N'Djaména, April 28, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington D.C., USA

Dear Mr. Köhler:

1.  On behalf of the government of Chad, we are pleased to transmit to you the attached memorandum of economic and financial policies (MEFP). It describes developments during the second half of 2000 in the context of the first annual program supported by a Poverty Reduction and Growth Facility (PRGF) arrangement, and outlines the government's economic and financial policies and objectives for 2001.

2.  As explained in the MEFP, the program was implemented in difficult circumstances, including a worsening security situation related to intensified rebel fighting in the northern part of the country, which required an increase in defense outlays, a persistent energy crisis, a shortfall in external financing, and a temporary setback in reforms. As a result, performance criteria for end-September 2000 relating to net credit to the government, the primary fiscal deficit, and the reduction of domestic payments arrears were not met. In addition, the government accumulated external payments arrears; thus, the related continuous performance criterion was also not met.

3.  Against this background, in November 2000, the government of Chad introduced a policy package aimed at both strengthening transparency and good governance (measures in this area constituted prior actions for the Initiative for Heavily Indebted Poor Countries (HIPC) Initiative decision point) and correcting macroeconomic imbalances, while catching up in the structural reforms area (which constituted additional prior actions for the second review under the PRGF arrangement). The government has complied with all prior actions in the area of transparency and governance, as well as those in the structural area. At the same time, as some of the revenue and expenditure control measures were introduced with some delay, the fiscal performance fell short of target at end-December 2000. Therefore, additional measures are being introduced, as described in the MEFP. The government is making all possible efforts to clear its external payments arrears and has contacted the relevant creditors to agree on an action plan to settle any remaining arrears. On the basis of these actions, the government of Chad requests waivers for nonobservance of the above-described performance criteria.

4.  Erratic weather conditions threaten Chad with the worst famine in a decade. The government has identified the associated emergency needs for food imports, much of which will be satisfied by assistance from the international donor community. However, a significant increase in balance of payments needs remains uncovered. Accordingly, the government of Chad is requesting an increase of the arrangement by SDR 5.6 million (corresponding to 10 percent of quota), to be disbursed upon the approval by the Executive Board of the second annual program.

5.  The preparation of Chad's poverty reduction strategy paper (PRSP), in a fully participatory manner and involving development partners, is on schedule, and we expect to finalize it by the fall of 2001.

6.  The government of Chad believes that its actions aimed at improving transparency and governance, as well as at implementing an ambitious fiscal and structural adjustment program, provide a basis both for an approval of continued Fund financial assistance for the second-year program under the PRGF arrangement and for reaching the decision point under the enhanced HIPC Initiative. The proposed enhanced quarterly program monitoring in the MEFP demonstrates the government's commitment to the PRGF-supported program.

7.  The third review under the PRGF arrangement will be completed by end-December 2001 and will consider, inter alia, budget implementation in 2001 and actions in the governance area. The government of Chad will provide the Fund with all information that the Fund requests in connection with the implementation of the MEFP, and it will consult with the Fund regarding the implementation of any major policy initiatives not considered during the program discussions. The government of Chad believes that the policies set forth in the MEFP are adequate to achieve the objectives of the program. During the arrangement period, the government of Chad stands ready to take additional measures that may become appropriate to ensure the achievement of the program's goals.

Very truly yours,

Memorandum of Economic and Financial Policies

N'Djaména, April 28, 2001

I.  Developments in 2000 under the PRGF-Supported Program

1.  During 2000, the government of Chad aimed at implementing a comprehensive program of economic, structural, and poverty-reducing reforms. This program received support from the International Monetary Fund under a Poverty Reduction and Growth Facility (PRGF) arrangement, approved on January 7, 2000. The first review of the program was completed on July 25, 2000; on that occasion, Executive Directors also considered Chad's interim PRSP and the preliminary document under the enhanced HIPC Initiative, and declared Chad eligible for external debt relief.

