The sixth review will be completed on or after April 15, 2020. The government undertakes to adopt, in consultation with IMF staff, any new financial or structural measures, which may be necessary for the success of the program.

Table 1.

Chad: Quantitative Performance Criteria (QPC) and Indicative Targets (IT)* Under the ECF Arrangement

(In billions of CFAF, unless otherwise indicated)

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Sources: Chadian authorities; and IMF Staff. *The adjustors for the QPCs and IT are defined in paragraph 23 of the TMU. 1. NOPB: Non-oil revenue less grants, minus domestically financed primary expenditure (ie. expenditure, less net interest payments and foreign financed investment). 2. Customs revenue as given by the Treasury in the Table "Situation des Regies financières". 3. Includes net financing from Treasury bills / bonds and domestic banks direct loans net of amortization, see Technical memorandum of understanding. 4. As given in the PNG. 5. Stock of verified arrears, as given in the Table "Restes à payer". 6. Applies continuously. 7. Applies continuously. 8. Expenditure of Ministries in charge of social sectors, as recommended by the World Bank in the absence of a budgetary functional classification. An adjustor will be defined in case of expenditure cuts, which will ensure an increase of the share of poverty-reducing social spending in the total of primary current expenditure (see TMU for details). 9. DAO is defined as all expenditures which do not go through the standard spending procedure. Regularization of DAO consists in recording the expenditure in the correspondent line of the budget. This will be done within 45 days after the end of the quarter. 10. DAO is defined as all expenditures which do not go through the standard spending procedure. Regularization of DAO consists in recording the expenditure in the correspondent line of the budget. This will be done within 45 days after the end of the quarter. 11. External concessional borrowing (US$ million) 12. Oil Revenue is the sum of direct receipt and the sale revenue of government oil net of operating and transportation 13. Budget grants.
Table 2.

Chad: Prior Actions and Structural Benchmarks for the Program, 2019–20

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Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (TMU) spells out the concepts, definitions, and data reporting procedures mentioned in the Letter of Intent (LOI) and Memorandum on Economic and Financial Policies (MEFP) of November 26, 2019. It describes the information requirements to monitor performance under the ECF arrangement. The authorities will consult with the IMF before modifying measures contained in this TMU or adopting new measures that would deviate from the goals of the program. It describes more specifically:

  • a) reporting procedures;

  • b) definitions and computation methods;

  • c) quantitative performance criteria;

  • d) indicative targets;

  • e) adjusters to the quantitative performance criteria and indicative targets; and

  • f) structural benchmarks

A. Reporting Procedures to the IMF

2. Data on all the variables subject to quantitative performance criteria (QPC) and indicative targets (ITs) and information on the progress towards meeting structural benchmarks will be transmitted regularly to the IMF in accordance with the table shown in Attachment 1 herewith. With respect to continuous QPCs, the authorities will report any non-observance to the IMF promptly. For the purpose of this TMU, days refer to calendar days unless otherwise specified. Revisions to data will also be forwarded to the IMF within 14 days after being made. In addition, the authorities will transmit to IMF staff any information or data not defined in this TMU but pertinent for assessing or monitoring performance relative to the program objectives.

B. Definitions and Computation Methods

3. Unless otherwise indicated, the term Government refers to the central government of the Republic of Chad comprising all the executive bodies, institutions and any structure receiving special public funds and whose competence is included in the definition of central government as defined in the Government Finance Statistics Manual of 2014 (GFSM 2014), paragraphs 2.85 – 2.89.

4. A public nonfinancial enterprise is a government-controlled corporation1 whose principal activity is the production of goods or nonfinancial services. For the purpose of the program monitoring, these include: Société Tchadienne des Eaux (STE), Société Nationale d’Electricité (SNE), Société des télécommunications du Tchad (SOTEL), Société Tchadienne des Postes et de i’Epargne (STPE), Société des Hydrocarbures du Tchad (SHT), Compagnie Tchadienne de Textiles (COTEX), Sociètè Nationaie de Ciment (SONACIM Tchad), CimenTchad, Société Industrieiie de Materieis Agricoies et d’Assemblage des Tracteurs (SIMATRAC), Société Tchadienne d’Hydraulique (STH), Fonds d’Entretien Routier (FER).

