Dear Mr. de Rato:

1. Performance under the program supported by the Stand-By Arrangement (SBA) continues to be satisfactory. This letter describes economic and financial developments during the first nine months of 2004, the measures being implemented to meet the objectives for 2004, as well as the objectives and policies for 2005.

A. Recent Economic and Financial Developments

2. The trends in economic activity observed during the first half of the year continued during the third quarter, while budget execution at end-September was in line with program objectives. Oil production is expected to exceed program projections, with production amounting to 13.6 million metric tons in 2004, up from 13.5 million in 2003, as a result of the substantial investments made since 2003. Non-oil GDP in real terms is projected to grow by 2.3 percent (up from 1 percent in 2003), in line with program projections. Manganese production and timber processing remained strong, while activity in the construction and public works sector, as well as cement production, picked up recently, notably as a result of the accelerated execution of the public investment program. Power generation is also up. In the timber sector, Okoumé exports continued to be hampered by the high costs of freight, sluggish demand in the Asian market, and stiffer competition from neighboring producer countries. As a result, Okoumé exports are expected to total 900,000 m3 in 2004, compared to 1 million metric tons in 2003. The logging of other species (bois divers) was spurred by strong external demand, with a 10 percent jump in exports, which could total 660,000 m3 tons. Timber processing is also on the rise, boosted by greater capacity.

3. Inflation is on a downward trend. In October 2004, on a year-on-year basis, the consumer price index rose by only 1.0 percent, lower than the 2 percent projected in the program.

4. The external position remains favorable. The current account surplus is expected to widen considerably in 2004 owing to the positive performance of oil and manganese exports, and to reach the equivalent of 11.5 percent of GDP, compared with 9.6 percent in 2003. Consequently, at end-September 2004, Gabon's contribution to the net foreign assets of the regional central bank (Bank of Central African States-BEAC) was more than twice its level at end-2003, and is projected to increase by CFAF 140 billon (3.6 percent of GDP) during the whole year. Following the debt rescheduling agreement concluded with Paris Club creditors on June 11, 2004, negotiations on bilateral agreements were initiated with these creditors and are expected to be concluded shortly; the Paris Club secretariat will be kept regularly informed of progress. As for debt to non-Paris Club bilateral creditors, Gabon has concluded an agreement with Korea and has begun negotiations with the others (Saudi Arabia, China, and Libya). The agreement with London Club banks will be signed in the coming weeks.

5. Fiscal performance at end-September was in line with the program and all the end-September quantitative performance criteria have been met (Table 1). In particular, the objective for the primary fiscal balance excluding externally financed investment expenditure (adjusted for the excess in the oil revenue) was met with a comfortable margin.

6. Non-oil revenue fell slightly short of the target (by CFAF 3 billion, or the equivalent of 0.1 percent of non-oil GDP); the customs revenue shortfall of CFAF 17 billion was almost entirely offset by higher-than-expected yield from the value-added tax, the IRVM tax on securities income, and registration fees. The shortfall of non-oil revenue was offset by current expenditure on goods and services and domestically financed investment expenditure which were somewhat below program projections. The floor on non-wage current expenditure in the social sectors, which is a quantitative indicator under the program, was observed.

7. Oil revenue exceeded program projections by CFAF 7 billion, reflecting favorable international prices for crude oil and a small increase in production in the first nine months of the year, compared with the same period of 2003. Government oil revenue, however, grew more slowly than oil exports, owing to the transition of many operators from the concession regime to the production sharing arrangement, which allow for a more rapid recovery of investment costs, thus creating an incentive for investment in more modern techniques.

8. The wage bill was contained within program limits as a result of the measures taken in April 2004. These included strictly enforcing the retirement age, reducing the size of ministerial offices, monitoring contractual staff actually in service, ensuring that functional allowances are paid only to those entitled to them, and paying air service allowances only to those entitled.

9. After the sharp reduction of the Treasury float in the first six months, the float increased slightly in the third quarter. The repayment of Libreville Club domestic creditors (18-month consolidation agreed in March 2004) continued as planned. The target for the stock of domestic arrears at end-September (performance criterion) was met. The performance criterion regarding the net position of the government vis-à-vis the banking system was met with a margin of CFAF 12.6 billion, equivalent to 0.3 percent of GDP.

10. Developments in the monetary sector up to end-September 2004 were marked by the strong growth of net foreign assets, which more than compensated for the decline in net bank credit to the government and in bank credit to the economy. The money supply rose in the first nine months by 3.5 percent (6.2 percent over the 12 months period to end-September). Credit to the economy fell by 4.8 percent over the nine months, as the reduction in the Treasury float enabled many borrowers to repay their bank loans. Moreover, banks continue to be very cautious in granting credit to the forestry sector, owing to the relatively large amount of nonperforming loans in that sector. The ratio of nonperforming loans, which stood at 13.8 percent of total gross loans at end-2003, rose to 17.3 percent at end-September 2004, reflecting the stricter classification required by the regional banking commission, COBAC. However, banks have substantially increased their loan loss provisions, which, at end-September, covered 72 percent of nonperforming loans. The banking system also significantly strengthened its capital and reserve position during the first nine months of 2004.

