July 6, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431

Dear Mr. Köhler:

1. On behalf of the government of Chad, I am pleased to transmit to you in the attached the memorandum of economic and financial policies (MEFP) for the first review of the first annual arrangement under the Poverty Reduction and Growth Facility. This document describes the measures decided on by the government to correct the weaknesses identified during the first six months of the annual program, which resulted in the nonobservance, for certain reasons, of some of the performance criteria for end-March 2000.

2. In view of the implementation of these measures, and the important efforts undertaken to meet the objectives of the program, the government requests a waiver for the nonobservance of the performance criteria relating to (1) the reimbursement of domestic payments arrears of the government; (2) the nomination of a controller-general and the adoption of a financial rehabilitation plan for COTONTCHAD; and (3) the establishment of a monthly cash-flow plan for the treasury based on a system of analysis and projection of the cash-flow situation, which was only formally adopted on April 10, 2000.

3. The government considers that the policies and measurers described in this memorandum, which complement those presented in the memorandum of November 12, 1999, will facilitate the achievement of the program’s objectives. The government will provide the International Monetary Fund with all information necessary for monitoring the implementation of these measures, and will take any additional measures that may be necessary to meet the program’s targets.

4. In any event, the Fund will conduct a second review of the PRGF arrangement, to be completed no later than January 15, 2001, which will coincide with the finalization of the program covering the period 2001-2002. The third review under the arrangement should be completed before end-July 2001.

Attachment: Memorandum of Economic and Financial Policies.

MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES

N’Djaména, July 6, 2000

1. The Executive Board of the International Monetary Fund approved on January 7, 2000 the government of Chad requests for a new three-year arrangement under the Poverty Reduction and Growth Facility. The government of Chad has reviewed the implementation of the first annual program under this arrangement with the staff of the IMF. The memorandum describes the measures envisaged by the government to ensure that the objectives of the program are achieved.

A. The Situation at End-1999

2. The estimates of the major macroeconomic aggregates in 1999 largely confirm the projections made during the negotiation of the first annual arrangement under the Poverty Reduction and Growth Facility (PRGF) in November 1999. The rate of real growth is estimated at -0.4 percent; the inflation rate is estimated at -8 percent; and the external current account deficit rose from 11.4 percent to 13.4 percent of GDP.

3. In terms of fiscal performance, the current primary balance registered a deficit of CFAF 0.4 billion (0.04 percent of GDP), as against the surplus of CFAF 8.2 billion projected in November 1999, mainly because certain tax arrears owed by major public enterprises could not be collected. Total revenue thus amounted to CFAF 79.5 billion (as against the projected level of CFAF 87.2 billion). The authorities have maintained control over current expenditure, particularly the wage bill and military spending; capital expenditure was below the programmed level on account of delays in mobilizing project grants; while domestic payments arrears were reduced by CFAF 4 billion. The overall balance (on a cash basis) of CFAF -87.5 billion (compared with a forecast of CFAF -97.9 billion) was financed by external loans, as well as through greater-than-anticipated recourse to domestic bank financing.

4. Developments in the monetary sector led to a contraction of 2.5 percent in broad money by year’s end. While net credit to the government increased substantially, owing to the PRGF drawing and the drawdown of treasury deposits at the commercial banks, credit to the rest of the economy fell by 1.8 percent of beginning-of-period money stock, because of the impact on crop credit of the decline in cotton production and the low purchasing price during the cotton-buying season. Reflecting these trends, the net foreign assets declined sharply (CFAF 9.2 billion).

5. Toward the end of the year, major strides were made in the area of structural reform. The government of Chad adopted a comprehensive strategy to liberalize the cotton sector after consulting with its sector partners on key elements of this strategy. Negotiations for the privatization of the sugar company (SONASUT), as well as negotiations on the privatization of the management of the water and electricity company (STEE), began in the third quarter of 1999.

