CHAD 2021 ECONOMIC UPDATE RECOVERING FROM SHOCKS: IMPROVING MACRO-FISCAL SUSTAINABILITY TO REBUILD BETTER 2 CHAD – 2021 ECONOMIC UPDATE © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org 3 CHAD 2021 ECONOMIC UPDATE RECOVERING FROM SHOCKS: IMPROVING MACRO-FISCAL SUSTAINABILITY TO REBUILD BETTER Prepared by Fulbert Tchana Tchana (Senior Economist, EAWM1), Claudia Noumedem Temgoua (Economist, EAWM1), and Aboudrahyme Savadogo (Economist, EAWPV) with inputs from Landry Kuate Fotue (Consultant, EAWM1), under the guidance of Jean-Pierre Chauffour (Program Leader, EAWDR) and overall supervision of Theo David Thomas (Practice Manager, EAWM1) and Johan Mistiaen (Practice Manager, EAWPV). The team appreciates comments from Ivailo V. Izvorski (Lead Economist, EECM1), Raju Singh (Lead Economist, EAWM2), Rohan Longmore (Senior Economist, ELCMU), Yele Batana (Senior Economist, EAEPV), Olanrewaju Malik Kassim (Economist, MIGEC), Rasit Pertev (Country Manager, AWMTD), and Soukeyna Kane (Country Director, AWCW3). 4 CHAD – 2021 ECONOMIC UPDATE TABLE OF CONTENTS LIST OF CHARTS 5 LIST OF TABLES AND BOXES 6 EXECUTIVE SUMMARY 8 1. RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 10 1.1. Recent Economic Developments and Outlook 11 1.1.1. A second economic recession in five years. 11 1.1.2. An Expansionary fiscal policy led to a need of fiscal consolidation 14 1.1.3. Current account deficit has widened 16 1.1.4. Relaxation of monetary policies to mitigate the Impact of Covid-19 17 1.2. Risks Associated with the Outlook 19 1.3. Poverty and socio-economic impact of Covid-19 20 1.3.1. Covid-19 dampened Chad’s household income and reversed gain in poverty reduction 23 1.3.2. Covid-19 increased household vulnerability to shocks 24 1.3.3. Covid-19 disrupted school services, exacerbated health care need, gender gap, and food insecurity 25 2. CHAD FISCAL MANAGEMENT FOR DEBT SUSTAINABILITY IN THE TIME OF COVID-19 28 2.1. Fiscal space analysis 29 2.1.1. Structural low non-oil revenues threatened fiscal sustainability 29 2.1.2. Weak management of oil revenues volatility hampers budget execution 31 2.2. Public expenditure analysis 32 2.2.1. Public expenditure has been pro-cyclical during the last decade 32 2.2.2. Composition of public expenditure and source of fiscal pressure 33 2.3. Significant Debt Service threatens Debt Sustainability 37 2.4. Assessment of the Public Finance Management System 40 2.4.1. Weak connection between planning and budgeting is a source of inefficiency 40 2.4.2. Public Financial Management Characterized by Poor Budget Execution weak Expenditure Controls 40 2.4.3. Public procurement system is being renovated to improve its efficiency 42 3. POLICY PRIORITIES 43 3.1. Strengthening economic diversification to enlarge the fiscal base 44 3.2. Improving spending efficiency to delivery more service with declining resources 45 3.3. Improving debt and financial sustainability 46 ANNEX: SELECTED ECONOMIC AND FINANCIAL INDICATORS 47 REFERENCES 50 5 LIST OF CHARTS Chart 1.1. Chad’s GDP growth 2017-23 11 Chart 1.2. Selected oil-exporting countries -- GDP growth estimate in 2018-23 11 Chart 1.3. Chad – Daily new confirmed Covid-19 cases. 13 Chart 1.4. Chad’s sector contribution to GDP. 14 Chart 1.5. Chad’s demand component contribution to GDP. 14 Chart 1.6. Chad -- Fiscal position (% of non-oil GDP), 2017-23 15 Chart 1.7. Chad -- Government spending (% of non-oil GDP), 2017-23 15 Chart 1.8. Chad -- Trade balance, 2017-2023 17 Chart 1.9. Chad & CEMAC -- Current and financial accounts, and reserves 17 Chart 1.10. Chad & CEMAC – Inflation dynamic 2017-2023 18 Chart 1.11. Monthly CPI variation by sector of production 18 Chart 1.12. Impact of Covid-19 on Households’ total income 21 Chart 1.13. Sector of activity of employed respondent who lose their job since the outbreak 21 Chart 1.14. Impact of Covid-19 on consumption and poverty 21 Chart 1.15. Distribution of the increase in the poor population caused by COVID-19 21 Chart 1.16. Households coping strategies to mitigate the effects of the pandemic. 24 Chart 1.17. Share of households having difficulties experiencing difficulty to satisfy food need 26 Chart 2.1. Total fiscal revenues (excluding grants) and oil revenues, 2009-20 29 Chart 2.2. Revenues, 2009-20 29 Chart 2.3. Average total revenue/GDP ratio (2011 -2020) in the CEMAC region. 30 Chart 2.4. Percentage change in revenues (2016 - 2020) 30 Chart 2.5. Oil Revenue, Expenditure and real GDP 2012-20 32 Chart 2.6. Chad’s Public Spending 2012-21 32 Chart 2.7. Public spending in 2020 and in the past 3 years (average) 33 Chart 2.8. Source of financing of Public investment 33 Chart 2.9. Budget Allocation by sector as percentage of Total Budget 34 Chart 2.10. Budget Allocation for public Investment by sector 35 Chart 2.11. Investment financed by external sources by sector 35 Chart 2.12. Composition of external debt 2020 37 Chart 2.13. Debt Service (percentage of total revenue) 37 6 CHAD – 2021 ECONOMIC UPDATE LIST OF TABLES AND BOXES Table 1.1. Key macroeconomic indicators 12 Table 1.2. Simulated Impact of COVID-19 at the Household Level 22 Table 1.3. Types of Covariate and Idiosyncratic Shocks in the HFPS 24 Table A.1. Chad – Key Macroeconomic Indicators, 2017–23 47 Table A.2. Chad – Fiscal operations of the central government, 2017¬–23 49 Box 1.1. Fiscal and Economic Measures Adopted by the Government in Response to the COVID-19 Crisis 16 Box 1.2. Household Income 20 Box 1.3. Definition of Shocks in the HFPS 23 Box 2.1. Debt Restructuring under the G20 Common Framework 38 7 LIST OF ACRONYMS bbl Barrel BDEAC Central African States Development Bank BEAC Bank of Central Africa States CAD Current Account Deficit CAR Central Africa Republic CEMAC Central Africa Economic Community CID Circuit Intégré de la Dépense COVID-19 Coronavirus Disease 2019 CPI Consumer Price Index DSA Debt Sustainability Analysis DSSI Debt Service Suspension Initiative ECOSIT 4 Chad household survey 2018-19 FDI Foreign direct investment G20 CF G20 Common Framework GDP Gross domestic product HFPS High-frequency phone survey HIPC Heavily indebted poor countries IMF International monetary Fund ISC High Institution for Public Finance Control MDRI Multilateral Debt Relief Initiative MPO Macro-Poverty Outlook OTFiP Chadian public finances observatory PIT Personal income tax Pp Percentage point PPG Public and publicly guaranteed SYSGADE Système informatisé de gestion et d’analyse de la dette T-bills Treasury bills UNESCO United Nations Educational, Scientific and Cultural Organization US$ United States dollars VAT Value Added Tax WBG World Bank Group WEO World Economic Outlook WFP World Food Programme XAF CFA Franc of Central African Countries 8 CHAD – 2021 ECONOMIC UPDATE EXECUTIVE SUMMARY The COVID-19 pandemic has significantly disrupted individuals living below the national poverty line (national Chad’s economic recovery, which started in 2018. GDP poverty rate) by 5.5 percentage points in 2020. About 17 contracted by 0.9 percent in 2020. Agriculture and the oil percent of unemployed were employed before Covid-19. sector remained the main drivers of growth, contributing 1.1 Also, children’s education outcomes have been affected percentage points, while services contracted (contributing by the school closure as close to 90 percent of students -2.0 percent). The impact of containment measures on were at home without any engagement with educational domestic supply chains pushed up prices, and inflation activities. School closure is estimated to have increased the rose from -1.0 percent in 2019 to 3.5 percent in 2020. Both dropout rates and gender gap in education. Households the fiscal and current account balances deteriorated ‘access to health services has been disrupted, with 8 substantially, and difficulties in financing fiscal deficit may percent not getting access to health services because of have led to further domestic arrears’ buildup. the fear of being infected by the disease. To tackle this economic recession, the Government The economy is projected to gradually recover starting adopted an expansionary fiscal policy, and the central in 2021 with the recovery of global oil markets and bank relaxed the monetary policy. In 2020, despite a extension of the vaccination campaign. In 2021 growth is significant increase in oil revenue (thanks to a one-year projected to reach 1 percent. With the rollout of COVID-19 lagged in oil-revenue taxation), Chad posted a fiscal deficit vaccines in the second half of 2021, the recovery is (excluding grants) of 3.7 percent of GDP, as it increased expected to gain momentum in 2022-23, economic growth its spending to mitigate the impact of the COVID-19. An reaching 2.5 percent and 2.9 percent, respectively, thanks increase in grants, which stood at 4.8 