Press Release No. 95/44

Press Release: IMF Approves ESAF Loans for Chad

September 1, 1995

The International Monetary Fund (IMF) approved a series of loans for Chad over the next three years under the enhanced structural adjustment facility (ESAF)¹ totaling the equivalent of SDR 49.6 million (about $74 million), or 120 percent of quota, in support of the Government's 1995-98 macroeconomic and structural adjustment program. Of this total, the equivalent of SDR 16.5 million (about $25 million) will be disbursed in the first year in equal semiannual installments, the first of which is available on September 15, 1995.

Background

For a long time, Chad's economy has suffered from recurring civil wars and a worsening of its terms of trade, developments that have caused a serious deterioration in the economic, social, and administrative infrastructure. In the early 1990s, internal strife resumed and the economy entered a period of severe weakening in public administration and decline in private sector activity that was aggravated by a growing overvaluation of the regional currency, the CFA franc. The authorities took advantage of the devaluation of the CFA franc in January 1994 to restart the economy by designing an economic adjustment program that was supported by an IMF stand-by credit and other external financing (see Press Release no. 94/17). After a weak beginning, economic and financial performance strengthened measurably with the program between July 1994 and June 1995, and the track record that was then established served as the basis for the formulation of a medium-term program that could be supported by the IMF.

The Program for 1995-98

The 1995-98 program, which is supported by the ESAF, seeks to achieve an annual growth in real GDP of around 5 percent, permitting some recovery in per capita income and helping to reduce poverty. In addition, the program aims to bring inflation down significantly to levels prevailing in key partner countries by the end of the program period. The fiscal and external current account deficits will also be reduced to more sustainable levels.

To these ends, the program will focus on: (i) maintaining macroeconomic stability to foster private-sector development, safeguard external competitiveness, strengthen the saving- investment balance, and protect the most vulnerable groups in society from the transitional impact of some of these measures; (ii) improving the functioning of public administration, with emphasis on the efficiency and transparency of public sector financial management; (iii) reinforcing the revenue departments to ensure adequate domestic resource mobilization; (iv) revitalizing the private sector and strengthening the response mechanisms of the economy through privatization, price and trade liberalization, easing of market access, and a streamlining of the regulatory environment; and (v) defining clear spending priorities, with a view to raising investment in human and physical capital.

Macroeconomic stabilization is to be pursued mainly through a reduction in public and private dissaving. In particular, the Government's current primary balance is to be turned to a surplus of 1 1/4 percent of GDP in 1998 from a deficit of 6 percent in 1994. Given pressing spending needs in a number of priority areas, the Government will pursue fiscal consolidation primarily through measures that broaden the tax base and strengthen revenue collection in the context of the regional tax and customs reform program of the Central African Economic and Customs Union (UDEAC), of which Chad is a member. Prudent monetary management will accompany fiscal policies. To strengthen market mechanisms, these policies will also aim to broaden the use of indirect instruments of monetary control.

Within this medium-term strategy, the program for 1995 envisages real GDP growth accelerating to 5.5 percent, from 5.2 percent in 1994; a reduction in the rate of inflation to 6.5 percent from 41.3 percent in 1994; and a further narrowing of the current account deficit to 21.1 percent of GDP from 22.7 percent in the previous year. To these ends, fiscal policy aims to reduce the current primary deficit to 2 1/4 percent in 1995 from 6 percent of GDP in 1994, in large part through improvements in revenue collection.

Structural Reform Policies

The principal objective of structural reform under the program is to revitalize and expand the size of the private sector. Accordingly, the Government plans to accelerate the privatization program and to strengthen the operations and market orientation of public enterprises. The authorities will also reform the Labor Code to increase the flexibility of labor markets; abolish import and export licenses to facilitate and stimulate trade and commerce; and streamline exchange regulations to remove uncertainties about, and lower the cost of, foreign exchange transactions. In addition, Chad will support and implement regional initiatives aimed at a simplification and harmonization of business laws and regulations. The authorities will also take measures to strengthen the budget process and initiate a comprehensive civil service reform. Finally, the program envisages an improvement in the flow and transparency of information on economic developments and policies to the business community and to the general public.

Social and Environmental Issues

Poverty reduction is the ultimate objective of Chad's economic program. The recovery of economic growth is to make the main financial contribution toward this objective. The rural population will continue to benefit from the correction of relative prices and incentives, and other measures and effects that followed the devaluation of the CFA franc. In addition to the general upturn in economic activity, the urban population is to benefit from temporary labor-intensive public investment schemes financed by donors. The social policy program also includes a substantial increase in budget allocations for basic health services, including the supply of essential generic drugs, and primary education.

Environmental problems arising from inappropriate cultivation practices and widespread deforestation pose serious threats to Chad's rural economic base. A new forest and wildlife policy was approved in late 1994 to deal with illegal timber felling and to promote a sustainable use of forest resources. The Government has also revised mining regulations in an effort to prevent the discharge of industrial waste into local water supplies. It is expected that the private sector and an environmental fund established by the Government in 1994 will bear the cost of repairing environmental damage.

The Challenge Ahead

Given its narrow production structure, Chad remains vulnerable to external shocks. It will, therefore, remain important to further strengthen the responsiveness of markets and the adaptability of economic sectors. Chad's long-term balance of payments prospects will also depend on maintaining of competitiveness through appropriate wage and producer price policies and measures that raise long-term productivity.

Chad joined the IMF on July 10, 1963. Its quota² is SDR 41.3 million (about $62 million), and its outstanding financial obligations to the IMF amount to the equivalent of SDR 27 million (about $40 million).