B. Program Implementation in First Quarter of 2000

6. The implementation of the program during the first quarter of 2000 was satisfactory, despite the energy problems. However, three performance criteria for end-March were missed, primarily owing to the exogenous factors set out below. One of the measures, the adoption of a cash-flow plan for the treasury, was taken in the first days of April, and the government intends to complete the other measures as soon as possible.

7. The first quarter of 2000 was marked by a decline in production and imports on account of problems in procuring fuel from neighboring countries, the obsolescence of the power station, and the negative impact on domestic transportation of inadequate road maintenance. The downward trend in consumer prices observed in the fourth quarter of 1999 continued into the first quarter of 2000 (-1.5 percent), reflecting the combined effect of slack demand and abundant supply in food crops, and normal seasonal trends.

Government finance

8. Developments in the public finances were largely in line with the current program, and the current primary deficit for the first quarter of 2000 was much smaller than the program objective. Revenues reached the targeted level, although their composition was different from expectations, as the slump in customs and corporate income tax receipts was largely offset by the exceptional increase in nontax revenues. Thanks to careful preparations prior to its introduction, the performance of the value-added tax (VAT) since January 1, 2000 has fulfilled expectations. The government has continued to keep expenditure under firm control. Current primary expenditure was limited to CFAF 18.5 billion, compared with the programmed level of CFAF 20.2 billion, notwithstanding the advance payment of budget allocations for electricity to the STEE in an attempt to ease its cash-flow problems. Nonetheless, spending in the priority sectors was
weak—on account, inter alia, of the nondisbursement of assistance from the European Union, which was delayed pending the results of an audit of expenditures funded by the previous disbursement. This resulted in a current primary balance of CFAF -0.3 billion, as opposed to the CFAF -3.8 billion projected under the program.

9. However, the cash-flow situation was complicated by the advance payments of electricity bills and by SONASUT’s failure to repay the external debt service paid by the government on its behalf, which made it impossible to reimburse arrears as programmed. The relevant performance criterion was thus not met. Accordingly, the government requests of the Executive Board a waiver in respect of the nonobservance of this criterion. The overall balance (on a cash basis) thus registered a deficit of CFAF 10.4 billion (as against the programmed level of CFAF 23.1 billion), which was financed through greater-than-anticipated use of the government’s deposits at the commercial banks, as well as additional recourse to statutory advances from the central bank. Nevertheless, net bank financing remained below the ceiling established in the program, adjusted for the shortfall in foreign aid.

10. The cash-flow management plan (based on a system for analyzing and projecting all revenue and expenditure components), which ought to have been in place by end-March 2000, was not finally approved until April 10, 2000 on account of an administrative reorganization at the Ministry of Finance. The government of Chad therefore also requests a waiver for nonobservance of the performance criterion on this measure. However, the government has made progress in implementing the recommendations for strengthening the tax administration proposed by the IMF technical assistance mission in December 1999. Specifically, the government has established a number of taxpayer survey and collection commissions, whose work is expected to facilitate efforts to identify taxpayers (particularly in the informal sector) while enhancing the effectiveness of tax collection. The mechanism for monitoring exemptions on imports under externally financed government procurement contracts has been improved, and the final version of the Guide du Soumissionaire (bidder’s guide) will be published shortly. However, the implementation of the SYDONIA customs software, planned for the beginning of 2000, has not yet taken place, partly as a result of resource constraints. With respect to expenditure management, the work on harmonizing the budget and accounting nomenclatures, simplifying accounting procedures, and updating the system for the economic and functional classification of expenditure is continuing, with the support of IMF technical assistance.

Money and credit

11. During the first quarter of 2000, there was a significant increase in the money stock (10.8 percent), reflecting an upsurge in domestic credit. The growth of domestic credit was partly attributable to the treasury’s use of its deposits in the commercial banks, as well as the January 2000 drawing on the new PRGF; it also partly reflected the financing for the new cotton crop. Net foreign assets declined by CFAF 3.5 billion.