11. Progress has been made on structural reforms. The decree establishing the Large Enterprise Directorate (structural performance criterion for end-September) was adopted on September 9, 2004, the director was appointed on October 14, and implementing regulations are to be prepared by end-2004. Also, all the structural benchmarks for end-October have been met (Table 2), except for the conclusion of a performance contract with the National Social Guarantee Fund (Caisse nationale de garantie sociale-CNGS) which has been observed with some delays; this was prepared in October, but has been signed on November 17. In the area of administrative reform, the government has introduced the single unified personnel roster (fichier unique de référence - FUR), which harmonizes the civil service and payroll rosters, while the computerized civil service management project (ANITA) will become operational by end-March 2005. Significant steps are being taken in the area of public enterprise restructuring. The process of privatizing Gabon Télécom, which was delayed for several months to allow for greater equity participation by the private sector (sale of more than 51 percent instead of the 35 percent initially envisaged) is in its final stage, with the updating of the memorandum of information for investors. Bids will be submitted by mid-March 2005 and a successful bidder will be selected by the end of that month. The new management team installed at Air Gabon in May 2004 has achieved encouraging improvements in the company's operating results, with a redeployment of the fleet and a higher aircraft occupancy rate. This has enabled Air Gabon to reduce its debts to suppliers by about CFAF 5 billion, although the remaining debts are large. As already indicated in my letter of September 8, 2004, the end-2004 structural benchmark of a balanced operating result before depreciation will not be met. On September 14, an international consulting firm was selected, through a competitive bidding process, to assist in the partial privatization of the company. In the area of trade liberalization, the import surcharge on eggs was eliminated on August 11, 2004.

B. Policies for the Remainder of 2004

12. The government is confident that the end-2004 program target for the non-oil budget deficit of CFAF 161.7 billion can be met. Because of the downward revision of the non-oil GDP deflator in 2004, this is equivalent to 7.7 percent of non-oil GDP, compared with 7.6 percent targeted under the revised program. Non-oil revenue is expected to remain on target, with a shortfall in customs revenue estimated at about CFAF 12 billion to be offset by the strong performance of other non-oil revenue. Major efforts are underway to improve the collection of forestry taxes—through increased cooperation between the General Directorate of Taxes, the customs administration, and the General Directorate of Water and Forests—as well as of tax arrears, particularly the corporate income tax. The customs revenue target, however, has been adjusted downward to take account of the impact of the increase, in August 2004, of the number of products subject to the 10 percent reduced VAT rate, in the context of the social truce. In contrast, the higher VAT rate (25 percent) introduced in August 2004 on banking services and telecommunications, as well as on certain luxury goods, has been eliminated and replaced with the normal 18 percent rate, effective October 1, to ensure that it does not hinder the development of important sectors. Administrative steps have been taken to keep expenditures within program limits.

13. It is expected that oil revenues for 2004 will amount to CFAF 640 billion, based on a Brent oil price of US$47.85 per barrel in the fourth quarter, compared with CFAF 618 billion under the revised program. This excess will be used to repay the statutory advance from the central bank by CFAF 15 billion, and to increase deposits in the Fund for Future Generations (FFG) by CFAF 7 billion. Any surplus or shortage will be allocated to reduction of the statutory advance, as well as any savings expected to be made on external debt service because of the deferment to 2005 of the signing of some rescheduling agreements.

C. Objectives and Policies for 2005

The macro framework for 2005

14. Macroeconomic prospects are expected to remain favorable in 2005, marked by faster non-oil sector growth, a less pronounced decline in oil production, and high prices for crude oil and manganese. Non-oil real GDP is expected to grow by 3.5 percent in 2005, fueled by ongoing investments in the recently privatized agribusinesses and in petroleum refining, expanded timber processing capacities, higher manganese production, and new initiatives in the housing sector. Oil production is expected to reach 13.1 million metric tons, well above the level of 12.3 million previously projected. The implementation of prudent fiscal policies should contribute to contain inflation at 2 percent. With the projected high prices for oil and manganese, the external position is expected to strengthen, with a current account surplus equivalent to 13.5 percent of GDP and a substantial build-up of external reserves. The ratio of external debt to GDP is expected to fall from 56 percent at end-2003 to 45 percent at end-2005.¹ These projections, however, are highly dependent on oil prices, which are subject to major fluctuations.

Key elements of the fiscal program for 2005

15. The draft budget for 2005 submitted to parliament in October is in line with the program, which aims at reducing the non-oil primary budget deficit, including grants, by 1.9 percentage points; this will lead to a deficit of 5.8 percent of non-oil GDP, compared with 5.7 percent under the original program, given the downward revision of the non-oil GDP deflator. This will result from an increase in non-oil revenue (0.4 percentage point of non-oil GDP) and a reduction in primary expenditures (1.6 percentage points of non-oil GDP). Given the projected high level of oil revenues for 2005 (CFAF 670 billion, equivalent to 16.6 percent of GDP, on the basis of a favorable oil price) and the rescheduling agreement with Paris Club creditors, which extends through the first half of 2005, there will be no financing gap in 2005.