5. Oil revenue is defined as the sum of (i) the gross sales revenue of government’s crude oils obtained through government’s equity participation in oil companies minus all costs incurred due to the equity participation (cash-call) and transportation cost associated with the sales of government’s crude oils, (ii) royalties, (iii) statistical fees, (iv) profit tax, (v) dividends, (vi) bonuses, (vii) revenues from exploration duties, (viii) surface tax, (ix) access rights to the pipe and (x) any other flows of revenue paid by oil companies (settled in-kind and in-cash), except indirect duty and taxes. The authorities will notify IMF staff of changes in the oil taxation systems and laws that may impact revenue flows. Exceptional receipts paid by oil companies, whose definition is given in Paragraph 7 below, are excluded from oil revenue.

6. Customs revenue is defined as the revenue generated from all levies and duties payable on goods of a particular kind because they are entering the country or services because they are delivered by nonresidents to residents (as defined in GFSM 2014, paragraph 5.84). Customs revenue is recorded on a cash basis. For the purpose of the program monitoring, customs revenues are those recorded in the table “Situation des régies financières” of the Treasury.

7. Exceptional receipts are defined as payments to the government that include:

  • Payments from resolution of protracted disputes between foreign companies operating in Chad and the Government in connection with their tax obligations or potential violations to laws and standards or any other legal obligations.

  • Payments from the sale or placement or privatization of Government’s assets, granting or renewal of licenses.

8. Total government revenue is the sum of tax revenue and non-tax revenue (as defined in GFSM 2014, Chapter 5). Oil revenue, as defined in paragraph 5 and custom revenue as defined in paragraph 6, and exceptional receipts as defined in paragraph 7. These items will be shown in the breakdown of total government revenue report.

9. Total government expenditure is understood to be the sum of expenditure on wages and salaries of government employees (as provided in the document “Masse salariale”, see Paragraph 11 for details), goods and services, transfers (including subsidies, grants, social benefits, and other expenses), interest payments, and capital expenditure. All these categories are recorded on a commitment basis, unless otherwise stated. Except for capital expenditure, which is defined as shown in the Government Finance Statistics Manual 1986 (GFSM 1986),2 all other spending items are defined as in GFSM 2014 (Chapter 6). Total government expenditure also includes “dépenses avant ordonnancement” (DAO) which are not yet regularized (see paragraph 10 for details).

10. Dépenses avant ordonnancement (DAO) is defined as all expenditures which do not go through the standard spending procedure. A standard procedure entails a chain which includes the commitment, validation, authorization, and cash payment. There are two categories of DAOs:

  • The first category consists of DAOs which are made relative to a credit line in the budget. These DAOs can be regularized (i.e., recorded in the correspondent line of the budget) without difficulties.

  • The second category consists of DAOs which are made regardless of the existence of a credit line in the budget. Their regularization requires either an adjustment in the revised budget, i.e., Amended Financial Law (LFR), or a ministerial order to transfer credit allocation within the budget.

11. Wages and salaries correspond to the compensation of all government employees, including civil servants and members of the armed and security forces. Compensation is defined as the sum of wages and salaries, allowances, bonuses, pension fund contributions on behalf of civil servants, and any other form of monetary or non-monetary payment. For the purpose of program monitoring, data are computed from the document “Masse salariale”, which excludes compensations to staff under certain contracts that are classified as Transfers (see Paragraph 13 for details).

12. Subsidies are defined as government current expenditure that are made, via ordinary or in-kind payment, to enterprises, on the basis of the level of their production activities or the quantities or values of the goods or services they produce, sell, export, or import. For the purpose of program monitoring, subsidies refer to those reported in “Tableau de 4 Phases”.

13. Transfers are defined as government current expenditure to individuals, private nonprofit institutions, nongovernmental foundations, corporations, or government units, including SNE that are not included in other categories of transfers. For the purpose of program monitoring, transfers refer to those reported in “Tableau de 4 Phases”.