percent of GDP, to solid growth in the non-oil sector. Inflation should led to an overall fiscal surplus (including grants and a decelerate to reach the CEMAC convergence criteria of commitment basis) of 1.1 percent of GDP in 2020. However, 3.0 percent in 2021 and then remain at that level with the on a cash basis, the fiscal deficit was 1.3 percent of GDP resumption of supply chains, the withdrawal of subsidies, as the government started to pay some domestic arrears. and the convergence of GDP growth towards its potential. The regional central bank (BEAC) prudently relaxed the Despite the beginning of a fiscal consolidation program, monetary stance by cutting the policy interest rate from the fiscal balance will continue to deteriorate with the 3.5 percent in March to 2.70 percent in July 2020, while lagged effects on royalties of the sharp oil price drop in the marginal lending facility rate was reduced from 6 to 2020. Projected oil price recovery will dampen the current 5 percent. Regional reserves stayed at their 2019 level account deficit. Simultaneously, the pursuit of relatively of 3.5 months of imports in 2020. The relaxation of the easy monetary conditions by the BEAC will hamper the macroeconomic stance led to an almost doubling of the build-up of regional reserves. The adverse effects of the current account deficit to 9.3 percent of GDP in 2020, which COVID-19 crisis on poor and vulnerable households are was financed by a significant increase in external grants expected to last for several years, with the poverty rate and foreign direct investment. increasing to 42.5 percent by 2023. The pandemic has negatively impacted household COVID-19 has highlighted the economic weaknesses income, children’s education, and increased poverty. The related to the dependency on the oil sector and exposure combined effect of the loss of income reduced domestic to multiple risks. The combination of the global recession, transfers and remittances. Higher inflation decreased disruptions in global and domestic supply chains, measures households ‘consumption and increased the share of to flatten the contagion curve, financial disruptions, and EXECUTIVE SUMMARY 9 investment risk aversion have taken a heavy toll on the 29.7 percent of GDP is external. Chad’s debt service needs economy. The uncertain nature of the depth and duration cannot be realistically filled by external financing and of the pandemic coupled with fiscal liquidity constraints the regional financial market. Chad authorities recently exacerbate an economic context already witnessing requested from its creditors a debt restructuring under several downside risks. Regional conflicts may further the G20 common framework. The Government is also disrupt bilateral trade and stretch government finances as working to reprofile its domestic debt with the support the flow of refugees from neighboring countries increases. of the BEAC. The Government took action to improve debt Intense socio-political tension following the passing transparency in 2020. However, the remaining weaknesses away of president Deby and the takeover of power by the in debt transparency and management should be fixed. military could cloud economic recovery prospects in 2021. Chad’s budget planning and budgeting processes have Chad remains highly dependent on oil revenues, an been inefficient, leading to substantial bottlenecks in impediment to diversifying the economy and exploiting the delivery of public services. There is low compliance other opportunities to create fiscal space. Chad’s with budgetary rules and procedures from the budget oil revenue management is inconsistent with fiscal preparation to its execution, including fund disbursement stabilization and sustainability. The lack of an adequate to the different line ministries. Accurate measure of budget fiscal framework has created a complex system where oil execution performance is limited by the complex budget revenue is highly vulnerable to the volatility of oil prices. data structure and inconsistencies across budget data. Moreover, despite recent reforms for the publication of Existing public expenditure assessments have pointed audit reports, there is still limited transparency and public out to the weak budget execution performance. Besides, involvement in oil revenue management. Non-oil fiscal the opacity of public procurement systems presents revenues have nearly stagnated over the past 4 years, important challenges in terms of transparency, integrity with a slight increase from 7.2 percent of GDP in 2017 to and efficiency. 7.8 percent of GDP in 2020. There is a significant scope to improve mobilization efforts and diversify the fiscal Given the lack of fiscal space and large financing revenue base. requirements, bold actions are needed. In this regard, the government could first strengthen economic diversification On the expenditure side, current spending puts pressure to enlarge the fiscal base, by removing bottlenecks to on capital and social expenditure. Substantial and livestock exports, adopting business-friendly reform rigid wage spending puts pressure on capital and social to support the private sector, and strengthening fiscal expenditure thanks to long-term structural factors such administration and policy for better revenue collection. as insecurity that shape public expenditure decisions. Second, the government could improve its spending Public investment spending remains insufficient and efficiency to deliver quality service under declining dependent on external financing, creating significant resources by enhancing the selection process, the planning infrastructure gaps and poor outcomes in social sectors and designing of investment projects, and improving such as health and education. Slight improvement in the public spending efficiency in health and education. Finally, budget allocation for investment in social sectors such as the government should improve debt sustainability by health and education hide their growing dependency on strengthening its management and transparency.  external financing. Chad is currently in debt distress and will need a significant debt restructuring to achieve the moderate risk of debt distress level. Chad’s public and publicly guaranteed (PPG) external debt consists of a broadly equal share of multilateral, bilateral, and commercial debt. Public debt reached 47.6 percent of GDP in 2020, of which 10 CHAD – 2021 ECONOMIC UPDATE RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 1 RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 11 1.1. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 1.1.1. A SECOND ECONOMIC RECESSION IN Containment measures worsened the 2020 economic recession, and no recovery is expected in the first half FIVE YEARS of 2021. The COVID-19 pandemic, with its worldwide containment measures, led to supply and demand After a short recovery from the 2015-16 crisis, Chad shocks of both regional and global scope, which have entered recession in 2020 and is likely to remain in 2021. negatively affected Chad’s economy. After relaxing The oil price shock in 2014/15 led to a recession between containment measures between August and October 2016 and 2017; the economic recovery started in 2018 and 2020, the authorities reintroduced some measures in the continued in 2019 due to an increase in oil production and a last two months of 2020 and January 2021. The economy significant recovery of the non-oil sector. But the COVID-19 will remain in recession in the first half of 2021 due to and related oil price decline changed this trajectory in continued containment measures, public finance liquidity 2020, the economy contracted by 0.9 percent, see Chart constraints (due to lower oil revenues and decreasing 1.1. The recession was less pronounced in Chad than in grants), and economic disruption resulting from social other oil-exporting countries in the Gulf of Guinea (See unrest during the presidential election period. Chart 1.2), thanks to previous investment in the oil sector that led to a high production capacity, to the relatively low health impact of the pandemic, and the large share of the primary sector (less impacted by the pandemic) in Chad. Chart 1.1. Chad’s GDP growth 2017-23 Chart 1.2. Selected oil-exporting countries -- GDP growth estimate in 2018-23 15.0 5.0 10.0 30.0 1.0 5.0 % change -1.0 0.0 -3.0 -5.0 -5.0 -10.0 -7.0 -15.0 -9.0 2017 2018 2019 2020e 2021f 2022f 2023f Chad Cameroon Congo Rep Gabon Nigeria Angola SSA Oil GDP 2018-19 Non-Oil GDP 2020e Real GDP 2021-23f Source: Chadian authorities and World Bank staff estimates Source: World Bank MPO 12 CHAD – 2021 ECONOMIC UPDATE Table 1.1. Key macroeconomic indicators 2018 2019 2020e 2021f 2022f 2023f Real GDP growth, at constant market