16. Non-oil revenue is projected to reach the equivalent of 24.8 percent of non-oil GDP (24.4 percent of non-oil GDP in 2004), or CFAF 550 billion, compared with a program estimate of CFAF 553 billion. The revenue effort is ambitious and will require implementation of the planned improvements in tax administration. These include (i) the gradual start of operations of the new Large Enterprise Directorate (DGE) in 2005; (ii) improvements in land title registration and in the collection of property taxes, based on the assessment lists to be finalized in early 2005 for Libreville and Port-Gentil; (iii) replacement of the income tax credits for property taxes with deductions from taxable income; (iv) implementation of a program to secure forestry revenue, including through the establishment of a stumpage tax withholding system (withholding made by purchasers of timbers who, according to the law, are jointly liable for the payment of this tax) and stepping up the collection of forestry tax arrears; (v) continuation of the effort started in 2004 to update the taxpayers roster, by ensuring that a uniform tax identification number is used for all taxes; (vi) extension of the self assessment procedures used for VAT to corporate income tax; (vii) increase in the number of tax auditors and in the scope of audits; and (viii) stepped-up collection of tax arrears. The initial customs revenue target was adjusted downward to take account of the impact of the 10 percent reduced VAT rate over the course of the full year. However, greater efforts to collect tax arrears and forestry taxes are expected to compensate for nearly all this shortfall.

17. On the expenditure side, the adjustment effort reflects the impact of measures to contain the wage bill and other current expenditure. The wage bill will be reduced by CFAF 1 billion to CFAF 225 billion in 2005 (5.8 percent of GDP), despite net recruitment of 500 employees in 2004 in the health, education, police, and justice sectors. Attainment of the wage bill target relies on (i) full implementation of the measures adopted in 2003-04; (ii) a reduction in the cost of nonpermanent workers; (iii) the introduction of a merit-based promotion system; and (iv) rationalization of the regime for contractual workers, including modification of the promotion system to align that of the permanent civil servants, and cuts in certain transportation benefits and other allowances; a decree to this effect was adopted on August 2004. Moreover, the adoption of the new law on the civil service statute is expected to contain the growth of the wage bill, inter alia by eliminating the system of automatic promotions.

18. With regard to nonwage spending, the government expects to achieve savings on a number of items. Investments will be made to contain water and electricity consumption. In addition, sovereignty expenses will be reduced by CFAF 2 billion from the 2004 level, and subsidies to public enterprises will decrease owing to completion of the privatization of the two agribusinesses, Agrogabon and Hevegab, as well as efforts to reduce Gabon Poste expenditures. This will allow for more realistic allocations to employee pensions, as well as government contributions to the CNGS. Strict enforcement of the provisions of the public procurement code by the General Directorate of Government Procurement and the General Budget Directorate should also lead to some reduction in the costs of investment projects included in both the state and Road Fund budgets.

19. With regard to scholarships, the Scholarships and Training Directorate has completed a study on how to enhance effectiveness in the awarding of scholarships. In particular, the study proposes (i) a better match between scholarship awards and human resource requirements, (ii) a reduction of the number of university scholarships for studying abroad in favor of upgrading Gabonese training institutions; and (iii) an improved legal framework for awarding scholarships. This study has been submitted to the World Bank for review. A commission chaired by the Deputy Prime Minister, which has been reactivated, will deepen the analysis and provide the government with specific proposals for reforming the scholarship system, to improve its effectiveness, and achieve savings on university scholarships beginning with the 2005-06 academic year, which will be used to strengthen the domestic higher education infrastructure. An action plan to that effect will be adopted before end-May 2005 (structural benchmark), and a pluriannual action plan will be an integral part of the PRSP.

20. The investment budget is expected to increase by an amount equivalent of 0.2 percentage point of GDP, to 4.1 percent of GDP in 2005. To ensure a fast start of budget execution in 2005, detailed line-item budgetary appropriations have been attached to the budget submitted to parliament, thus meeting one of the program's structural benchmarks. Consequently, the execution of the investment budget will start by end-February 2005, as envisaged in the program. For regional expenses related to the independence celebration (fêtes tournantes), the National Commission responsible for project selection will take closely into account the needs in the social sectors. These expenditures will be executed in accordance with the bidding procedures set out in the public procurement code, and to that end, projects will be selected sufficiently in advance before the end of the preceding year.

21. In the road sector, the government expects to enhance the effectiveness of investments through rigorous multiyear planning and stepping up the monitoring and control of road development and maintenance projects. In addition, the government, aware of the vast urban rehabilitation needs, is preparing an ambitious program to improve urban living conditions, which it expects to launch in 2006, and for which it will seek external financing.

22. The government is continuing its efforts to enhance effectiveness and transparency in budgetary management. Accordingly, a functional budgetary expenditure classification has been prepared and an external expert recruited to help apply the new economic and administrative budgetary expenditure classification to the investment budget. The Ministry of Planning will continue the audit of financial and physical execution of the investment budget begun in 2004. The selection process of consultants for the audit of FER arrears and expenses related to the regional independence celebration (fêtes tournantes) has been launched, and the audits will be concluded by end-April 2005.

23. For the first time, the budget of the National Social Guarantee Fund (CNGS) is annexed to the State budget, and the operations of the special accounts are presented in annexes to the budget. To ensure that the financial equilibrium of the CNGS is soundly based, a study on the level and applicable base of payroll taxes was recently completed. A decree establishing the new payroll taxes and applicable base will be adopted by end-March 2005 for implementation in early 2006.