14. For the purposes of this TMU:

  • The term “debt” is as defined in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107) but also includes contracted or guaranteed commitments for which values have not been received. For purposes of these guidelines, the term “debt” is understood to mean a current, that is, not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract Debt can take several forms; the primary ones being as follows:

  • i. Loans, that is, advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchange of assets that are equivalent to fully collateralized loans, under which the obligor is required to repay the loan funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

  • ii. Suppliers’ credits, that is, contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

  • iii. Lease agreements, that is, arrangements under which the lessee is allowed to use a property for a duration usually shorter than that of the life of the property in question, but without transfer of ownership, while the lessor retains the title to the property. For the purposes of this guideline, the debt is the present value (at the inception of the lease) of all the lease payments expected for the period of the agreement, except payments necessary for the operation, repair, and maintenance of the property;

  • In accordance with the definition of debt set out above, penalties and judicially awarded damages arising from failure to pay under a contractual obligation that constitutes debt are also debt Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

  • Domestic debt is any debt as defined in above, which is denominated in Central African Franc (CFAF).

  • External debt is any debt as defined in above, which is denominated in a foreign currency, i.e., a currency other than CFAF.

  • Debt is considered concessional if it includes a grant element of at least 35 percent3 and non-concessional if otherwise. The grant element is defined as the difference between the nominal value of the loan and its present value, expressed as a percentage of the nominal value of the loan. The present value of the debt at the date on which it is contracted is calculated as the discounted sum of all future the debt service payments at the time of the contracting of the debt4. The discount rate used for this purpose is 5 percent per annum.

15. Domestic payment arrears are defined as the sum of (i) recognized expenditure payment arrears, and (ii) domestic debt payment arrears, which are defined below:

  • The outstanding amount in a payment order, to a private or public company, for an expenditure incurred, validated and certified by the financial controller and then created by the “Direction of Ordonnancement”, is defined as a float after the payment authorization is issued by the Treasury. The outstanding amount of a float is classified as a recognized expenditure payment arrear 90 days after the issuance of the payment authorization. The recognized expenditures payment arrears so defined do not include domestic debt payment arrear and arrears on wage and salaries. Unrecognized expenditure payment arrears are defined as any potential expenditures payment arrears which have not gone through that standard spending procedure. The nature and the amount of those potential arrears will be determined by an audit of domestic arrears (see paragraphs 24 and 25).

  • Domestic debt payment arrears are defined as the difference between the amount required to be paid under the contract or legal document and the amount actually paid after the payment deadline specified in the pertinent contract.

16. External debt payment arrears are defined as external debt obligations of the government and public, non-financial enterprises that have not been paid when due in accordance with the relevant contractual terms (taking into account any contractual grace periods). This concept excludes arrears on external financial obligations of the government for which the creditor has accepted in writing to negotiate alternative payment schedules before the relevant payment due and excludes technical arrears that are less than six weeks.

17. The non-oil primary balance (NOPB) is defined as the difference between (i) total government revenue (not including grants, oil revenue and exceptional receipts), and (ii) primary expenditure on a commitment basis, which is defined as the total government expenditure minus interest payments on domestic and external debt, SNE transfers and foreign-financed capital expenditure.

18. Poverty-reducing social spending, according to the latest general structure of Government, comprises public spending by the following ministries: (i) National Education and Civic Promotion, (ii) Public Health, (iii) Women, Early Childhood Protection and National Solidarity, (iv) Production, Irrigation and Agricultural Equipment, (v) Livestock and Animal Production, (vi) Environment Water and Sanitation, and (viii) Professional Training and Small Job Promotion. It also includes education spending in the benefit of the ministry of health in the amount of 7 CFAF billion.

19. Domestic currency government financing is defined as the issuance of any instrument in CFAF to creditors; loans from BEAC (including support from the IMF), BDEAC, and CEMAC Member States, or any other debt contracted in CFAF. Net domestic currency financing to the government is subdivided into net bank financing, net securitized financing, net government financing from BEAC, and other non-bank financing. Net bank financing is defined as the change in the net government position towards the domestic commercial banks and includes prepaid interest. Net government financing from BEAC is defined as the change in net government position towards the BEAC.5 Net securitized financing includes the issuance of securitized government bonds and loans in CFAF to domestic and regional banks net of related amortizations since the end of the previous year.