2.  Program implementation was carried out in difficult circumstances, including a worsening security situation related to intensified rebel fighting in the northern part of the country, which required an increase in defense outlays, and a persistent energy crisis. As a result, real GDP increased by only 0.6 percent in 2000 after a similar small increase in 1999. Energy shortages continued, and food production was considerably smaller than the year before, but investment, mainly related to the Doba and Sedigi oil field projects, increased. The current account deficit, excluding official transfers, is estimated to have widened to 16 percent of GDP, compared with 14.9 percent under the program, mainly on account of higher imports related to the above-mentioned oil sector projects. The higher deficit was in large part financed by higher-than-expected foreign direct investment. Consumer prices increased by 3.8 percent in 2000, after a decline of 8 percent in 1999, reflecting both weak food supply and an increase in energy prices.

A.  Performance at End-September 2000

3.  Overall program implementation was broadly satisfactory until the early summer of 2000, but it suffered a temporary setback in the second half of 2000. Governance weakened temporarily. For reasons explained in part by emergency security needs, part of the US$25 million petroleum agreement signing bonus that the government received in April 2000 from the consortium exploiting the Doba oil field was spent outside the provisions of the Law on Petroleum Revenue Management—on non-priority sectors, and outside the budget. By end-September 2000, more than half of the oil bonus had been spent, primarily on defense and public enterprise subsidies. There were other instances when budget procedures were not followed. Competitive bidding procedures were not always fully respected, especially for the awarding of several major government contracts.

4.  Program implementation also weakened. During the period January-September 2000, the primary current fiscal deficit rose to CFAF 7.1 billion, compared with CFAF 0.7 billion under the program. Higher-than-programmed government revenues were more than offset by higher-than-programmed primary current expenditures (in part financed by the aforementioned oil bonus). Domestic arrears were reduced by considerably less than programmed; at the same time, net bank credit to the government exceeded the program target by CFAF 3.2 billion. As a result, the associated performance criteria were missed.¹ In addition, at the end of the year, the government started to build up external payments arrears following the drying up of external financing. As a result, the associated continuous performance criterion was not observed.

5.  Structural reforms proceeded in some areas, but delays occurred in others. Compliance with prudential regulations improved in the financial sector; while the management of STEE, the water and electricity company, was privatized in September 2000. In the cotton sector, after the introduction of a new pricing system in early 2000, under which prices are determined in consultation with farmers on the basis of international prices and exchange rate movements, reforms were slower than expected, in part for reasons outside the government's control. As of end-September, the envisaged restructuring plan for the cotton company, COTONTCHAD, as well as the study for spinning off its nonmainstream oil and soap activities, had not been completed, and its general controller had not been nominated, owing to a lack of financing. As a result, the related structural benchmarks were not observed at that time. Benchmarks related to the establishment of a monitoring system for spending in education, the launching of training programs in the rural sector, the reform of the civil service statutes, and the evaluation of a decentralized administrative structure were also not observed as of end-September.

6.  In view of these slippages, Chad's decision point document under the enhanced HIPC Initiative could not be presented to the Executive Boards of the Fund and the World Bank, and the completion of the second review of the PRGF-supported program was delayed.

B.  Corrective Measures and Performance at End-2000

7.  Against this background, the government introduced a series of measures, aimed at improving transparency and governance and bringing the PRGF-supported program broadly back on track. These measures were also intended to facilitate the presentation of Chad's HIPC Initiative decision point document to the Executive Boards of the Fund and the Bank, and constituted prior actions for the completion of the second review under the PRGF-supported program. Transparency was improved through the following measures. First, the government froze the rest of the oil bonus at its mid-October level of CFAF 7.2 billion (about US$10 million). The freeze would last until the oversight committee (Collège de Contrôle et de Surveillance des Revenus Pétroliers, CCSRP), the body that by law is to oversee the spending of oil revenues, is created and made fully operational. The remainder will be spent, under the oversight of the CCSRP, on priority sectors, and its use was included in the 2001 budget law. Second, in December 2000, the government submitted a report on the use of the bonus to the CCSRP; in a separate letter to the CCSRP, it also committed itself to undertaking an audit on the use of the bonus as of December 31, 2000. Moreover, at an open parliament session in December 2000, the government answered questions related to the use of the bonus. Third, the government provided the Fund and the Bank with full information on its fiscal and bank accounts, including those on projects and outside the budget. These accounts have been integrated into the treasury accounts and budget framework covered by the table of the financial operations of the government (TOFE), as well as into the revised definition of net credit to government. Fourth, the government has decided not to approve or execute any government spending outside the budget.