24. An action plan to strengthen local authorities' finances is being prepared, based on the report of a joint commission of the Ministry of Finance and Ministry of the Interior, completed at end-October. The plan focuses on the strengthening of real property taxation, strict management of personnel costs, and an equitable system for the allocation of transfers to local governments. Efforts will be made to improve the allocation of resources from the equalization account. The ongoing process of updating urban property registers, which includes the issuance of real estate titles, will generate nonrecurrent revenue beginning in 2005. It will also considerably enlarge the number of properties subject to real estate taxation and the related revenue.

Managing the oil surplus and good governance

25. Given that projected 2005 oil prices and production are higher than under the program as revised during the first review, oil revenue is expected to exceed program projections by CFAF 66 billion (1.6 percent of GDP). However, in 2005 the external debt service after rescheduling is expected to exceed original program projections, as a number of rescheduling agreements will be concluded in 2005 rather than in 2004. The government plans to use the additional net revenue to (i) reduce outstanding statutory advances from the BEAC, which carry a fairly high interest rate by about CFAF 50 billion; (ii) pay reschedulable external obligations falling due in the second half of the year; and (iii) increase the resources of the Fund for Future Generations (FFG) by about CFAF 6 billion. No external financing gap is presently projected for 2005. The reduction in domestic and external debt will help ease the debt burden, while freeing financial resources needed for private sector development.

26. The government plans to improve the efficiency and transparency in the management of FFG resources. In view of the projected increase in these resources, it is essential that the FFG be properly managed and that its investments yield an adequate return. The immediate actions envisaged include (i) ensuring that the FFG effectively plays the role of a savings fund, the resources of which cannot be used to finance government expenditure, (ii) putting into operation the FFG management committee provided for in the 1998 law;(iii) authorizing the investment of FFG resources in long-term, low-risk financial instruments. The latter measure will need to be decided at the regional level, to ensure consistency with BEAC regulations. Should the law of 1998 require modification, Fund staff will be consulted.

27. The government remains committed to improving governance by combating corruption and enhancing transparency in the management of revenues from raw materials. In this regard, the National Commission Against Illicit Enrichment (CNLEI) continues its work on financial disclosure procedures and in other areas, such as investigations and awareness campaigns. The CNLEI budget for 2005 includes adequate allocations for its operating and investment expenses. An initial report on the activities of the Commission will be produced by end-2004. In the area of transparency, the templates for the Extractive Industries Transparency Initiative (EITI) are being properly filled by the government and the oil companies. A monitoring committee chaired by the Minister of Finance and including representatives of civil society will be established by end-February 2005, and the duly completed forms will be forwarded to the Monitoring Committee by end-April 2005 with the information for the last quarter of 2004, and in July 2005 with the information for the full year 2004. Thereafter, the forms will be completed and forwarded to the Monitoring Committee on a quarterly basis. External technical assistance may be obtained, if necessary. In view of the promising outlook for manganese production, the government plans to extend the coverage of this initiative to the manganese sector in 2005.

Monetary policy

28. Monetary projections for the remainder of 2004 and for 2005 are marked by a substantial increase in net foreign assets and the expected recovery of bank credit to the economy in the final quarter of 2004, associated with increased economic activity. In 2005, the rise in net foreign assets and the decline in net bank credit to the government are expected to continue, with growth of 21.5 percent and a decrease of 20.4 percent, respectively, relative to beginning-of-period money supply. With projected growth of credit to the economy of 7.8 percent (5.3 percent of beginning-of-period money supply), the money supply could grow 5.5 percent on an annual basis, in line with nominal non-oil GDP growth. The recovery of credit to the economy in 2005 is expected to result from a pick up in construction and public work, expansion of agribusinesses and oil refining, as well as new initiatives being prepared in the urban housing sector (National Real Estate Company's project for 2000 medium-standard housing units in Libreville), aided by accelerate procedures for allocating land parcels and issuing titles. The ample liquidity position of the banks, which hold liquid reserves equivalent to 20 percent of deposits and a similar amount of foreign assets, should facilitate this recovery.

Measures to boost non-oil sector growth

29. The government is committed to strengthening the ongoing structural reforms, which are essential for stimulating non-oil sector growth and economic diversification. Efforts in the coming months will focus on financial sector reforms, continued foreign trade and price liberalization, improvement of the investment climate, reform of the forestry and mining sectors, and public enterprise restructuring.

Financial sector reforms

30. To support economic diversification, growth, and employment, it is essential that the financial sector be strengthened and become more responsive to the need for financing small and medium-sized enterprises, housing, and micro-projects (microfinance). Regarding the increase in nonperforming loans observed since 2003, it is important that the provisioning of such loans remain adequate. The profitability of banks, which deteriorated in 2003 partly because of the need to put aside larger provisions, is expected to improve in 2004 and 2005.