prices 2.4 3.2 -0.9 1.2 2.7 2.9 Private Consumption 0.7 1.4 0.3 0.8 2.5 2.5 Government Consumption -11.8 1.7 18.1 -4.4 3.4 2.8 Gross Fixed Capital Investment 5.4 6.6 -9.8 -0.6 13.3 17.4 Exports, Goods and Services 4.6 6.0 1.1 4.8 0.7 0.4 Imports, Goods and Services 1.4 4.0 2.0 4.0 4.1 4.1 Real GDP growth, at constant factor prices 2.3 3.3 -0.9 1.0 2.4 2.8 Agriculture 4.0 4.6 2.4 5.8 3.2 2.8 Industry 0.6 0.9 -0.2 0.8 1.6 1.6 Services 1.0 2.5 -5.2 -4.8 2.1 3.3 Inflation (Consumer Price Index) 4.0 -1.0 3.5 3.0 3.0 3.0 Current Account Balance (% of GDP) -4.7 -4.9 -9.3 -5.9 -6.2 -7.3 Fiscal Balance (exc. grants, com. basis, % of GDP) -1.3 -1.8 -3.4 -5.2 -4.8 -4.4 Fiscal Balance (inc. grants, com. basis, % of GDP) 1.5 -0.6 1.1 -1.1 -0.8 2.2 Fiscal Balance (inc. grants, cash basis, % of GDP) 0.8 -1.2 -1.1 -2.4 -2.1 -1.8 Debt (% of GDP) 48.3 44.4 47.3 46.9 47.0 46.9 Primary Balance (% of GDP) 3.0 1.0 2.9 0.4 0.3 3.3 Oil GDP 12.7 7.6 2.4 4.4 0.4 -0.5 Non-oil GDP 0.3 2.0 -1.7 0.2 3.1 3.8 GDP per capita 713 686 644 667 701 733 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Notes: e = estimate, f = forecast. On top of Covid-19 and its related drop in oil price increases. Moreover, the ongoing conflict with Boko Haram shock, two other major shocks hit the country in 2020: intensified in early 2020, with almost 100 Chadian soldiers insecurity; and major floods in Ndjamena and locust killed in March 2020. Insurgence was restrained following invasion. Although the COVID-19 infection rate remains the increased presence of the Chadian army in the region. low, the pandemic has significantly affected the Chadian Nonetheless, insecurity persists, resulting in major economy. As of March 11, 2021, Chad registered 4231 population movements. Constant flows of refugees and COVID-19 cases and 149 deaths (Worldometer, March internally displaced populations are seriously affecting 2021).1 In 2020, insecurity has been on the rise in the Sahel host communities, with over 2,500 new refugees entering countries, with a growing number of fatalities and violent Chad from Darfur since July 2020. Natural hazards such events. The situation has deteriorated in Libya, as fighting as increasingly intense droughts and flooding induced by between the eastern and the western governments climate change are exacerbating this situation. 1 After about one year of pandemic, with a peak in November-December 2020, some relaxation of confinement measures from the population could lead to another outbreak prior to the full roll-out of the vaccine. RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 13 Chart 1.3. Chad – Daily new confirmed Covid-19 cases. 70 60 50 40 30 20 10 0 19-Mar-20 09-Apr-20 30-Apr-20 21-May-20 11-Jun-20 02-Jul-20 23-Jul-20 13-Aug-20 03-Sep-20 24-Sep-20 15-Oct-20 05-Nov-20 26-Nov-20 17-Dec-20 07-Jan-21 28-Jan-21 18-Feb-21 11-Mar-21 01-Apr-21 22-Apr-21 13-May-21 Source: https://ourworldindata.org/coronavirus/country/chad?country=~TCD The economy is projected to slowly recover, thanks to The recovery should gain speed in 2022-23 as structural the global oil market resumption and significant ease of reforms start bearing fruit as the pandemic phases- containment measures. The global oil market resumption out. The non-oil GDP would gradually increase from would boost international trade and bring its positive 0.2 percent in 2021 to 3.8 percent in 2023, thanks to spillover effect in other sectors of the economy. Oil GDP the gradual elimination of the effects of the Covid-19 growth is projected to stand at 4.4 percent in 2021. The pandemic and structural reforms. The outlook assumes end of the presidential election and the beginning of the a gradual revenue-led fiscal consolidation and that COVID-19 vaccine rollout will lead to the beginning of the spending controls would be maintained. The focus non-oil sector recovery. The recovery in the second half on reforms would be on improving domestic revenue will be strong enough to compensate for the negative mobilization while containing the increase in current non-oil GDP growth of the first semester. As a result, the spending. Improving the quality and targeting (particularly non-oil GDP would grow by 0.2 percent in 2021. Overall, spatially) of social spending would help create fiscal space Chad’s GDP growth would reach 1.2 percent in 2021. Chad’s for increasing public investment, which also underpins modest and gradual economic recovery is consistent with the outlook. Additional structural reforms in the livestock growth projected in regional oil-exporting peers, see sector, telecommunications sector, entrepreneurship, and Chart 1.2. public investment efficiency are expected to buttress non-oil growth. 14 CHAD – 2021 ECONOMIC UPDATE Chart 1.4. Chad’s sector contribution to GDP. Chart 1.5. Chad’s demand component contribution to GDP. 8.0 6 6.0 4 4.0 2 2.0 0.0 0 -2.0 -2 -4.0 -4 -6.0 -8.0 -6 2014 2015 2016 2017 2018 2019 2020 2021f 2022f 2023f 2017 2018 2019 2020 2021f 2022f 2023f Agriculture Industry Fixed Investment, Private Private Consumption Services GDP Growth Fixed Investment, Government Government Consumption Net Exports, GNFS GDP Source: Chadian authorities and World Bank staff estimates Source: Chadian authorities and World Bank staff estimates Spurred by the oil sector and investment in productive infrastructure in agriculture, the primary sector will 1.1.2. AN EXPANSIONARY FISCAL POLICY LED TO remain the main growth driver. The services and industrial A NEED OF FISCAL CONSOLIDATION sectors will contribute a combined negative 1.8 percentage points (pp) to growth due to confinement measures in In 2020, despite a significant increase in oil revenue, 2021 and a modest 1.0 pp on average in 2022-23. On the Chad posted a fiscal deficit, as it increased its spending other hand, the agriculture and oil subsectors (the main to mitigate the impact of the COVID-19 pandemic. The oil drivers of growth) are projected to contribute a positive 2.8 revenue increase was due to a one-year lag in oil revenue pp, thanks to an increase in oil production in 2021 and 1.5 taxation. An increase in grants, which stood at 4.8 percent pp in 2022-23 thanks to strong growth in agriculture as oil of GDP, led to an overall fiscal surplus (including grants production stagnate, see Chart 1.6. and a commitment basis) of 1.1 percent of GDP in 2020. However, on a cash basis, the fiscal deficit was 1.1 percent On the demand side, in 2021, the government investment of GDP. Since 2019, fiscal consolidation efforts stalled, and and consumption will contribute negatively to GDP COVID-19 had exacerbated the trend in 2020. The overall in 2021 but will become positive in 2022-23 as fiscal fiscal balance (excluding grants) deteriorated from a consolidation is loosening. Net exports will contribute deficit of 1.8 percent in 2019 to 3.4 percent in 2020. The negatively as oil exports stagnate while imports continue expansionary fiscal policy included a rise in transfers to grow due to the lifting of trade restrictions. Overall, to the health sector and wage bills. The government private consumption and private investment will be the reinstated bonuses and allowances of public service engine of growth on the demand side (see Chart 1.7). workers to put an end to a two-day strike. It also provided subsidies to the electricity and water companies to pay for the 3-month free electricity and the 6-month free water program. Significantly, about 1652 medical workers were recruited to strengthen the coverage of health systems to mitigate a COVID-19 outbreak, see Box 1.1. This resulted in a permanent increase in current spending of about 0.8 percent of GDP. RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 15 Despite fiscal consolidation driven a sharp decline of the fall in oil price in 2020.2 A modest fiscal consolidation government revenues, fiscal deficit will be substantial. through government spending will widen the fiscal deficit. The 2021 Budget implies a substantial overall fiscal deficit Government spending will modestly decline by 3.7 percent. (excluding grants) of XAF 338 billion (5.6 percent of GDP). The public expenditure (excluding debt amortization) is The Budget projected XAF 838 billion (15.4 percent of GDP) projected at XAF 1,176 billion (21.7 percent of GDP) against as total revenue (excluding grants) against XAF 1,010 billion XAF 1,221 billion in 2020, a 3.7 percent drop. There seems in 2020, a 17-percentage point fall. Revenue includes oil to be no major variation in absolute terms and their revenue projected at XAF 341 billion in 2021 (a 39 percent composition between the 2020 public expenditure and fall from the XAF 560 billion of oil revenue estimated in 2021. The 2021 debt service is projected at XAF 119 billion 2020. The sharp drop in oil