8.  The government also introduced a package of corrective measures, with a view to bringing its program supported by the PRGF arrangement broadly back on track. In the area of revenue collection, the government introduced a series of measures to bring revenues close to their program level. These included, inter alia, a series of measures to strengthen customs administration and the collection of tax arrears. The government also implemented measures to improve expenditure management through the simplification of the expenditure execution process, which will help increase the efficiency of budget execution and improve expenditure tracking for, inter alia, social sector spending. These measures arrested the worsening of the fiscal situation, but fiscal performance still fell short of the revised targets for end-December 2000. The current primary deficit reached 0.8 percent of GDP (compared with the original program target of 0.4 percent surplus) as result of a shortfall in revenue (0.4 percent of GDP) and a slippage in expenditures.

9.  The tightening of the fiscal situation and major external debt payments falling due led to an accumulation of external overdue payments of CFAF 5.7 billion (equivalent to US$7.7 million) as of March 31, 2001. The government has been making all possible efforts to service its external debt obligations, both to multilateral and bilateral creditors, including the mobilization of additional revenues as described below. The government of Chad has contacted all concerned creditors with a view to settling all outstanding overdue payments and has agreed with most concerned creditors on a plan to settle all arrears according to a time-bound schedule. Agreements with remaining creditors are expected to be completed prior to the Executive Board meeting. All arrears will be cleared within the next 12 months.

10.  Structural reforms were accelerated, ensuring a catch-up in the program's structural reforms agenda. First, the successful bidder for the nomination of the controller general for the cotton company, COTONTCHAD was announced in January 2001, and the study on the spinning off and privatization of the company's oil and soap activities was completed in December 2000. Second, in the area of harmonizing the civil service and payroll files, the census of the civil service was completed in November 2000; in addition, the payroll is being updated, using the results of the census. Finally, an action plan to monitor commitments and actual spending in the education sector was introduced in January 2001; a similar system was introduced in the health sector at the same time. As a result, albeit with a delay, all associated structural benchmarks were observed.

II.  Economic and financial Policies in 2001

11.  Real GDP growth is projected to increase to 8.2 percent in 2001, spearheaded by private and public sector investment related to the projects in the Doba and Sedigui oil fields; oil projects and their spillover effects will account for about two-thirds of this increase. Consumer price inflation is projected to rise to 7.3 percent, chiefly reflecting price pressures associated with the above-mentioned food shortages.

A.  Fiscal Policies

12.  The government's fiscal policies aim at turning the primary fiscal balance (excluding elections, famine-related emergencies,² and spending financed by the Poverty Fund³) from a deficit of CFAF 7.8 billion in 2000 (0.8 percent of GDP) into a small surplus of CFAF 2.5 billion in 2001 (0.2 percent of GDP). This would result from both a revenue effort and expenditure restraint. The overall fiscal deficit, on a commitment basis and excluding grants, will reach CFAF 237 billion in 2001, the equivalent of 20.8 percent of GDP, reflecting a large increase in foreign-financed investment, including for oil-related projects.  

13.  The fiscal program envisages an increase in fiscal revenues from CFAF 80 billion (8 percent of GDP) in 2000 to CFAF 96 billion (8.4 percent) in 2001. To achieve this objective, the following measures are being taken, in addition to above-described package of revenue measures introduced in November 2000: (i) the introduction of interest payments on government deposits held with commercial banks before June 30, 2001 (with an estimated impact of CFAF 750 million); (ii) the prohibition of all "exceptional" exemptions from customs duties (these amounted to about CFAF 1 billion in 2000); and (iii) the reinforcement of tax administration in a number of areas (para. 17). In particular, customs administration will be streamlined following a functional and financial audit by an internationally reputable firm, to be completed by December 2001 (para. 20); moreover, on-site inspections by the joint tax-customs brigades will reinforce the system of chèques du Trésor for public procurement, as well as the implementation of bilateral agreements on tax exemptions. The taxation of the quasi-informal sector in the retail sales of petroleum products will be reinforced also by the joint tax-customs brigades. In addition, as part of the Doba oil project arrangement, the government expects to receive a payment related to the financial settlement with ESSO of an estimated US$4.8 million (CFAF 3.3 billion).