20. “Program reference rate”, is based on staff’s “average projected rate” for the six-month USD LIBOR over the following 10 years and is identified as 3.22 percent for the duration of the program. The present value of loans with flexible interest rate will be calculated using the program reference rate plus the fixed spread (in basis points) specified in the loan contract. Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 basis points) will be added.

C. Quantitative Performance Criteria

21. The quantitative performance criteria and indicative targets listed below are those specified in Table 1 of the MEFP. Continuous Quantitative Performance Criteria (QPC) require that at no point in time it will be non-observed. Should any non-observance occur, the authorities would inform the IMF promptly. Adjusters for the QPCs are specified in Section E below. Unless stated otherwise, all quantitative performance criteria will be assessed cumulatively from the beginning of the calendar year to the applicable test-dates (the assessment period) specified in Table 1 of the MEFP. The quantitative performance criteria and details on their assessment are as follows:

  • A floor for the non-oil primary balance. The non-oil primary balance is defined in paragraph 17 above.

  • A floor on custom revenue. The custom revenue is defined in paragraph 6 above.

  • A ceiling on the net domestic government financing (excluding BEAC). This is the sum of net bank financing and net securitized financing as defined in para 19.

  • A ceiling on net government financing from BEAC (as defined in para 19). The ceiling includes support from the IMF.

  • A ceiling on the stock of domestic recognized expenditure payment arrears. Domestic recognized expenditure payment arrears are defined in paragraph 15. As of end-December 2018, the stock of recognized expenditure payment arrears was at CFAF 160 billion based on information in the Table “Reste à Payer” (prepared by the Treasury). The ceiling set for end-March 2020 would be adjusted to reflect the end-December 2019 actual stock of arrears when final data is available.

  • A zero ceiling on the accumulation of any new external payment arrears by the government and public non-financial enterprises. This ceiling applies continuously. Any non-observance to the ceiling will be reported promptly to the IMF with information regarding the date of the non-observance, amount of the missed payment and the creditor involved.

  • A zero ceiling on new non-concessional external debt contracted or guaranteed by the government and non-financial public enterprises, with a maturity of more than one year. This ceiling applies continuously and does not include IMF financing. Debt is non-concessional if it includes a grant element of less than 35 percent, as described in Paragraph 14. Excluded from the ceiling are: (i) normal short-term credits for imports; and (ii) debt contracted before the ECF arrangement and rescheduled during this arrangement to the extent that the rescheduling is assessed to improve the overall public debt profile.

Table 1.

Baseline Projections of Selected Variables (Cumulative on annual basis)

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Net Oil Revenue is the sum of (i) the sale revenue of government oil net of operating and transportation cost and (ii) oil tax revenues.

D. Indicative Targets and Memo Items

22. The indicative targets and memo items listed below are those specified in Table 1 of the MEFP. Adjusters of them are specified in Section E below. Unless stated otherwise, all indicative targets will be assessed cumulatively from the beginning of the calendar year to the applicable test-dates (the assessment period) specified in Table 1 of the MEFP. The indicative targets and details on their assessment are as follows:

  • A floor on poverty-reducing social spending equivalent to 34 percent of domestically financed primary spending in 2019 and 2020. Poverty-reducing social spending is defined in paragraph 18.

  • A ceiling (22 percent in 2019 and 20 percent in 2020) on the use of emergency spending procedures (DAO) excluding the wage bill, military spending and debt service as a percent of primary spending excluding the wage bill and military spending (memo item). Military spending is spending by the Ministry of Defense.

  • A floor on the regularization of spending executed through DAO (memo item). Regularization of DAO (as defined in paragraph 10) will be done within 45 days after the end of the quarter and as follows: 70 percent after the second quarter, 75 percent after the third quarter, and 80 percent after the fourth quarter.