Structural measures

12. The privatization of SONASUT was completed on April 10 with the transfer of SONASUT assets to the buyer in exchange for a payment of CFAF 3.8 billion, accompanied by an agreement concerning the treatment of the medium- and long-term debt, and a lease agreement for the sugarcane fields. A concession agreement for the private management of the STEE was signed on January 28, including the government’s takeover of the long-term debts and the transfer to a separate debt-recovery structure of the STEE’s short-term domestic liabilities. With reference to the other privatization operations under way, the documents for the tender for bids for a partner of record for the privatization (by means of the sale of stock) of the national road maintenance company (SNER) were prepared in March 2000 and sent to the World Bank for nonobjection and will be finalized after taking the Bank’s comments into account. Moreover, the assessment of the net worth of the national post and telecommunications office (ONPT-TIT) was completed in November 1999, and the government and the telecommunications company (SOTELTCHAD) signed an agreement under which the long-term debts on-lent by the government would be offset against SOTELTCHAD’s short-term claims on the government in connection with its use of telecommunications services.

13. In response to rising international prices at the beginning of the year, the government increased retail fuel prices in Chad in February, and in April it established an interministerial committee responsible for monitoring import price developments for petroleum products, with a view to adjusting sale prices accordingly. Furthermore, the government and the main donors involved in the road transportation sector reached agreement on the required reforms of the road maintenance financing system, with the aim of ensuring its autonomy. The legislation creating a new autonomous organization, the Road Maintenance Fund (FER), will be submitted to the National Assembly prior to the end of the current session at end-May.

14. With respect to civil service reform, preparations for harmonizing the civil service ministry and payroll records are moving forward. Draft legislation has been prepared to revise the civil service regulations, as well as the remuneration and merit-based promotion system. This legislation will be reviewed by an international expert and discussed at a national workshop prior to its submission to the government. A draft Social Security Code has been discussed by the stakeholders (including trade unions) and government. The code will be finalized and submitted to the National Assembly by year’s end.

15. In addition, in March the authorities completed a review of the statistics produced in Chad (a performance criterion for end-March), thereby facilitating more effective planning of efforts to improve the statistical system.

16. A technical unit entrusted with implementing cotton sector reforms, as well as the technical committee for monitoring the reform strategy, has been established. Local coordination committees are in place. However, the anticipated external financing for the financial audit of the cotton company (COTONTCHAD) was obtained far later than anticipated, and the audit will not be completed until mid-June 2000. Thus, the action plan for financial rehabilitation of COTONTCHAD and the appointment of a controller-general to monitor the audit, which were expected to follow the audit, have not yet been completed; as such, the relevant performance criterion was not observed. Consequently, the government of Chad is likewise requesting of the Executive Board a waiver in respect of the nonobservance of this criterion.

17. Finally, as decided by the government in March during a joint IMF/World Bank mission, the process of preparing the poverty reduction strategy paper has begun: the government presented the concept at an outreach session with representatives of civil society; and a steering committee has been established that includes representatives of government, civil society, local nongovernmental organizations (NGOs), and the private sector. In a national seminar to launch the process on April 25-27, the participatory approach to be followed in preparing the PRSP was defined and approved, and a preliminary budget was prepared. As agreed with IMF and World Bank staffs, the interim PRSP was finalized and transmitted to the Bretton Woods institutions at end-May 2000.

C. Program Implementation Through End-2000

18. The implementation of the program for the remainder of the year will be adversely affected by the downtrend in all sectors of Chad’s economy caused by problems in procuring fuel from neighboring countries, coupled with exogenous factors, such as the upheavals that a number of Chad’s economic partners are undergoing. These difficulties have grown more severe since April, compounding the energy crisis. Accordingly, the government intends to take active steps to establish and maintain an adequate safety stock. The Sedigi oil development project will begin this year, with the government’s contribution to be financed by part of a foreign loan.