14.  The government will complete, with the support of the Fund and the World Bank, a study on the pricing and taxation of the Sedigui oil and gas field, on the basis of which it will adopt a plan of pricing and taxation policy by September 30, 2001. The main principle of these guidelines will be to use gains from this field to contribute both to a reduction of the presently high electricity prices and to an increase in fiscal revenue starting in 2002.

15.  Overall expenditure will rise from CFAF 203 billion in 2000 (20.3 percent of GDP) to CFAF 333 billion in 2001 (29.2 percent of GDP), mainly on account of an increase in public investment programs. The total nonmilitary wage bill, excluding wages financed by the remainder of the bonus and interim HIPC Initiative assistance, is budgeted to rise from CFAF 40.0 billion in 2000 to CFAF 43.8 billion in 2001, reflecting increases in priority social sectors (health and education), both in average wages (10 percent, because the government will pay part of the previously frozen service-related entitlements) and in employment. In all other nonmilitary sectors, nominal wages will rise in line with statutory advances, and employment will be adjusted downward to reflect the results of the civil service census completed in December 2000 (including the elimination of "ghost" workers). The military wage bill will rise by about 13 percent to include a cost-of-living adjustment that has not been changed in the last three years. The government is preparing an action plan to reduce domestic arrears. It has already regularized part of its arrears toward state-owned enterprises; it is now in the process of verifying the remaining stock of arrears with a view to establishing a timetable for their settlement. In addition, the government has identified possible expenditure cuts in nonpriority sectors, should there be a shortfall in revenues. These target nonwage current and investment spending in nonsocial ministries (internal security, Ministry of Finance, etc.).

16.  Unfavorable weather conditions have required the securing of emergency food supplies to avert famine. The government, together with donors, has identified 66,000 tons of cereal (the equivalent of about US$24 million, or CFAF 16.5 billion) as an emergency need for the most vulnerable groups in hard-hit areas. This amount is being covered by food aid from the World Food Program (27,000 tons), bilateral donors, and the European Union; contributions from the national budget of CFAF 2.1 billion (including the use of CFAF 1 billion from the remainder of the oil bonus); and a requested increase of the arrangement by SDR 5.6 million (corresponding to 10 percent of quota), to be disbursed upon the approval by the Executive Board of the second annual program.

17.  Structural measures in the fiscal area to strengthen revenue collection include the following: (i) improving value-added-tax (VAT) administration and preparing the extension of its base in the context of the 2002 budget; (ii) reinforcing the joint tax-customs brigades by, inter alia, providing for additional transportation equipment; (iii) completing the assignment to all economic agents of the personal tax identification number (NIF) by end-June 2001 and the exclusion from public procurement bidding, as well as from any supply and payment orders, of firms without a NIF; (iv) completing the computerization of the customs database via the use of SYDONIA; and (v) computerizing the large-taxpayers' unit by October 2001.

18.  Budget control will be reinforced through the following measures: (i) extension of the coverage of the cash treasury plan to 12 months, with regular updates of at least twice a month, starting on April 1, 2001; (ii) the full implementation of the simplification of the expenditure circuit adopted by a decree in December 2000 and January 2001 through, inter alia, the publication of a new procedure handbook by May 30, 2001, and the computerization of the expenditure circuit by December 2001; (iii) the treasury's receipt of information on the execution of all public investment projects from the project managers on a monthly basis; (iv) starting on March 1, 2001, an exclusive mandate to the Minister of Finance (or in his absence, the Director of the Treasury) to authorize the opening of a bank account lodging government resources; and to inform Fund staff of any such new account; and (v) the consolidation of government accounts with commercial banks through the elimination of inactive accounts. In addition, a study will be conducted on the guidelines for reforming budget elaboration, monitoring, and regulation procedures by September 30, 2001, with the assistance of the Fund's Fiscal Affairs Department and of the World Bank.