31. The IFC's Foreign Investment Advisory Service (FIAS) study emphasized the lack of adequate institutions and instruments for financing small and medium-size enterprises, as well as the very high financing costs. As in other countries, mutual guarantee schemes can facilitate access to bank financing. The FODEX (Fund for the Development and Expansion of Small and Medium-Sized Enterprises) could play an important role in this area by serving as a mutual guarantee institution. As part of this reform, the FODEX would cease its bank refinancing and direct lending activities, which have not shown good results. A new FODEX charter, with the aim to enable it—through separate units—to engage both in mutual guarantee activities and refinancing microfinance institutions, in accordance with COBAC regulations, is being prepared and will be adopted in the first half of 2005.

32. The government recognizes the important role that microfinance institutions can play in economic development and poverty reduction. Consequently, a National Microfinance Promotion Unit was established in December 2003 at the Ministry of Finance to oversee the promotion of microfinance activities in Gabon. The unit has drafted standard by-laws based on the CAEMC (Central African Economic and Monetary Community) guidelines for microfinance organizations, and is responsible for examining the licensing requests submitted by associations wishing to engage in such activity. The Association of Microfinance Institutions (Association des Établissements de Microfinance - APEMFG) was established in December 2003. During an information and education mission carried out throughout the country between June and August 2004, the unit identified about one hundred associations and groups engaged in microfinance or interested in starting such activities. Some of these associations are in the process of amending their by-laws to obtain authorization to engage in microfinance. In the next few months, the government plans to contact donors that might be able to provide technical and financial assistance to these institutions, promote direct investment in this area, and extend lines of credit; training and education seminars will also be held on the regulatory framework.

Foreign trade

33. The significant nontariff barriers in place within the CAEMC continue to limit the potential benefits of regional integration. The government is determined to involve other member countries in the rapid elimination of such barriers, starting with liberalization of the sugar market at the CAEMC-regional level. An agreement concluded with the private sugar company, SUCAF, in August 2004 gradually eliminates the reductions in import duties that the company had enjoyed. The government also plans to abolish the import surcharge on cigarettes by end-December 2004.

Price liberalization

34. The government remains committed to not expanding the list of products subject to price controls; only pharmaceutical products, bread, petroleum products and school books are currently on the list. Moreover, with regard to domestic oil prices, the government plans, by end-March 2005, to reinstate the mechanism that automatically adjusts prices to reflect changes in international prices.

Investment climate

35. The government has prepared an action plan for implementing of the recommendations of the report by the FIAS team which conducted the first phase of a diagnostic study on the business climate in May 2004. The main recommendations of the report, which are to be presented in a seminar in January 2005, include: (i) improving the financing instruments for small and medium-sized enterprises; (ii) containing factor costs, with particular attention to the very high costs of port and transport operations; (iii) simplifying the procedures for starting new businesses, which are still too slow and necessitate a revamping of the private investment promotion agency (Agence de promotion des investissements privés - APIP); (iv) increasing the supply of skilled labor by upgrading the vocational training centers; and (v) improving the functioning of the courts and promoting the use of arbitration as an instrument to settle commercial disputes. A plan of action to implement the key recommendations of the seminar will be established before end-March 2005.

Forestry and mining sector policies

36. The government is in the process of implementing the program of forestry sector reforms set out in the letter of Development Policy for Forestry, Fisheries, and the Environment adopted on May 18, 2004. The aim of the reforms is to ensure the observance of sustainable forestry development principles and transparency in the use of resources. Accordingly, the list of forestry permit holders and basic information about them, already available to the public, will be made more accessible for easy consultation; the granting of new forestry permits has been suspended; and a pilot auction project of forestry permits is being developed with the World Bank; the suspension will be maintained until the end of the pilot project. Implementation of the timber marketing board (SNBG) restructuring plan continues with a view to considerably reducing its operating costs, given the low volume of the Okoumé and Ozigo exports, for which it has the monopoly. On the basis of the conclusions and recommendations of the consultant's study on the role of the SNBG, which was finalized at end-November, the government has decided to fundamentally change the role of SNBG, including the elimination of the export monopoly, and has adopted a time-bound action plan for the implementation of this important reform. Under this plan, SNBG will be profoundly restructured and transformed into a private company trading timber and processed wood; the timber quality and quantity control role will be transferred to the government. The government requests a waiver for the delay in the adoption of this plan, which was programmed for end-November 2004.

37. In the mining sector, the implementing regulations of the mining code have been drafted and will be adopted by end-2004, as planned. They are essential for defining a clear tax framework for new investors. The draft standard concession agreement will be submitted to Fund staff for review, before adoption by end-December.

Public enterprises

38. The government is currently expediting the privatization of Gabon Télécom so that the successful bidder can be selected by end-March 2005, on the basis of a revised timetable agreed with the investment bank. Efforts to reorganize Air Gabon continue with encouraging results, but the company's financial position remains fragile. The operating results will probably still be negative in 2004, but they are expected to reach balance in 2005, and to turn into a surplus in 2006. To monitor the company's restructuring, quarterly earnings targets have been defined by its general management and the Ministry of Finance. The current effort to reduce personnel expenses will continue. The timetable for partial privatization will be prepared by end-January 2005 with the assistance of the consultant selected to assist the government in the process of privatizing the company. By end-April 2005 the consultant will prepare the documents necessary for the invitation to prequalify for the privatization (structural benchmark), and the call for bids for the partial privatization will be issued by end-2005. Concerning Gabon Poste, on the basis of a recent consultants' report the government is examining measures that need to be taken in order to reduce costs and increase revenue, with the aim to reducing the annual subsidy and improve the quality of service.