19. This crisis is bound to exacerbate the shortfalls in certain revenue categories during the first quarter of 2000. In view of this situation, the program’s fiscal objectives for the remainder of the year have been carefully reviewed with Fund staff. Given the shortfall in revenue owing to the slowdown in economic activity, the performance criteria concerning the public finances have been revised, while steps have been taken to ensure that the adjustment effort remains firmly on track. The adjusted objectives for end-June, end-September, and end-December 2000 are included in the table annexed to this memorandum. The government is committed to exercising the utmost vigilance to ensure that the program objectives are not affected.

Government finance

20. With respect to revenue, the authorities intend to continue their efforts to strengthen and improve tax collection. The taxpayer surveys conducted in N’Djamena during the first quarter of 2000 have resulted in the addition of a large number of taxpayers to the database at the Tax Directorate (DIT). These surveys will be gradually expanded over the course of the year to include the country’s other major towns. As most taxes are already being collected de facto through the DIT’s Subdirectorate for Major Enterprises, the government will over the coming months progressively transfer responsibility for collection of other taxes and duties from the treasury to the DIT, and DIT staffing levels will be increased through the recruitment of new personnel beginning in June 2000. The government has accepted the principle of its obligation to refund the turnover tax (TCA) credits held by businesses at end-1999, and it will decide on procedures for this refund by end-June 2000.

21. A number of formal sector enterprises that have appropriate accounting systems and are in full compliance with their tax obligations post tax credits at the end of the year, owing to their requirement to pay the 4 percent tax advance. This advance, which in principle is designed to ensure more effective taxation of the informal sector, can be applied to the corporate income tax, but the laws make no provision for refunding or carrying forward into subsequent years any amounts paid in excess of the actual obligation. Pending the revision of the legislation in the context of the next budget law, and in conformity with the recommendations of the December 1999 IMF technical assistance mission, the authorities decided to give authorization at end-May for taxpayers to apply any credit balances toward the advance profit tax payments [tiers provisionnel] due during the current year.

22. In the area of customs, the Chadian authorities will meet their obligations under the SYDONIA project by end-June 2000, including personnel recruitment and the provision of part of the necessary financing. They will redouble their efforts to obtain from foreign partners the resources needed to make the system operational by end-September at the latest. Finally, Chad’s customs authorities will work together with their Cameroonian counterparts to resolve the problem of fraud linked to imports of petroleum products, in order to prevent any recurrence of the supply interruptions that Chad has been experiencing since April 2000.

23. In view of the revenue pressures, the authorities will ensure that expenditure restraint is maintained and strengthened. Achieving this objective requires the monthly rolling (three-month) cash-flow management plan to be fully operational as of May 2000; this plan will be based on thorough and realistic estimates of the probable level of revenues and an appropriate prioritization of expenditure that cannot be reduced (such as for use of public utilities like electricity and water and social outlays). To accelerate the rhythm of social spending, the authorities will improve procurement procedures, so as to shorten the time lags involved in the disbursement of the European Union’s assistance, which finances a substantial portion of such expenses. Furthermore, in order to avoid the usual delays in carrying out spending in the social sectors at the beginning of the fiscal year, the appropriate departments will prepare tender documents for expenditures scheduled for 2001, and will assess the bids during the fourth quarter of 2000. Contracts will be awarded once the 2001 Budget Law has been adopted.

24. The government has received an initial transfer of US$25 million from the members of the newly constituted petroleum consortium. Although oil revenue has not yet begun to flow regularly, the government is committed to complying fully with the provisions of the oil revenue management law in using this money, which will permit social policies to be strengthened despite the expected constraints in terms of current revenue.

25. The government’s financial position could also be strengthened by the use of net earnings from the privatization of SONASUT. The authorities will ensure that their bank deposits are used carefully, so as to ensure that withdrawals do not place undue strain on the cash-flow situation of banks, which has improved somewhat in recent months.

26. The government’s cash-flow management plan provides for renewed efforts to settle domestic payments arrears, including vis-à-vis COTONTCHAD. These efforts extend to the repayment of short-term debts of the STEE assumed by the government in accordance with the terms and conditions negotiated with creditors. The government will continue to verify the stock of arrears to local suppliers in order to prepare a timetable for settling these arrears by end-September, as envisaged in the program.