19.  The above-described policies will be fully reflected in a modified budget for 2001 that the government will submit to parliament before the discussion of this MEFP at the Fund's Executive Board (a prior action under the program). This modified budget will also include the government's program regarding the use of external debt relief under the enhanced HIPC Initiative.

B.  Governance

20.  The government is strongly committed to further strengthening transparency and governance. To this end, the following audits will be conducted: (i) the agreed audit of the use of the oil bonus as of end-December 2000⁴ by the Accounting Office (Chambre des Comptes) of the Supreme Court—terms of reference for this audit will be adopted before April 30, 2001, in consultation with Fund and Bank staff, and the audit will be completed by September 30, 2001; (ii) a functional and financial audit of customs administration—terms of reference for this audit will be adopted before June 15, 2001, and the bidding procedures to recruit an internationally reputable firm will be launched by July 31, 2001; and (iii) audits of the five largest public procurement contracts—other than those financed and monitored by the World Bank, the African Development Bank, and the European Union—granted in 2001. The terms of reference of the first two audits of procurement contracts signed in the first half of 2001 will be adopted before August 31, 2001, and the bidding procedures to recruit an internationally reputable firm will be launched by October 15, 2001. Audits mentioned in (ii) and (iii) will be carried out with financial support from the World Bank. The results of the audits will be made public, and the associated after-audit follow-up measures will be integrated into the overall reform of public procurement, to be carried out with assistance by the World Bank (see para. 27).

21.  Other measures to improve governance will include (i) submission to parliament of the new civil service statutes in April 2001, and the computerization of the harmonized civil service and payroll file by end-2001; (ii) publication in June 2001 of the first quarterly public procurement bulletin, including a list of firms barred from bidding; and (iii) inclusion of all stakeholders in the defining and monitoring of Chad's governance strategy to be adopted in June 2001. All these measures will be implemented with assistance from the World Bank. Furthermore, the government will accelerate implementation of the judicial reform through, inter alia, the setting up of appellate and commercial courts.

C.  Monetary Prospects

22.  Monetary policy is conducted at the regional level by the Bank of the Central African States (BEAC). The bank's key objective is to maintain price stability over the medium term by maintaining the peg between the CFA franc and the euro, and to build up the monetary zone's official reserves. It is expected that, reflecting the carryover of energy price increases in 2000 as well as weak food supply, consumer prices will increase by about 7 percent on average in 2001, and that money supply will grow by about 19 percent. Banking supervision will continue to be strengthened by the regional Central African Banking Commission (COBAC).

D.  External Outlook

23.  The external current account deficit, excluding official transfers, is projected to rise from 16 percent of GDP in 2000 to 40.7 percent of GDP in 2001, mainly reflecting an increase in imports related to oil projects (17 percent of GDP) and famine-related emergency food imports (2 percent of GDP). Exports will increase only slightly, with the rise owing mainly to a projected increase in the price of the main export item, cotton. The current account deficit will be financed mainly by foreign direct investment (19 percent of GDP) and public sector project loans and grants (16 percent).

E.  Structural reforms

24.  In light of the shortages experienced in the supply of petroleum products at the official prices and the existence of de facto uncontrolled prices on the domestic market, the government has decided to liberalize the domestic price of petroleum products. To this end, it has submitted to parliament a draft law liberalizing the domestic prices of petroleum products (a prior action under the program). The mixed committee in charge of monitoring domestic prices of petroleum products will monitor price movements on a regular basis, with a view to ensuring that the market remains competitive.

25.  The government will continue the reform of the cotton sector, which aims to durably increase the producers' income and their productivity. This reform will involve the disengagement of the state from COTONTCHAD, the liberalization of the sector, and the introduction of accompanying measures to ensure the active participation of producer organizations in the implementation of the reform. The government will privatize COTONTCHAD's oil and soap activities by September 2001 and will complete its studies of the possible disengagement scenarios by February 2002, aiming to a complete a full implementation of the sector's reform strategy by mid-2002. The government will also complete the privatization of its road maintenance agency (SNER) and will sign contracts on the exploitation of its air routes by the end of 2001.