PRSP preparation

39. PRSP preparation is on track and the document should be ready by end-June 2005. In this connection, a flash survey (questionnaire on core welfare indicators-QUIBB) will be prepared in January 2005 and completed in March 2005. The results will be used to update the poverty indicators as well as other social indicators. The review of the results of the General Population and Housing Census, undertaken with donor assistance, is in progress. Regarding the participatory process, seminars for civil society, the private sector, and various associations are planned in the nine provinces of the country by end-December, with financial and organizational support from the UNDP and the World Bank. National workshops were held in July and August in the provinces of Estuaire and Ogooué Maritime. Based on the 15 focal points of the PRSP, strategies for the priority sectors (education, health, agriculture, etc.) are being developed in the various key ministries and will be completed by end-December 2004. They include a quantification of the costs, which will be reflected in the 2006 budget and the 2006-08 public investment program, in line with the medium-term expenditure framework (MTEF). These strategies will be submitted to donors before they are adopted by the government, to facilitate mobilization of the necessary external financing. A review of public expenditure in the education, health, and infrastructure sectors will begin by end-2004, with assistance from the AfDB, the European Union, and the World Bank.

Program monitoring

40. The attached Table 1 presents the performance criteria and quantitative targets for end-March 2005, as well as indicative targets for end-June 2005. The attached Table 2 presents the structural performance criteria and benchmarks for the program.

41. The government has also decided to maintain larger balances in its SDR holdings accounts with the IMF to facilitate scheduled repayments.

Sincerely yours,

GABON

Technical Memorandum of Understanding

1. This memorandum spells out the understandings for the monitoring of program implementation, and the reporting requirements for the period May 2004-June 2005. In this context, it defines (a) the quantitative performance criteria; (b) the structural performance criteria and benchmarks; (c) the quantitative indicative targets; (d) the adjusters for the quantitative performance criteria; and (e) the key assumptions used in the formulation of the program for 2004-05 presented in the Memorandum for Economic and Financial Policies (MEFP) of the government of Gabon attached to the letter from the Minister of Economy, Finance, Budget, and Privatization to the Managing Director of the International Monetary Fund dated May 6, 2004. The key assumptions of the program, in particular those related to oil revenue, have been modified by the letter of the Minister of Economy, Finance, Budget, and Privatization of December 10, 2004. The adjusters for the quantitative performance criteria for end-March 2005 have also been modified slightly.

D. Monitoring of Program Implementation

2. Monitoring of the implementation of the program will be made on the basis of (i) an assessment of the observance of quarterly quantitative performance criteria as well as of the structural performance criteria and benchmarks at specified dates; and (ii) observance of quarterly quantitative indicative targets.

E. Quantitative Performance Criteria, Quantitative Indicative Targets and Adjusters

Quantitative performance criteria and indicative targets

3. The quantitative performance criteria are specified in Table 1 of the letter of the Minister of Finance of December 10, 2004. The quantitative performance criteria are the following:

• a ceiling on the net claims of the banking system on the central government;
  
  
• a ceiling on new nonconcessional external debt with original maturity of more than one year contracted or guaranteed by the central government;
  
  
• a ceiling on the outstanding stock of new nonconcessional external debt with original maturity of up to (and including) one year owed or guaranteed by the central government;
  
  
• a zero limit on the accumulation of external payments arrears by the central government (a continuous performance criterion);
  
  
• a ceiling on the stock of domestic payments arrears of the central government (as defined in paragraph 10) ; and
  
  
• a floor on the primary fiscal balance of the central government, on a payments order basis (excluding foreign-financed investment, FINEX, cumulative from January 1).

4. The program includes adjusters for the quantitative performance criteria as specified in paragraphs 20-24 below and in footnotes 2, 6 and 7 of Table 1 of the letter of the Minister of Finance of December 10, 2004.

5. The quantitative indicative targets (cumulative from January 1) are as follows:

• a floor on central government non-oil revenue;
  
  
• a ceiling on the total central government wage bill, on a payments order basis;
  
  
• a ceiling on total noninterest expenditure, on a payments order basis;
  
  
• a floor on current expenditure for the sectors of education, health and social assistance, as defined in paragraph 17; and
  
  
• a floor on the reduction of the float at the treasury, wage arrears (rappels) and obligations resulting from political violence.

Definitions and computation

6. The outstanding amount of the net claims of the banking system on the central government is measured in accordance with the accounting practice at the central bank, the BEAC, along the lines of the IMF format, excluding deposits of the postal checking account system.² As of December 31, 2003, this outstanding amount was CFAF 231.9 billion, and its breakdown was as follows:

7. The Account for the Fund for Future Generations (AFFG) at the BEAC will be fed in 2004 by 10 percent of oil revenue and oil revenues in excess of the programmed levels (based on program baseline assumptions detailed in para. 24). The use of AFFG resources is discussed in paragraph 20. The AFFG is part of the net claims of the banking system on the central government.