E. Adjustors to Performance Criteria and Indicative Targets

23. To take into account factors or changes beyond the government’s control, the following quantitative performance criteria during the assessment period will be adjusted as follows:

  • If the total budgetary receipts and loans are lower than the programmed amount, because of lower oil revenue or budget support, then the ceiling on the stock of domestic payment arrears can be adjusted upward up to the planned arrears repayment amount. An increase in net domestic financing (either net domestic government financing excluding BEAC or net government financing from BEAC) could be envisaged up to 25 percent of the shortfall not compensated for through reduction in arrears payment.

  • Twenty percent of total surplus oil revenue—as defined in the Oil Price and Production Smoothing Law—will be deposited at the end of the year in the Special Account of the Treasury for Oil Price and Production Smoothing, up to CFAF 10 billion.

  • If the total budgetary receipts and loans are larger than the programmed amount, because of higher oil revenue, additional budget support excluding grants to finance the parliamentary elections, or exceptional receipt, the amounts—excluding amounts placed in the Special Account of the Treasury for Oil Price and Production Smoothing—must be used through adjustment of a combination of the following elements:

    • ➢ the floor for the non-oil primary balance can be adjusted down by up to 25 percent of the excess amount;

    • ➢ the ceiling on net financing from the BEAC can be adjusted down by 25 percent of the excess amount; and

    • ➢ the ceiling on the stock of domestic recognized expenditure payment arrears can be adjusted down by 50 percent of the excess amount.

  • The non-oil primary balance can be adjusted downward by the same amount of budget grants provided to finance the parliamentary elections. Accordingly, the non-oil primary balance will be adjusted downward by any amount budgeted for elections in 2019 that remains unspent in 2019. For the purpose of the TMU, baseline oil revenue, budget support and exceptional receipts are shown in the text table below.

  • Should primary expenditure compression be needed, poverty-reducing social spending would be adjusted to the extent that it is reduced proportionally less than other domestically financed primary spending such that its ratio does not decline below 34 percent.

F. Structural Benchmarks

24. Prior Actions are specified in Table 2 of the MEFP

  • Submit the 2020 budget to the National Assembly for approval in line with the program parameter.

  • Based on the conclusion of the audit of BCC and CBT, adopt restructuring and funding plans for CBT and BCC in coordination with the BEAC, COBAC and IMF staff.

  • Complete audit of remaining domestic arrears. Coverage of the audit should include at least i) all remaining “Grand Travaux Presidentiels” and ii) all potential arrears not yet reviewed from the Infrastructure ministry.

Table 2.

Chad: Summary of Data to be Reported

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For end-December fiscal data, data should be reported 45 days after the end of the complementary period.

Including maturities.

Including the breakdown by currency and maturity.

Both market-based and officially determined, including discounts, money market rates, and rates on treasury bills, and bonds and other securities.

25. Structural benchmarks are specified in Table 2 of the MEFP. Outstanding SBs are governed by the previous TMU.

  • Publication of a quarterly note on the oil sector, in line with the template agreed with the IMF staff, including detailed information on debt service to Glencore, quarterly, starting end-December 2019 (Table 2). The note issued at end-December will cover developments up to the end of the previous quarter (June 2019).

  • i. The note will comment on the recent development in the oil sector, including information related to production, export, and new exploration over the previous quarter, and expectation and forecast for the next 6 months.

  • ii. The note will also provide a detailed account of the flow of oil revenue. Oil revenue will be reported by categories and the corresponding types of payments, in-cash (payment made in cash by oil companies) and in-kind (payment made in crude oil by oil companies). Other information will include information on the sale of government-owned crude oils, such as gross sales revenue, volume sold, transaction prices, operating costs (“Cash-call”) to oil companies, transportation cost, interest payments, principal repayment, other related fees paid to service the Glencore loan and the final amount of sales revenue accrued to the Treasury.

  • In consultation with IMF staff, adopt a clearance strategy of domestic arrears based on the completed results of both audits by end-December 2019.

    • ➢ The clearance strategy should include transparent and objective factors for prioritization, including economic and social impact, and the effect payment is expected to have on the banking sector. It should address clearance modalities, notably whether and how much the government will pay in cash, restructure and securitize.

    • ➢ The strategy should also indicate the plan to finance clearance.