26.  The government will also press on with the reform of the civil service. Under the reform, the adequacy of civil servants' skills vis-à-vis the requirements of their position will be reinforced, systematic evaluation of civil servants' performance will be regularly conducted, and competitive recruitment and merit-based advancement will be introduced. The reform is to be completed by January 2003.

27.  The government has launched an ambitious procurement reform, the main provisions of which—adoption by the government of a new procurement code and its implementation decrees—will be implemented by mid-2002. All the above reforms (indicated in paras. 25–26) are being implemented with technical assistance and financing from the World Bank and are covered by Bank conditionality; they do not form part of the structural conditionality under the PRGF-supported program.

F.  PRSP Process and HIPC Assistance

28.   The preparation of a fully participatory poverty reduction strategy has been proceeding according to the schedule laid out in the interim poverty reduction strategy paper (PRSP). A national seminar will be held in N'Djaména in May 2001 to discuss the results of the steps undertaken thus far (the poverty analysis, study on the perception of poverty, preliminary sectoral analysis documents, and participatory consultations), and to define the main priorities and objectives of the national poverty reduction strategy. The PRSP is expected to be finalized by the fall of 2001. Work on the costing of the identified actions will also start after the seminar, in order to ensure that they are reflected in the 2002 budget.

29.  Data currently available on the poverty line in Chad are derived from a partial survey. Sectoral administrative statistics are, however, reliable and regularly updated. A household survey on income and expenditure will be launched in May 2001, with assistance from the World Bank. The results of this survey will include the poverty line, as well as the main poverty indicators (incidence, depth, and severity); data will start to become available around the beginning of 2002 and will be continuously fed into the national poverty reduction strategy.

G.  Use and Tracking of Resources Earmarked for Poverty Reduction

30.   The government has prepared an additional budget, laying out the use of expected HIPC Initiative interim assistance in 2001 (US$12.4 million, equivalent to CFAF 8.7 billion). Expenditures will be directed exclusively to priority social sectors, following official budget procedures. Planned expenditures are as follows: (i) health (CFAF 1.5 billion); (ii) education (CFAF 1.4 billion); (iii) governance (CFAF 1.3 billion); and (iv) other priority sectors (CFAF 4.5 billion). In order to ensure an enhanced tracking of these expenditures, the government has also taken three measures. First, it has opened a special account with the BEAC where all HIPC Initiative-related resources are to be lodged. Second, the use of the resources will be fully integrated into the budget, and budget lines associated with spending related to poverty reduction will be flagged and monitored specifically. Furthermore, to highlight the "additional" character of the use of HIPC Initiative resources, a column will be added in the presentation of the finance law specifying the part of each "poverty-flagged" budget line financed by these resources—for the 2001 budget, a similar approach has been adopted for the use of the remainder of the bonus. Finally, an expenditure report, specifically identifying expenditure financed by HIPC Initiative resources, will be prepared every six months by a committee headed by the Minister of Finance. ⁵ These reports will be made public and will be discussed during the periodic consultations updating the poverty reduction strategy.

31.   The government also reconfirms its commitment to use the remainder of the oil bonus (CFAF 6.2 billion) exclusively on priority social sectors.⁶ In conformity with the Law on Petroleum Revenue Management, these expenditures will be overseen by the CCSRP. These outlays are inscribed in the modified 2001 budget law, as follows: (i) health (CFAF 1.2 billion); (ii) education (CFAF 1.2 billion); (iii) governance (CFAF 1.1 billion); and (iv) other priority sectors (CFAF 2.7 billion). These two resources—HIPC Initiative interim assistance and the remainder of the bonus—constitute a virtual Poverty Fund, reflecting the government's additional effort for poverty reduction.

H.  Prior Actions

32.  The following measures have been agreed to constitute prior actions for the presentation of the new annual program under the PRGF arrangement:

• extension of the coverage of the treasury cashflow plan to 12 months;

• submission to parliament of a draft law to liberalize petroleum products prices; and

• submission of a modified budget law for 2001 to parliament.