8. The performance criteria on nonconcessional external debt are ceilings on new nonconcessional external debt. The performance criterion on the contracting and guaranteeing of new nonconcessional debt with maturity over one year by the central government applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the IMF on August 24, 2000, but also to commitments contracted or guaranteed for which no value has yet been received. Excluded from this performance criterion are rescheduling arrangements and purchases from the IMF. The performance criterion on the outstanding stock of nonconcessional external debt,³ with an original maturity of up to one year (one year included) excludes rescheduling arrangements, purchases from the IMF, and normal import-related credits. The concessionality of debts will be calculated on the basis of the reference interest rates for the specific currencies of denomination used, as established by the Organization for Economic Cooperation and Development (OECD). A debt is deemed to be on concessional terms if, at the time of the initial disbursement date, the ratio between the present value of the loan calculated on the basis of the reference interest rates, on the one hand, and the face (nominal) value of the loan, on the other hand, is less than 65 percent (i.e., a grant element of at least 35 percent).

9. The accumulation of external payments arrears by the central government which is a continuous performance criterion with a zero limit, is calculated as the difference between (a) the gross amount of all the maturities falling due on account of contractual external debt-service obligations (interest and principal, including moratorium and late/penalty interest, where applicable); and (b) the amount of actual payments made during the period under consideration. Arrears resulting from the nonpayment of the debt service for which a rescheduling agreement is sought are excluded from this definition.

10. The stock of domestic payments arrears of the central government corresponds to the stock of payments arrears on: (i) interests on treasury debt, securitized commercial agreement, "other" debts, and bank debt; (ii) the principal on securitized commercial debt agreements and "other" debts.⁴ At end-December 2003, the stock of domestic payments arrears amounted to CFAF 21.2 billion, of which CFAF 4.6 billion on interests and CFAF 16.6 billion on principal.

11. The treasury float consists of the "payment orders at the treasury", float at the Road Maintenance Fund (FER) and the "other treasury float."⁵ The "payment orders at the treasury" corresponds to the difference between the cumulative payment orders (ordonnancements)⁶ and the cumulative actual payments (checks encashed-cash basis). At end-December 2003, the central government's domestic payments arrears amounted to CFAF 94 billion, comprising CFAF 84,7 billion in outstanding treasury float and CFAF 9.3 billion in "other treasury float." The net reduction of the treasury float is defined as the reduction in the float existing at end-2003, less the accumulation of new float during 2004.⁷ For 2005, the net reduction of the treasury float is defined as the reduction in the float existing at end-2004, less the accumulation of new float during 2005.

12. Total central government revenue is measured on a cash basis and includes offsetting revenue and expenditure operations, including private sector tax obligations offset against central government obligations to the private sector. Tax receipts are specified in the Table of central government financial operations (Tableau des opérations financières de l'Etat-TOFE), including all earmarked revenues (Road Fund and special funds).

13. Total central government expenditure include spending on payment order basis (ordonnancements), and treasury advances (avances à régulariser), and outlays on special funds and earmarked revenues. The quantitative indicative target on total noninterest expenditure excluding foreign-financed investment (FINEX) is calculated on the basis of this definition.

14. The primary fiscal surplus, on a payment order basis (ordonnancements), is defined as the difference between (a) total central government revenue (excluding grants) on a cash basis; and (b) total noninterest current expenditure plus investment expenditure (excluding foreign-financed investment), net lending, and outlays of the Road Fund and on earmarked revenues.

15. The indicative target on the central government wage bill is defined on a commitment basis (engagements) for all personnel (whether on a permanent or a temporary basis) of the civil service and the security and defense forces. The wage bill consists of all remunerations, including indemnities, social contributions, housing allowances, and other allowances.

16. The wage arrears (rappels) correspond to the unpaid financial impact of advancement promotion of civil servants at end-2002 (line 1281 of the budget).

17. Expenditure for the education and health sectors correspond to spending on goods and services for education, health and social affairs services. Under the quantitative indicative target for 2004, the following outlays will be monitored: (i) expenditures on goods and services for the Ministries of Education, Health, Social solidarity, social affairs and well-being, Family and child protection (title 5, chapters 81, 82, 84, 91, 93 and 94); and (ii) transfers and subsidies in favor of private education and social safety nets of the Ministries of National solidarity and Family (lines 6421 and 6511 under chapters 81, 93 and 94).

18. The restructuring costs posted as "financing" represent the social costs relating to the public enterprises to be liquidated or privatized in the context of the central government's divestiture of its productive sector holdings, the operating costs (consultants, etc.) of the Secretariat of the Privatization Committee, and the costs of voluntary departures in the context of the administrative reform. The other expenditures, intended in particular for maintaining the activity of the other public enterprises included in the privatization program, are posted under "transfers and subsidies".

19. The financial operations specified in the Table of central government financial operations (Tableau des opérations financières de l'Etat-TOFE) relating to treasury correspondents (correspondants du Trésor), local governments (collectivités locales), and other treasury operations correspond to the change from period to period in the balance of these accounts. The Government will provide information on the balance of all these accounts on a monthly basis to the IMF.