revenue reflects the negative (2.2 percent of GDP). effect of the COVID-19 pandemic on oil production and Chart 1.6. Chad -- Fiscal position (% of non-oil GDP), 2017-23 Chart 1.7. Chad -- Government spending (% of non-oil GDP), 2017-23 50 3.0 25 2.5 40 2.0 20 In months of next years imports 1.5 30 1.0 In percent of GDP 15 0.5 20 0.0 10 -0.5 10 -1.0 5 -1.5 0 -2.0 0 2017 2018 2019 2020 2021f 2022f 2023f 2017 2018 2019 2020 2021f 2022f 2023f Total revenues Total expenditures Capital expenditures Current expenditures Overall fiscal balance (RHS) Hydrocarbons revenues Total expenditures Wages and salaries Source: Chadian authorities and World Bank staff estimates Source: Chadian authorities and World Bank staff estimates 2 This is reflected in 2021 because of the one-year lag embedded in oil revenue tax. 16 CHAD – 2021 ECONOMIC UPDATE Box 1.1. Government Fiscal and Economic Measures in Response to the COVID-19 Crisis • Temporary provision of water and electricity to the most • Simplification of import processes for selected food and vulnerable populations, free of charge, while ensuring a other necessities, as well as medical products and equipment system of transfers to compensate for the induced deficits purchased to fight the COVID-19 pandemic, and these items’ of the utility companies. For water, the measure was to be exemption from customs duties and taxes. applied for six months starting in April; for electricity, the defined period was three months. • Payment of XAF 110 billion in domestic arrears owed to suppliers, in accordance with a repayment plan adopted by • Replenishment of the national food distribution program the government in January 2020. (Office National de Sécurité Alimentaire, ONASA) in the amount of XAF 25 billion. • Establishment of a Youth Entrepreneurship Fund in partnership with local commercial banks in the amount of • Payment of death benefits due to deceased civil and military XAF 30 billion. agents, indemnities owed to retirees, and medical expenses for civilian agents and defense and security forces in the • Hiring of 1,652 additional health workers, particularly in rural amount of XAF 5 billion. and vulnerable areas. • Reduction by 50 percent of the business license tax (patente) • Establishment of a solidarity fund for the most vulnerable and the presumptive income tax for small entities (impôt population, amounting to XAF 100 billion. général liberatoire) for 2020. • Deferral of all tax verifications by the Department of Taxation for three months. Source: The Ministry of Finance and Budget communicated these items in Circular n°004/PR/MFB/2020 1.1.3. CURRENT ACCOUNT DEFICIT Before the COVID-19 pandemic, Chad’s current account deficit, which had worsened after the 2014-15 crisis, was HAS WIDENED slowly narrowing down. Real exports grew by 6.0 percent in 2019, outpacing import growth of 4.0 percent. Chadian Driven by the trade balance, the current account oil prices rose from US$49.4/barrel (bbl) in 2017 to US$61/ deficit widened in 2020. In nominal terms, total exports bbl in 2019, while oil production increased by 11 million decreased by 21.4 percent in 2020 due to the impact of barrels as a result of investments in enhanced recovery COVID-19 on global demand, the oil price shock, and and production additions. Imports continued to grow border closures. Total imports did not adjust in the same mainly due to investments in the oil and cotton production proportion, increasing by 0.2 percent. Chad’s savings- sectors and to satisfy a pick-up in domestic consumption, investment balance deteriorated, and the current account as the economy continued to recover gradually. The deficit deficit (CAD) widen to 9.3 percent. was financed by significant FDI inflows, which increased from 3.0 percent of GDP in 2018 to 4.3 percent in 2019. RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 17 Chart 1.8. Chad -- Trade balance, 2017-2023 Chart 1.9. Chad & CEMAC -- Current and financial accounts, and reserves 90 0 10 6 80 -5 5 5 70 In months of next years imports 60 -10 4 In percent of GDP In percent of GDP 0 In percent of GDP 50 -15 3 40 -5 30 -20 2 20 -10 -25 1 10 0 -30 -15 0 2017 2018 2019 2020 2021f 2022f 2023f 2017 2018 2019 2020 2021f 2022f 2023f Imports (in % of GDP) Foreign direct investment Exports (in % of GDP) Current account balance Trade balance (RHS) CEMAC gross reserves in months of nest years imports RHS Source: Chadian authorities and World Bank staff estimates Source: Chadian authorities and World Bank staff estimates The current account deficit is projected to decrease slightly in 2021-24, with oil exports picking up. The 1.1.4. RELAXATION OF MONETARY POLICIES TO Covid-19 impact is expected to lessen in 2021, with a MITIGATE THE IMPACT OF COVID-19 rebound of exports and imports by 13.1 percent and 5.5 percent, respectively, and a narrowing of the CAD to 5.9 The regional Bank of Central African States (BEAC) has percent of GDP. Budget support from donors will provide a relaxed its monetary stance by cutting interest rates to reliable source of financing as FDI inflows will slow down cushion the pandemic’s impact. Since March 2020, the due to global growth contraction. BEAC has been injecting liquidity into the banking system by buying public securities issued on the secondary CEMAC has progressively managed to rebuild its regional market and has lowered the policy rate to 3.25 percent in external reserves, but they remained below 5 months March 2020 and then to 2.70 percent in July 2020. This was of imports in 2020. CEMAC regional external reserves are a departure from the regional monetary policy tightening projected to broadly stabilize after their sharp decline in 2017-19 to support regional reserve accumulation. The in 2020 Q3 at the equivalent of 3.5 months of imports at relaxation of the monetary policy led the change in the the end-2020, well below the pre-COVID projections. With real exchange rate to contract by 1 percent in 2020, from 3.9 oil prices lower than pre-COVID over the medium term, percent in 2019. Inflation has significantly increased from reserves are projected to be rebuilt at a slower pace but -1.0 in 2019 to 3.5 in 2020 and is expected to remain around should not reach the equivalent of 5 months of imports 3.0 in 2021-23, Chart 1.10. The consumer price index (CPI) by 2025. There is a large external financing need for the decreased by 1.3 percent in December 2020 (compared to CEMAC region as a whole (US$7.9 billion over 2021-23). November) due to the decline in the price level of food Chad accounted for about 10 percent of the BEAC foreign products and non-alcoholic drinks, furniture, household reserves in 2020. However, Chad’s reserves declined by items, routine household maintenance, and restaurant about XAF 82 billion (30 percent of its 2019 value) in 2020 hotel services. and are projected to decline in 2021 and 2022, thereby contributing negatively to the regional reserves in the coming years. 18 CHAD – 2021 ECONOMIC UPDATE Chart 1.10. Chad & CEMAC – Inflation dynamic 2017-2023 Chart 1.11. Monthly CPI variation by sector of production 5.0 120 4.0 115 110 3.0 105 2.0 100 1.0 95 0.0 90 85 -1.0 80 Nov-2018 Jan 2019 Mar-2019 May 2019 Jul-2018 Sep 2019 Nov-2019 Jan 2020 Mar 2020 May 2020 Jul 2020 Sep 2020 Nov 2020 -2.0 2017 2018 2019 2020 2021f 2022f 2023f Chad CPI Inflation CEMAC CPI Inflation Primary sector Secondary sector Tertiary sector Source: Chadian authorities and World Bank staff estimates Source: Chadian authorities and World Bank staff estimates Although there has been a sharp increase in the issuance CEMAC (Chad could obtain up to 1/5 of this amount). The of long-term securities in the BEAC debt market in Q2- subscription period was scheduled from December 21-29, 2020, Chad has kept its preference for short-term bonds. 