I.   Program Monitoring

33.  Program implementation will continue to be monitored on a semiannual basis, while performance criteria will be set on a quarterly basis, with associated quarterly disbursements. The third review will take place before en-December 2001, and will focus on budget execution and governance. Quantitative and structural performance criteria and structural benchmarks are proposed for end-June 2001 and end-September 2001, while indicative targets have been set for end-December 2001 and end-March 2002 (Table 1). The proposed quantitative performance criteria will comprise (i) a ceiling on the increase in net credit from the banking system to the central government; (ii) a floor on the current primary fiscal balance; (iii) a floor on total fiscal revenue (excluding grants); (iv) nonaccumulation of central government external payments arrears; (v) a ceiling on new medium- and long term nonconcessional external loans contracted or guaranteed by the government; (vi) a ceiling on net change in external debt with a maturity of up to and less than one year. Indicative benchmarks are proposed for (i) a floor on current expenditure on health; (ii) a floor on current expenditure on education; and (iii) a ceiling on the total wage bill (including military). In addition, the reform measures indicated in Table 2 of this appendix will serve as performance criteria and structural benchmarks.

Technical Memorandum of Understanding Relative to the Second Annual Program under the Arrangement Supported by the Poverty Reduction and Growth Facility

This memorandum provides the definitions of the quantitative performance criteria and benchmarks for the remainder of the three-year arrangement supported by the Fund under the Poverty Reduction and Growth Facility (PRGF), which was approved by the Executive Board of the IMF on January 7, 2000. These definitions may need to be revisited during program reviews, so as to ensure that this memorandum continues to reflect best understanding between the government of Chad and Fund staff. This memorandum also sets out the data-reporting requirements for monitoring the program.

III.  Quantitative Performance Criteria and Benchmarks¹

A.  Government Finances

1.  Total government revenue is defined as the sum of all tax and nontax revenues, cumulative since the start of the calendar year, excluding proceeds from public contract taxation, proceeds from sales of assets, and grants.

2.  The primary current fiscal balance for program purposes is defined as the difference between total revenue and current primary expenditures on a commitment basis, excluding spending on elections and for food emergencies. Current primary expenditures equal government expenditures less payments of interest on external and domestic debt and less capital expenditures.

3.  Under the program, a continuous performance criterion of no accumulation of external arrears will apply. External arrears are defined as total obligations of the government that have not been paid by the time they are due, excluding arrears on external debt service pending the conclusion of debt-rescheduling agreements.

4.   Reporting requirements. On a monthly basis, the following indicators will be provided through, inter alia, the provision of treasury balance sheets, with a delay not exceeding 45 days: (i) government revenue, total and main components; and (ii) primary current expenditure, on a commitment basis and on a cash basis, total and main components, with an explicit mention of expenditures of the Ministries of Health and Education. Detailed data on repayment of domestic arrears and information on the remaining stock of arrears carried over from previous years will also be transmitted on a monthly basis, within 45 days of the end of each month. Monthly data on the public sector's scheduled external debt service and actual payments on current maturities and on arrears, detailed by creditor and compiled by the Debt Department of the Ministry of Finance, will be transmitted on a quarterly basis within 45 days of the end of each quarter.

B.  Net Credit of the Banking System to the Central Government

5.  The ceiling on the cumulative change, from the beginning of the calendar year, in net credit of the banking system to the central government, excluding net use of IMF resources, constitutes a performance criterion. Net credit of the banking system to the central government is defined as all government liabilities minus all assets held by the government at the central bank, commercial banks, and other financial institutions, and excluding net use of IMF resources. An exhaustive list of government accounts is provided in the attached table. The government will inform Fund staff within five days of any opening of a new account.

Adjustors

6.  The ceiling on the cumulative change, from the beginning of the calendar year, on net credit of the banking system to the government will be adjusted upward by 75 percent of any shortfall in non-project-related external assistance cumulative since the beginning of the calendar year (excluding IMF financing) relative to the programmed amounts. Underlying the calculations is an average exchange rate of CFAF 698 per US$1 for 2001.