Adjustments to quantitative performance criteria

20. A specific contingency mechanism for oil revenue is established for 2004-05, given the importance of oil for the Gabonese economy and the uncertainties regarding oil prices and output. If oil revenue is above the baseline projections in a given quarter, the surplus will be deposited in the Account of the Fund for Future Generations with the BEAC, with a corresponding downward adjustment in the ceiling on net credit from the banking system to the central government and an upward adjustment in the floor for the primary fiscal balance. If oil revenue in CFA franc terms is lower than programmed (because actual oil prices, the exchange rate and/or output are lower than projected in the baseline scenario), the shortfall could be offset by additional net bank credit-with an upward adjustment in the ceiling on net credit from the banking system to the central government, and a downward adjustment in the floor on the primary fiscal balance. The cumulative ceilings to the adjustor are CFAF 17.0 billion for end-June, CFAF 25.5 billion for end-September, and CFAF 45.0 billion for end-December 2004. The cumulative ceilings to the adjustor are CFAF 50.0 billion for end-March 2005, and CFAF 100.0 billion for end-June 2005. If the oil revenue shortfall exceeds the maximum adjustor, the quarterly fiscal targets will be reassessed in consultation with Fund staff.

21. The program also includes (downward/upward) adjusters for the benchmarks on net credit from the banking system to the central government for (i) lower/higher-than programmed external debt service effectively paid⁸ (net of nonproject external financing disbursements); (ii) lower/higher-than-programmed net reduction of domestic arrears; and (iii) lower/higher-than-programmed net reduction in the float at the treasury.

22. The program also includes a symmetric (downward/upward) adjuster for the net bank credit to the central government for privatization proceeds higher/lower than projected in the program.⁹ The program's assumptions related to oil revenues, external and domestic debt service, disbursements on external nonproject financing, expected external debt rescheduling, and privatization proceeds are indicated in Table 1 of the letter of the Minister of Finance of December 10, 2004.

F. Structural Performance Criteria and Benchmarks

23. The structural performance criteria and benchmarks are specified in Table 2 of the MEFP attached to the letters of May 6, 2004, September 8, 2004, and December 10, 2004.

G. Key Assumptions of the 2004-05 Program

24. The main assumptions of the program are the following:

H. Reporting Requirements

25. To facilitate monitoring of program implementation, the government of Gabon will prepare and send to the IMF monthly reports within four weeks following the end of the preceding month. In addition, the Technical Support Unit of the Interministerial Committee for Monitoring the Structural Adjustment Program will communicate to the IMF's African Department, within the four weeks following the end of period, by fax or by e-mail the data required to monitor the implementation of the program. Such data will include (but are not limited to) the following:

(a) the comprehensive monetary survey, the central bank balance sheet, and the consolidated balance sheet of the commercial banks;

(b) the net financial position of the central government with the BEAC (PNG) and net credit from the banking system to the central government, with a separate line for the Account of the Fund for Future Generations;

(c) central government financial operations (opérations financières de l'Etat) on a payment order basis (ordonnancements), identifying any discrepancy between the fiscal deficit and changes in domestic and external arrears, on the one hand, and total net domestic bank/nonbank and net external financing, on the other;

(d) the detailed breakdown of petroleum receipts by nature (royalties, profit tax, and other) and by company, and the underlying basis when available (e.g. production, prices, turnover, costs, etc.), as well as the detailed breakdown of non-oil receipts (by type of tax) and nontax revenue;

(e) the detailed breakdown of total central government expenditure, on an adjusted commitment basis, adjusted payment order basis, and cash basis as presented in the Tableau Intégré produced by the Statistical Committee (Comité statistique).

(f) the details for domestic and external debt-service obligations, on a contractual and actual payments basis, respectively, with a breakdown into interest and principal and by creditor, as well as any possible accumulation of domestic or external arrears (electronic file);

(g) the details on the stock of external and domestic debt at the end of each month (electronic file);

(h) the details for the outstanding stock of domestic arrears (month to month) and the cumulative flows from January 1, 2004: the net accumulation of new arrears during 2004 as defined in paragraph 11 by the difference between payment orders (ordonnancements) and payments made (cash basis), as well as the repayment of pre-2004 arrears, with both items to be broken down by wages and salaries, goods and services, transfers and subsidies, interest, capital expenditure, and net lending; any stock-flow adjustment not consistent with flows should be explained (electronic file).

(i) the amount of new external debt contracted or guaranteed by the central government, with the detailed information (electronic file) on the original terms and conditions (currency of denomination, interest rate, grace period, and maturity);

(j) actual disbursements on non-project-related external financing, including on newly contracted loans, and the amounts of debt relief granted to Gabon by external creditors (electronic file);

(k) monthly information on the oil sector: export prices, effective exchange rate, production per oil field, exports, based on data from the Direction Générale des Hydrocarbures (electronic file);

(l) indicators and other statistical data on recent economic developments, such as the household consumer price index, merchandise imports and exports (in value and volume terms) by major categories on the basis of customs data, log production and exports (in value and volume terms), as well as the quarterly reports on economic activity prepared by the General Directorate of the Economy and the Interinstitutional Committee on Statistics;

(m) a status report on the implementation of the structural reforms specified in Table 2 of the MEFP attached to the letter of December 10, 2004;

(n) quarterly data on the finances of local authorities; and

(o) Quarterly financial data of Air Gabon.

26. The Technical Support Unit of the Interministerial Committee for Monitoring the Structural Adjustment Program will provide the African Department of the IMF with any other information that the latter may deem necessary or that may be requested by the staff of the IMF for the effective monitoring of the program.