2020. Bonds issued by BDEAC bear interest at 5.45 percent. The COVID-19 pandemic has prompted CEMAC countries to The term of the loan is seven years, at the rate of XAF raise XAF 849.5 billion on the BEAC debt market in Q2-2020, 10,000, the nominal value of a security. As of January 5th, with long-term securities accounting for 53.6 percent of 2021, the BDEAC had raised nearly XAF 107 billion for the overall issuance. However, unlike its CEMAC counterparts, whole of CEMAC. Chad approached the market more cautiously by issuing 26-week bonds for a total value of XAF 125.9 billion in Q2- COVID-19–related shocks significantly reduced 2020. The weighted average of interest rates for the 26- commercial activities and led to a decline in banking week bonds issued by adjudication range from 5.75 to sector activities and performance. Credit to the economy 6.10 percent. declined by 0.8 percent. The 2020 budget allocated XAF 3 billion to recapitalize one of the two banks and XAF 9 The Central African States Development Bank (BDEAC) billion to repay outstanding credit to both. The ability launched a bond loan operation for Chad. This operation of the remaining banks (four subsidiaries of global and called for public savings on the CEMAC financial market. regional banking groups and one local bank) to absorb This involves mobilizing XAF 100 billion per year for three losses will be contingent on shareholders’ ability and years from households, private or public companies, and willingness to support their continuity and inject capital. institutional investors to finance integrative projects in RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 19 1.2. RISKS ASSOCIATED WITH THE OUTLOOK Chad’s projected 2021-23 economic growth, fiscal and remains active. Conflicts have also resumed in Central external balances, and its financial sector’s soundness Africa Republique. In addition, social tension is building are vulnerable to several downside risks. These up as the country enters two important election contexts: risks include unfavorable weather conditions: debt is The Presidential election in April 2021 and the legislative unsustainable, worsening of the security situation, a elections in October 2021. These situations could induce COVID-19 outbreak, and prolonged border closures and economic disruption, stretch the government budget and confinement measures. favor the arrival of more refugees from neighboring countries. Delay in Debt restructuring could jeopardize its sustainability, exacerbate liquidity constraint, and A major wave of the COVID-19 pandemic related to the lead to disorderly fiscal consolidation. In January 2021, new COVID-19 variants could lead to longer and more the Government requested a debt restructuring with constraining containment measures. Many African its creditors under the G20 common framework. A draft countries are currently experiencing a new wave of preliminary DSA is being finalized as a critical input of the COVID-19, which seems more severe than the previous creditor’s committee meeting on Chad which is expected waves. This wave is arriving in the context of COVID-19 to take place in the second half of March. Successful debt fatigue within the population. If this were to happen for restructuring both from bilateral and commercial creditors Chad, it would lead to longer and severe is a necessary condition for significant donors’ engagement economic disruption. to close the substantial financing gap. Failure to complete this restructuring in the next six months would delay Under a downside scenario, the recovery will be sluggish. donors’ commitment to budget support and could lead to The economy would not grow at all in 2021. The economy the building-up of domestic arrears and substantial cuts would recover in 2022 thanks to the vaccine rollout in critical social spending at a time where they are more and the end of the electoral cycle. The fiscal deficit will than needed to mitigate the impact of Covid-19 on poverty. widen significantly, creating a significant financing gap. A subsequent rise in arrears accumulation will heighten Unfavorable weather conditions could hamper vulnerabilities in the banking sector. Export growth will agriculture production. Chad’s agriculture tremendously decline faster than import growth, causing a substantial depends on good weather. Like any Sahel country, a increase in current account deficits. short raining season and water scarcity are the weather’s main characteristics. Although the rainy season was Intense socio-political tension following the passing good in 2020, in recent years, the rainy season has been away of president Deby could cloud economic growth shorter than expected, and rainfall irregular or falling at prospects in 2021. The military took over power in inappropriate timing in the crops cycle. This could hamper Ndjamena on April 20 following President Deby’s passing. agriculture production, increase poverty, and ultimately, The President was wounded while leading his army economic growth. against a rebellion in the Kanem region. He subsequently passed away only one day after he was declared winner Persistent regional insecurity and electoral cycle tension of the April 11 presidential election. This extraordinary could disrupt bilateral trade and stretch government circumstance adds to pre-election socio-political tensions finances. Insecurity has been on the rise in the Sahel to create high uncertainty that could cloud economic countries, with an increasing number of fatalities. The growth prospects in 2021. ongoing conflict with Boko Haram in the Lake region 20 CHAD – 2021 ECONOMIC UPDATE 1.3. POVERTY AND SOCIO-ECONOMIC IMPACT OF COVID-19 1.3.1. COVID-19 DAMPENED CHAD’S percent), personal services (17 percent), and retail trade (15.7 percent), which are the main source of Chadian HOUSEHOLD INCOME AND REVERSED GAIN IN households’ income, as shown above. In Chad, many POVERTY REDUCTION informal workers are day laborers with highly uncertain income streams. The pandemic has also contributed to The Covid-19 pandemic has negatively impacted declining remittances, with 57 percent and 61 percent of household income. Data from a high-frequency phone transfer receivers reporting a decline in the amount and survey (HFPS) implemented in July-August to better the frequency of transfers, respectively. monitor the pandemic’s effects on the Chadian population show that seven out of ten households experienced a The decline in household income due to the Covid-19 decline in their total income since the outbreak (Chart caused the headcount poverty rate to rise by 5.5 1.13). The pandemic and the collapse of global oil prices percentage points (Chart 1.15) in 2020. This increase have contributed to a recession, which has primarily reflects 0.85 million people falling below the poverty affected households with members working in the rural line due to the cumulative effect of the loss of income, agricultural sector (48 percent) and the urban informal the decline in remittances, and the increase in prices sector, including trade (18 percent), services (6 percent), associated with the pandemic. Household consumption and transportation (7 percent). In fact, almost 17 percent of has dropped by an average of 10 percent nationally and by respondents who did not work during the last 7 days had more than 20 percent in N’Djamena, increasing the poverty a job before Covid-19, with 20 percent of them stopping rate in the capital by 11 percent. Moreover, the intensity working because of the pandemic, and 34 percent of female of poverty among the poorest households has increased, heads of household have stopped working, compared to and many households in the intermediate decile of the 18 percent of male heads of household. According to Chart distribution of consumption fell in poverty (Chart 1.16). 1.14, job loss affects mostly the sectors of agriculture (17 Box 1. 2. Household Income Agriculture, including livestock, is the primary source of income of households in Chad. The sector represents 54.3 percent of household total income, with 48.8 percent for agriculture and 5.5 percent for livestock. In rural areas, the share of agriculture’s income in household income is 65.1 percent, close to the sub-Saharan African average of 68 percent of rural income. However, agriculture’s contribution to rural income is much higher for the bottom 40 percent of the consumption distribution, 71 percent of the total income against 61 percent for the top 60 percent of the consumption distribution. The family enterprise is the second main source of household income, with nearly 25 percent of the total income coming from this source. The sector covers transport, retail trade, personal services, construction and contributes to almost 40 percent of the total income urban households against 20 percent for rural households. Source: World Bank staff RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 21 Chart 1.12. Impact of Covid-19 on Households’ total income Chart 1.13. Sector of activity of employed respondent who lose their job since the outbreak 100 60 80 50 48.4 40 72.9 76.5 72.4 73.1 60 30 18.7 20 17.1 15.7 17.6 40 13 13.1 7.1 10.1 10 6.7 5.8 6 6.2 5.5 4.6 2.1 0.6 1.8 20 24 17.3 16.5 17.2 0 Agriculture Transport Commerce Personal services Construction Education Health Administration Other 3.1 6.3 11.1 9.7 0 Ndjamena Other urban Rural Chad Increased Stay the same Decreased May-June July-August Source: World Bank staff calculation using data from HFPS (July-August 2020) Source: World Bank staff calculation using data from HFPS (July-August 2020) Chart 1.14. Impact of Covid-19 on consumption and poverty Chart 1.15. Distribution of the increase in the poor population caused by