Structural reforms

27. The Chadian government’s priority in this area for the remainder of this year is to revitalize the reform of the cotton sector. The action plan for the financial rehabilitation of COTONTCHAD will be finalized in July, as a prior action for consideration of the first program review by the IMF’s Executive Board. The authorities will ensure that the controller-general can take office before the start of the next cotton season in October, although it will be difficult to determine the exact timetable until the procedures for recruiting the controller-general have been approved. The joint committee on the cotton sector that resulted was formally constituted in May 2000. This committee has already deliberated on the producer prices for the next cotton season, and decided on a price increase from CFAF 150 to CFAF 165 per kilogram. Furthermore, a differential may be paid to producers in accordance with the agreed mechanism, in the event that international cotton prices improve beyond present projections. The definitive study on separating COTONTCHAD’s oil and soap production activities from its cotton ginning operations will be completed on schedule by June 2000, and the invitation to tender will be launched by year’s end. Finally, the government will decide by end-September on its strategy for withdrawing from the cotton sector, as envisaged in the program.

28. The implementation of the agreement on the STEE is contingent on the creditors’ agreement on the treatment of STEE’s short-term debts. The government has made a proposal to private sector creditors concerning the treatment of these debts, including the cash payment of a percentage of these claims and the issuance of treasury securities (discountable by the banking system) for the outstanding balance. A financial package for financing the STEE’s current deficit for this year has also been proposed. The authorities hope to be able to resolve these issues over the coming weeks, thereby facilitating implementation of the concession agreement with the buyer. However, in view of the STEE’s obsolescent equipment and the time required to produce and assemble replacement parts, a return to normal power generation levels is unlikely before September 2000.

29. In the context of the regional integration process, the Chadian authorities will maintain a tariff regime consistent with Central African Economic and Monetary Community (CEMAC) rules. Accordingly, the Chadian authorities will discuss with the buyer of Chadian sugar company (CST, formerly SONASUT) the appropriateness of renewing the temporary surtax on sugar imports when it expires in July.

30. The action plan for steadily increasing the number of qualified magistrates and auxiliary legal staff is being implemented; 11 new clerks have been recruited under the plan.

31. The government will finish the process of harmonizing the payroll and civil service ministry records, and will endeavor to complete the required steps for amending the civil service statutes during the third quarter of 2000, subject to consultations with stakeholders.

32. Finally, the laws establishing the statutes and electoral regime for local governments were promulgated in February 2000. The legislation to implement the laws transferring responsibilities and resources and establishing financial and accounting systems for local governments is being drafted. The government will ensure that the implementing legislation makes provision for appropriate budget procedures and financial controls.

Poverty reduction strategy

33. With regard to the national poverty reduction strategy, the government of Chad will endeavor to mobilize the domestic and external financing necessary to ensure the success of the activities specified in the national seminar that launched the process. Specifically, the government will focus on increasing the human and physical resources available to the permanent secretariat of the Steering Committee.

34. Over the rest of the year, the authorities will continue the participatory preparations with a view to finalizing the poverty reduction strategy paper in accordance with the action plan set out in the interim paper that is being drafted. In addition, the authorities will devise a program for using any resources generated in the context of the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) from the decision point onward to expedite the attainment of a number of specific goals measuring progress in the priority sectors.

35. Finally, the authorities have taken note of the recommendations made by the recent Statistics Department mission with respect to strengthening the country’s statistical system. The government will by year’s end adopt the legislation needed to ensure the effective implementation of the statistics law, and it will establish by end-September 2000 a plan of immediate action for this purpose, which will constitute an essential element of the multiyear statistical operations plan envisaged in the law. The government will also ensure that the preparations for the next budget include a substantial increase in the resources devoted to collecting, analyzing, and disseminating key statistics, using a portion of the revenues from the statistical tax, as prescribed in the law on statistics.