The country is pressing on with its Emerging Gabon plan (Plan Stratégique Gabon Émergent, PSGE) to reach emerging country status by 2025, but it faces near-term fiscal challenges – in part a result of the necessary high capital spending – as it lays the long-term foundations for sustained economic growth. As of late 2013, the Gabonese government expected increases in both mining and oil revenues for 2014, enabling a return to a budget surplus. However, the 2014 mid-year budget revision conducted in July indicates the budget deficit will persist through year-end, expanding slightly to 2.5% of GDP as compared with 2.3% of GDP in 2013.
As a upper-middle-income country, Gabon is not eligible for discounted loan programmes available to low-income countries. Thus, a more prominent role for the private sector in the economy, combined with institutional reforms to streamline government expenses, will be crucial to maintaining a positive fiscal balance.
Diversify, Diversify
A key fiscal challenge is the continued reliance on oil revenues, which leaves Gabon vulnerable to fluctuations in international commodity prices. Non-oil revenue rose by 10.8% from 2012 to 2013, but oil still accounted for over 56% of total government revenues in 2013, which fell year-on-year from 28.1% of GDP to 27.4% in 2013, according to a report by the African Development Bank (AfDB). The 2009 drop in global oil prices compelled the government to drastically reduce capital expenditures to avoid defaulting on payments, and recent reports suggest the country may do the same in 2014; in July, in the course of its annual mid-year budget review, the Council of Ministers adopted a draft Amended Finance Act announcing a 52.6% downward revision in capital expenditures from CFA1.3trn (€2bn) to CFA627.1bn (€940m).
To help cover the gap created by lower revenues, in December 2013, Gabon raised €1.1bn on international sovereign debt markets via the issue of its second Eurobond, at a yield of 6.375%. The 10-year bond will mature in 2024, but it will begin partial repayment in 2022, amortising at the level of €373m in each of its last three years. Some €455m of the funds raised will replace previous debt – from its maiden Eurobond issue in 2007 – while another portion of the funds will be used to finance the PGSE. Overall, the sovereign debt issue has provided the government with some much-needed short-term liquidity. Although Gabon has in the past been delinquent on some debt payments, it has managed to correct the errors without incurring penalties, and has maintained a “BB-” rating from both Standard & Poor’s and Fitch Ratings.
Indeed, in spite of the reduction in revenues – and the revised capex targets – the government will likely continue to push ahead with the PSGE, calculating that improved infrastructure and the development of domestic processing industries are key to diversifying the economy and the state’s sources of revenue.
Reducing Recurrent Expenses
Funding long-term investments, amid a constrained environment, will place pressure on the fiscal balance and the mid-2014 budget revision alludes to the difficulties inherent in sustaining funding levels. Thus the government is also looking to reduce recurrent expenses, including fuel subsidies, but also the public sector wage bill, which accounts for 20% of total expenses. The IMF reported that public sector wages increased by 39% in recent years. The mid-2014 budget review indicated a rise in the wage bill from the CFA511bn (€766.5m) projected in late 2013 to CFA540.5bn (€810.7m).
Trimming salaries should help the government extend funds to other areas, and it plans to provide 70% of budgetary funds to infrastructure. The six-year National Infrastructure Master Plan has 21 projects costing $11.83bn – $3bn for power infrastructure, $3.53bn for transport, $3.3bn for mining, $85m for tourism and $340m to establish the National Agency of Public Works. Additionally, in order to reduce the effects that fiscal incentives have on the budget, without eliminating them, the government is streamlining payment procedures, improving transparency of the tax code and helping reduce administrative burdens on businesses.
Read More from OBG