COVID-19 15.0 100 11.0 10.0 7.4 4.5 5.5 80 5.0 0.0 60 -5.0 -6.1 -10.0 40 -10.2 -15.0 -15.6 20 -20.0 -22.7 -25.0 Ndjamena Other urban Rural National 0 D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 Change in Consumption Change in Poverty Structurally poor New poor Structurally rich Source: World Bank staff calculation using data from ECOSIT 4 and HFPS (2020) Source: World Bank staff calculation using data from ECOSIT 4 and HFPS (2020) 22 CHAD – 2021 ECONOMIC UPDATE The effect of the pandemic on consumption and poverty to their lack of job security and limited savings. In 2018, depends on the transmission channel (Table 1.2). The remittances averaged XAF 37,122 for non-poor households decline in labor income alone caused the poverty rate and XAF 14,516 for poor households. While they represent a to increase by 4.4 percentage points. Two-thirds of the mere 5 percent of the income of poor households in Chad, newly poor live in rural areas, where households have the decline in remittances has led to a 1.4 percent decline experienced a 4 percent decline in total consumption. in total consumption and a 0.8 increase in the poverty The loss of household income has been especially rate. The third channel of transmission of the impact of significant in N’Djamena, where the poverty rate rose by Covid-19 is the market disruption. Government measures 9.6 percentage points as 0.14 million people fell below the to limit the spread of the virus have led to shortages of poverty line. Many vulnerable households in the capital essential goods and contributed to the increase in prices, city earn their livelihood from the informal sector, which negatively impacting poor and vulnerable households. has been disproportionately affected by the pandemic. This factor alone resulted in a 0.65 percentage point Informal workers are especially vulnerable to poverty due increase in the poverty rate. Table 1.2. Simulated Impact of COVID-19 at the Household Level Percentage Change Percentage Change Nominal Increase in the in Consumption in Poverty Poor Population Impact of decline in household income Ndjamena -18.9 9.63 143,321 Other urban -10.1 4.89 112,134 Rural -4.2 3.76 440,739 Chad -7.3 4.41 683,690 Impact of decline in domestic remittances Ndjamena -2.31 1.14 16,966 Other urban -3.94 2.66 60,997 Rural -0.32 0.48 56,265 Chad -1.37 0.88 136,428 Impact of consumer price inflation Ndjamena N/A 0.23 3,423 Other urban N/A 0.43 9,860 Rural N/A 0.74 86,741 Chad N/A 0.65 100,771 Response for households to the combine impact of decline in income, reduction in remittances and increase in prices Ndjamena -22.7 11.00 163,710 Other urban -15.6 7.40 169,691 Rural -6.1 4.50 527,480 National -10.2 5.48 849,574 Source: World Bank staff calculation using data from ECOSIT 4 RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 23 The Covid-19 pandemic will cause an increase in The adverse effects of the COVID-19 crisis on the poor inequality. Data from the first round (May-June 2020) are expected to last for several years. The international and the third round (January-February 2021) of the HFPS poverty rate is projected to increase to 42.5 percent by show that during the six months period, the share of 2023 that is a 0.8 percentage point increase compared households from the lowest quintile which lost a part to 2020. Indeed, the absence/weakness of redistribution of their total income increased by 10 percentage point programs or structural economic transformation limits against a 3 percentage points increase for households the space for poverty reduction. In particular, poor/ in the highest quintile. This decline in households’ total vulnerable households who earn a part of their livelihood income is partly due to a reduction in the frequency and from transfers and family enterprises that have been amount of remittances, particularly for households in closed because of the pandemic are at risk of remaining/ the poorest quintile. As a result, the disparity in incomes falling into poverty. between the rich and poor households will continue to widen, and therefore inequality will increase. Box 1.3. Definition of Shocks in the HFPS During the HFPS, respondents were asked the following question: “Has your household been negatively affected by one of the following issues since the beginning of the COVID-19 pandemic?”. The following list of idiosyncratic and covariate shocks was created to allow the data from the HFPS to be compared with the data from the ECOSIT 4 survey discussed in the section above. Table 1. 3. Types of Covariate and Idiosyncratic Shocks in the HFPS Idiosyncratic Shocks Covariate Shocks Demographic Death or disability of an active adult Natural Locusts or other pests household member Death of an individual who sends money to the household Illness of an income earner in the household Economic Loss of an important acquaintance Economic Important output price drop Loss of wage employment High input prices Bankruptcy of nonfarm enterprise High food prices Theft of money, assets, production, or other goods Bad harvest owing to lack of labor Source: World Bank staff 24 CHAD – 2021 ECONOMIC UPDATE 1.3.2. COVID-19 INCREASED HOUSEHOLD Meanwhile, urban residents have been more affected by economic idiosyncratic shocks (39 percent) than rural VULNERABILITY TO SHOCKS residents (25 percent). These shocks are likely due to lockdown measures implemented by the government The pandemic has increased the rate of economic since March 19, 2020, to contain the spread of COVID-19. covariate shocks compared to the pre-Covid-19 period, particularly in rural areas. Between 2014 and 2017, nearly Economic covariate shocks have had a significant impact 90 percent of the households had experienced a shock, on female-headed and poor households. Although the with rural residents being slightly more exposed than outbreak does not appear to have had differentiated effects their urban counterparts (89 percent versus 86 percent). on the likelihood of exposure to most shocks across gender The share of households that have been affected by lines and households’ poverty status, economic covariate covariate and idiosyncratic shocks were 63 percent and 64 shocks have disproportionately impacted female-headed percent, respectively. But the pandemic has exacerbated and poor households. Approximately 49 percent of poor households ‘vulnerability to shock, with about 92 percent households have experienced economic covariate shocks of households reported experiencing a shock during the during the pandemic, compared to 42 percent of nonpoor pandemic, and rural households have been especially households. Similarly, 54 percent of households headed by affected. An estimated 69 percent of households have women have reported being exposed to this type of shock, been affected by covariate shocks and 45 percent by compared to 44 percent of men. Additionally, the spike idiosyncratic shocks. All covariate shocks have been in food prices has affected poor households (73 percent) economic, and rural households (75 percent) have been more than their nonpoor counterparts (66 percent). more affected than their urban counterparts (52 percent). Chart 1.16. Households coping strategies to mitigate the effects of the pandemic. Selling agricultural assets Reducing education/health expenses Taking a loan Renting/pawning land Selling durable goods Selling food stock Did nothing Buying cheap fod Selling livestock Help from family or friends Reducing consumption Using savings 0 5 10 15 20 25 30 Source: World Bank staff calculation using data from HFPS (2020) RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 25 Reducing consumption and using savings have been the main coping strategies adopted during the pandemic. 