7.  The ceiling on the cumulative change, from the beginning of the calendar year, on net credit of the banking system to the government will be adjusted downward by any shortfall in the actual net reduction of domestic payments arrears relative to the programmed amount of CFAF 0 billion at end-June 2001, CFAF 6.7 billion at end-September 2001, and CFAF 7.0 billion at end-December 2001. The total annual amount of arrears reduction is the sum of European Union funds earmarked to arrears reduction (CFAF 6,355 million, of which CFAF 2,600 million was received in 2000 and CFAF 3,755 million is expected in 2001) and the amount of "accounting arrears"² (arriérés comptables, i.e., expenditures that were actually committed but never paid) that are planned to be paid in the 2001 budget (CFAF 624 million). For 2001, the quarterly pattern of arrears reduction takes into account the tight fiscal situation of the first semester. Arrears variations are calculated as the total amount of committed expenditures (data provided by the Department of Budget of the Ministry of Finance) minus the total amount of paid expenditures (data provided by the Department of Treasury of the Ministry of Finance).

8.  The ceiling on the cumulative change, from the beginning of the calendar year, on net credit of the banking system to the central government will be adjusted upward by 75 percent of any shortfall in sales of assets proceeds relative to the programmed amount (CFAF 3.0 billion).

9.   Reporting requirements. The preliminary monthly balance sheet of the BEAC-Tchad will be transmitted on a monthly basis, with a maximum delay of 45 days following the end of each month. In addition, the preliminary table on net credit of the banking system to the government (position nette du gouvernement, PNG), as calculated by the BEAC-Tchad, will be submitted on a monthly basis within 30 days of the end of each month. The government will ensure that the BEAC receives all necessary information in this regard, including with respect to its operations with commercial banks.

C.  New Nonconcessional External Debt

10.  The performance criterion on new noncessional external debt with maturities of more than one year contracted or guaranteed by the government applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No 12274-(00/85) adopted August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received. Nonconcessional debt is defined as debt with a grant element of less than 35 percent, calculated by using currency-specific commercial interest reference rates. For loans with a maturity of at least 15 years, the 10-year average commercial interest reference rate (CIRR), published by the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD), should be used to calculate the level of concessionality. For loans with shorter maturities, the six-month average CIRR should be used. Debt rescheduling and debt reorganization are excluded from this criterion, and so is the International Bank for Reconstruction and Development loan for the Chad-Cameroon pipeline project. Nonconcessional new external debt with maturities of more than one year will be zero throughout the program period.

11.   Reporting requirements. The government of Chad will consult with the Fund staff before assuming liabilities in circumstances where it is uncertain whether the instrument in question falls under the performance criterion. Details of all new external debt, including government guarantees, indicating terms of loans and creditors, will be provided on a monthly basis within 30 days of the end of each month.

D.  Short-Term External Debt

12.  The performance criterion on net change in external debt with maturity of up to and including one year contracted or guaranteed by the government applies to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No 12274-(00/85) adopted August 24, 2000). Excluded is normal trade financing.

13.   Reporting requirements. Data on all new short-term borrowing and guarantees, including terms of loans and creditors, will be transmitted, with detailed description, on a monthly basis, within four weeks of the end of each month.

E.  Indicative Benchmarks

14.  For program purposes, total wage spending by the government is defined as the sum of the wage bill for regular employees and contractuals (including civil servants and armed forces and embassy personnel), and of all personnel subsidies, pension-related payments, representation allowances, and mission and transportation spending.

15.  Total current expenditure in the health sector is defined as the sum of wage, material, transfer, and subvention spending by the Ministry of Health, measured on a commitment basis.

16.  Total current expenditure in the education sector is defined as the sum of wage, material, transfer, and subvention spending by the Ministry of Education, measured on a commitment basis.

17.   Reporting requirements. Data on the wage bill will be provided on a monthly basis, with a maximum delay of 45 days; data on current expenditure in health and education sectors will be provided on a monthly basis, within 45 days of the end of each month.

II.  Other Data Requirements for Program Monitoring Purposes

18.  Data on exports and imports, including volumes and prices, compiled by the BEAC will be transmitted on a quarterly basis within 45 days of the end of each quarter.

19.  The monthly disaggregated consumer price index for N'Djaména, compiled by the Statistics Department of the Ministry of Economic Promotion, will be transmitted monthly within four weeks of the end of each month.

20.  Documentation of all measures taken by the government will be transmitted within five working days after the day of implementation.