  • Complete the implementation of the recommendations of the audit of the 47 exemption conventions with a view to removing or modifying those that do not comply with the legal texts or that have not been correctly executed, by end-February 2020.

  • Publication every six months of a list of all new, renewed or extended tax and customs exemptions during the previous six months. The first list should be published at end-January and should cover the period July to December 2019.

  • Sign performance contracts with the management of CBT and BCC, by end March 2020.

  • Allocate new resources (building and software) to tax directorates in charge of large and medium firms in with line FAD’s recommendations, by end April 2020.

Table 3.

Chad: Summary of Oil Revenue

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1

See CEMAC regional reports, June 2019 and December 2019, for a fuller discussion of these issues affecting all CEMAC countries, including Chad.

2

Overdue loans are the sum of loans overdue for >90 days (NPLs) and <90 days.

3

The 2019 underlying NOPB excludes election spending, which is a one-off expense.

4

Oil profit tax in previous years was offset by the amortization of the operator’s initial investment. The impact this year will be partial with a full year effect expected in 2020.

5

EBS/19/60, Annex III, “Oil Dependence and Considerations for a Price Smoothing Mechanism”

6

While the Constitution specifies that the president of the republic, ministers, and certain “public figure” and “agent of the state”, have to declare their assets at the beginning and end of their service, it lacks the mechanisms and specifics necessary to effective implementation, compliance, and enforcement.

7

The new regulations introduced internal control requirements, minimum social capital, AML/CFT regulations, and prudential norms.

1

Control of a corporation is defined as the ability to make key financial and operating decisions (see GFSM 2014 paragraph 2.104–2.114).

2

Capital Expenditure – expenditure for acquisition of land, intangible assets, government stocks, and nonmilitary, nonfinancial assets, of more than a minimum value and to be used for more than one year in the process of production. Capital expenditure is frequently separated (in some cases along with certain revenue) into a separate section or capital account of the budget or into an entirely separate budget for expenditure, i.e., the capital budget. This separation may sometimes follow different criteria, however.

3

The IMF website gives an instrument (link hereafter) that allows the calculation of the grant element for a wide range of financing packages: http://www.imf.org/external/np/pdr/conc/calculator.

4

The calculation of concessionality takes into account all aspects of the loan agreement, including maturity, grace period, schedule, commitment and management fees commissions. The computation of the grant element for loans from the Islamic Development Bank (IsDB) will take into account the existing agreement between the IsDB and the IMF.

5

Net claims of the BEAC and domestic commercial banks to the State represent the difference between government debts and its deposits in the Central Bank and commercial banks. The scope of the net claims of the bank system on the State is defined by BEAC and represents the government net position.

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Cover IMF Staff Country Reports
Chad: Fifth Review under the Extended Credit Facility Arrangement and Financing Assurances Review-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Chad
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 399
Publisher:
International Monetary Fund
ISBN:
9781513524733
ISSN:
1934-7685
Pages:
70
DOI:
https://doi.org/10.5089/9781513524733.002
Figure 1.

Chad and Neighboring Countries: Fragility Indicators, 2010–19
Figure 2.

Chad: Selected Development Indicators, 1990–2018
Text Figure 1.

Chad: Contribution to real GDP growth

(Percent change)
Figure 3.

Chad: Fiscal Revenue Developments, 2011–19
Text Figure 2.

Chad: Credit and Deposit Growth, 2014–19

(Percent change)
Text Figure 3.

Chad: Trends in External Debt, 2015–19
Text Figure 4.

Chad: Current Account Deficit vs Net Foreign Assets

(CFAF Billions)
Figure 4.

Chad: Recent Economic Developments, 2012–19
Text Figure 5.

Wage Bills in CEMAC, 2017–19

(percent of GDP)
Text Figure 6.

Chad: Wage Bill, 2017–19

(CFAF billions)
Text Figure 7.

Chad: Procyclicality of Fiscal Policy

(CFAF billions)
Text Figure 8.

Chad: Domestic Debt, 2014–19

(CFAF billion)
Text Figure 9.

Chad: Financial Inclusion Indicators, 2011–17