1.3.3. COVID-19 DISRUPTED SCHOOL SERVICES, Rural households have been more likely than their EXACERBATED HEALTH CARE NEED, GENDER urban counterparts to adopt negative coping strategies. GAP, AND FOOD INSECURITY Approximately 27 percent of all households have reduced their consumption and used their savings to mitigate the Amid the COVID-19 pandemic the Government adopted effects of the current crisis (Chart 1.17). Also, 14 percent of various containment measures including school closures.3 households have received help from family or friends, and Schools often constitute both learning and a safe place for 9 percent sold their livestock. There has, however, been students. Additionally, the halt of school feeding programs a clear difference in the proportions of rural and urban threatens the food security status of many children. In a households that adopted these strategies. While 43 percent country already experiencing challenges on education of urban residents used their savings, the same was true indicators, COVID-19 threatens some of the gains in the for only 22 percent of rural residents, and 30 percent of sector. As of August 2020, 132,357 children were missing out rural households reduced their consumption, much higher on meals on school meals (40 percent of girls) (WFP, 2020b). than 18 percent of urban households. Moreover, a greater An e-learning platform available for secondary school share of rural households (11 percent) sold their livestock children was set up in April and televised broadcasts in than their urban peers (2 percent). This suggests that French and Arabic (UNESCO, 2020). On June 25th, schools rural households have been more likely to adopt harmful were allowed to reopen under the conditions that they coping strategies. Less than 1 percent of all households respect COVID-19 prevention measures.4 have received assistance in food or cash transfers from the government, non-governmental organizations, or School closures at the height of the COVID-19 pandemic other groups. left many students without alternative learning options at home. Two months after school closures, close to 90 Households’ ability to rely on family or friends has been percent of students were at home without engaging in diminished in the current crisis. While the ECOSIT 4 educational activities. Rural students (92 percent) were recorded that 63 percent of households relied on family or more affected by school closures, with a greater share not friends in the event of a shock, this share has plummeted engaging in any educational activities compared to their to 27 percent during the COVID-19 crisis. This is not urban peers (72 percent). Among those who were able to surprising because covariate shocks like pandemics have continue learning during school closures, the forms of a generalized impact on households and affect informal learning included home lessons with parents or private safety nets. Nevertheless, a smaller share of households teachers or classes delivered on television or radio. These has resorted to selling their livestock during the pandemic mostly benefited urban learners. There was very little (9 percent) than what was recorded in the ECOSIT 4 (17 online learning, even in urban areas. percent). The use of negative coping strategies, such as reducing consumption, can have long-term detrimental The Covid-19 will significantly impact girls’ and women’s effects on the welfare of household members, especially health conditions in general and their reproductive children. A positive observation is that female-headed health situation. The need for the Government to households have reduced their consumption at a lower reallocate public health services resources to take into rate (18 percent) than male-headed households (29 account the new Covid-related challenges in the sector percent). They have relied more on family or friends. There will probably cause disruptions to key health services for are no great differences in coping strategies that poor and women and girls, such as reproductive health services. nonpoor households have adopted. Indeed, evidence from previous health crises has shown increases in adolescent pregnancy for out-of-school girls 3 https://www.presidence.td/fr-synth-1111-Vendredi_le_20_mars_2020.html 4 https://reliefweb.int/report/chad/chad-emergency-update-external-23-june-2020 26 CHAD – 2021 ECONOMIC UPDATE and in maternal mortality due to lack of funding for these The pandemic further highlighted the precarity of the services. More recently, the reallocation of resources as food security status of households. Many households a response to the Ebola crisis in West Africa has caused experienced difficulties in satisfying their food need, a decline in the funding of women’s reproductive with more than eight out of ten households not eating health, leading to a 70 percent increase in the number healthy and nutritious food or worrying about not getting of women who died in childbirth (Smith, 2019). While enough food because of lack of money. More worrisome, digital technologies and educational radio programs one out of four households spent an entire day without during school closures link children to education services, eating, and a half of households did not have any food persisting gender inequalities in access to digital resources because of lack of money.5 This exposes children to severe in the country may hinder girls from accessing these malnutrition with a potential negative impact on their useful. In the current context of Covid-19, in July 2020, only early development and health situation. 8 percent of households having children attending school before Covid-19 continue to provide education/remote learning activity to their children, according to the results of the high-frequency survey. Chart 1.17. Share of households having difficulties experiencing difficulty to satisfy food need % Households skipping meal % Households spend entire day because of lack of money to 66.7 without eating because of lack 31.9 buy foods 66.7 of money 27.1 % Households eating the same 78.8 % Households hungry and 56.5 foods because of lack of money 77.6 did not eat because of lack of 49.6 to diversify foods money % Households have not eaten 89.4 % Households which does not 55.5 healthy and nutritious food 84.3 have any foods because of lack 53.4 of money 87.3 82.6 % Households worried about % Households eating less than not being able to get enough 87.4 they should eat because of 78.6 foods because of lack of money lack of money 0.0 50.0 100.0 0.0 50.0 100.0 May-June July-August May-June July-August Source: World Bank staff calculation using data from HFPS 5 The HFPS included a Food Insecurity Experience Scale (FIES) module in each round, capturing households’ experiences over the previous month. It should be noted that the recall period differs between ECOSIT 4 (last 12 months) and the HFPS (last 30 days). However, a comparison nevertheless provides some useful guidance on the potential impacts of the pandemic. RECENT ECONOMIC AND POVERTY DEVELOPMENTS, OUTLOOK, AND ASSOCIATED RISKS 27 In the months following the onset of the pandemic, The pandemic affected households’ ability to access poorer households were more likely to attribute food medical treatment through its impact on incomes. Across insecurity to the crisis. Two months into the containment the two rounds of the HFPS, between 80 percent and 85 measures, almost 95 percent of households in the lowest percent of households reported not being able to access wealth quintile felt that their food insecurity was due to medical treatment due to lack of money. Covid-19 itself was the crisis. This was about 25 pp higher than the percentage not a major deterrent for accessing medical treatment. In of households in the highest wealth quintile who felt May 2020, about 8 percent of households did not access the same. By July 2020, most of the poorest households medical treatment because they feared Covid-19. By July continued to attribute their food insecurity to COVID-19, 2020, no household reported that COVID-19 negatively as reported by close to 90 percent of them. But, fewer impacted their access to medical treatment. Across households in the highest wealth quintiles attributed their quintiles, households in the lower wealth quintiles were food insecurity to COVID-19, indicating that their situation more likely to attribute their inability to meet their basic improved at a marginally faster rate. health needs to Covid-19. Households in the higher wealth quintiles also felt that Covid-19 negatively affected their ability to attend to their basic health needs but not the same extent as the poorer ones. 28 CHAD – 2021 ECONOMIC UPDATE CHAD FISCAL MANAGEMENT FOR DEBT SUSTAINABILITY IN THE TIME OF COVID-19 2 29 CHAD FISCAL MANAGEMENT FOR DEBT SUSTAINABILITY IN THE TIME OF COVID-19 29 2.1. FISCAL SPACE ANALYSIS 2.1.1. STRUCTURAL LOW NON-OIL REVENUES challenges. Due to the recent shocks, the total fiscal revenue is projected to drop by 3.6 percent of GDP between THREATENED FISCAL SUSTAINABILITY 2020 and 2021, while oil revenues will decrease from 9.6 to 5.6 percent of GDP (Chart 2.2). Also, external debt is likely Chad’s total fiscal revenue is highly dependent on oil becoming unsustainable as Chad will struggle to meet its revenues and very sensitive to oil price volatility. Since debt obligations. the onset of oil production and exports in 2003, oil revenues steadily grew to become the most significant Non-oil revenue mobilization remains weak, with Chad share of total revenues, reaching almost 80 percent in having one of the lowest revenue collection rates among 2011. The total fiscal revenue to GDP ratio peaked at about its structural peers. The country could mobilize more non- 23 percent in the same year, with oil revenues contributing oil revenue by improving the personal income tax (PIT) almost 18 percent of GDP (Chart 2.1). While oil revenues and Value Added Tax (VAT). In October 2020, the Minister of are easy to mobilize, over-reliance on them constitutes a Finance officially launched an initiative to increase digital significant downside risk due to oil price volatility and their payment platforms for tax revenue collection, intending high sensitivity to global market shocks. Consequently, the to prevent losses and fraud. Although the reforms were dual COVID-19 pandemic and oil price plummeting shocks undertaken in recent years to improve non-oil revenue are projected to substantially decrease fiscal revenue collection, their implementation has been weak due to in 2021, which will very likely lead to significant liquidity Chart 2.1. Total fiscal revenues (excluding grants) and oil Chart 2.2. Revenues, 2009-20 revenues, 2009-20 25.0 150.0 25.0 20.0 20.0 100.0 15.0 Percent of GDP 15.0 US$/barrel 10.0 10.0 50.0 5.0 5.0 0.0 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(e) 2021(f) 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(e) 2021(f) Oil revenues Tax revenues Oil rev/GDP Non-tax revenues Grants TFR/GDP Brent (US$/barrel) Source: Chadian authorities and World Bank staff estimates Source: Chadian authorities and World Bank staff estimates 30 CHAD – 2021 ECONOMIC UPDATE capacity constraints and frequent civil servant strikes. does not have a functioning computerized tax system, and Therefore, such efforts are needed to overcome the not all branches and border crossing are equipped with current liquidity challenges. Moreover, Chad’s non-oil the customs tax system. This creates opportunities for revenue mobilization efforts have not been sufficient to irregular procedures. catch up with its structural peers. Between 2011 and 2020, total fiscal revenues averaged about 17.9 percent of GDP Chad has been slow in addressing the main issues while the average for other CEMAC countries stood at 20.7 that create bottlenecks to its fiscal management and percent (Chart 2.3). sustainability while strengthening its dependency on grants. Chad’s fiscal framework sustainability requires Limited effectiveness of tax policy and weak tax and urgently addressing the main fiscal challenges, which customs administration contribute to low domestic involves implementing an efficient system that is resilient revenue mobilization. The tax base is narrow and has many to shocks, non-oil revenue mobilization, more budgetary exemptions that are not properly monitored. Distortionary discipline, improved public finance management. Without taxes are the dominant source of revenue, and taxes with these efforts, the country will continue to rely on grants low collection potential still unnecessarily complicate (about 20 percent of total fiscal revenue over 2016-20) the tax system and administration. Furthermore, tax and for its fiscal revenue. So, running the risk of a potential customs administration capacity remain weak. Manual crowd-out effect of non-oil mobilization incentives. procedures are the norm since the tax administration Chart 2.3. Average total revenue/GDP ratio (2011 -2020) in Chart 2.4. Percentage change in revenues (2016 - 2020) the CEMAC region. Total rev. 30 (excl. grants) 25 Non-oil revenue 20 15 Oil revenue 10 5 Grants 0 CAR Cameroon Republic of Gabon Equatorial Chad 0 50 100 150 200 250 Congo Guinea Source: Chadian authorities and World Bank staff estimates Source: Chadian authorities and World Bank staff estimates CHAD FISCAL MANAGEMENT FOR DEBT SUSTAINABILITY IN THE TIME OF COVID-19 31 Chad’s transparency and governance management have been inconsistent and inadequate in fiscal 2.1.2. WEAK MANAGEMENT OF OIL REVENUES with fiscal sustainability goals. In recent years, the VOLATILITY HAMPERS BUDGET EXECUTION Government has implemented several measures and reforms to improve transparency and governance in fiscal The management of oil resource revenue is complex management. The latest reforms include the installation and presents numerous challenges involving oil price and operationalization of one of the four mobile scanners and production. Given the significant role of oil in GDP at the NGueli office for the inspection of containers and and government revenues, Chad has used oil revenues vehicles in October 2020; the digital platform for payment to boost procyclical spending, particularly during periods of customs duties and taxies by mobile money in October of oil price boom. In the absence of a functional fiscal 2020; public disclosure of all petroleum contracts since rule or stabilization fund, no fiscal buffers were available November 2019; quarterly publication of oil revenue when oil prices plunged at the end of 2014, which led the reports since 2018. country into recession. It’s only in November 2019 that the government adopted a revenue-smoothing mechanism In the medium term, economic diversification will to mitigate oil price volatility’s negative impact. As of be needed to create more fiscal space with non-oil February 2021, the stabilization account had received its revenue mobilization. The current liquidity challenges first three deposits, accounting for a total of XAF 10 billion; have highlighted the risks associated with Chad’s oil but this is insufficient to act as an effective buffer in the dependence and the importance of exploiting alternative face of all challenges triggered by the current crisis. opportunities for more fiscal space. Therefore, economic diversification could create more fiscal space with non- Furthermore, the weak capacity of the public oil revenue mobilization. The low non-resource revenue administration; insufficient regulation, planning, and tax collection also represents an opportunity for budgeting; and the prevalence of corruption in the public strengthening mobilization efforts while moving away sector have led to inefficient use of oil revenue and thus from the oil dependence path. Moreover, the oil revenue slowed progress toward the country’s development dividend of the 2000s did not translate into diversification objectives. Several existing gaps associated with and structural growth drivers. Hence, an efficient oil institutional capacity and inter-ministerial cooperation revenue management strategy could be a prerequisite to need to be addressed despite some recent improvements. effective economic diversification. Notwithstanding Chad’s geological potential, its mineral resources are under-explored. The opacity of the oil sector associated with the inefficient management of oil revenues are severely harming oil revenue collection and fomenting economic volatility 32 CHAD – 2021 ECONOMIC UPDATE 2.2. PUBLIC EXPENDITURE ANALYSIS 2.2.1. PUBLIC EXPENDITURE HAS BEEN and is projected to decrease public expenditure by 4.2 in 2021 (Chart 2.6). PRO-CYCLICAL DURING THE LAST DECADE The oil price shock has led to deterioration in Chad’s Public spending, especially public investment, is pro- public spending, which is now lower than its oil exporting cyclical in oil prices, thereby undermining sustainable and fragile peer. Between 2010 and 2019, public spending and resilient economic growth. The 2014/15 oil price in Chad declined from 24.4 to 13.4 percent of GDP due to shock and subsequent decrease in total revenues a significant oil revenue shortfall. Most of the adjustment depressed domestic demand by the public and private was made through a drastic reduction in public investment, sectors. Indeed, the bankruptcy of several companies and which declined from 10.0 to 4.9 percent of GDP between the postponement of public investment projects led to 2013 and 2020 (Chart 2.6). Over the past 3 years, Chad’s many layoffs in urban areas, contributing to the contraction spending averaged 16.1 percent of GDP while structural of consumption and investment between 2014 and 2016. and aspirational peers spent on average 22.6 and 30.6 The economy slowly started recovering in 2018, but the percent of GDP, respectively (Chart 2.7). Despite a sharp fall of oil price coupled with the containment measures increase in public spending due to the coronavirus crisis, to curb the spread of the COVID-19 has contracted public Chad’s public spending still lag behind its structural and and private gross fixed investment by 9.8 percent in 2020 aspirational peers6. Chart 2.5. Oil Revenue, Expenditure and real GDP 2012-20 Chart 2.6. Chad’s Public Spending 2012-21 30.0 10.0 30.0 25.0 25.0 5.0 20.0 20.0 Percent of GDP 15.0 Percent 15.0 0.0 10.0 10.0 -5.0 5.0 5.0 0.0 -10.0 0.0 2012 2013 2014 2015 2016 2017 2018 2019 2020(e) 2012 2013 2014 2015 2016 2017 2018 2019 2020(e) 2021(f) Oil revenues Expenditures Current expenditures Investment Real GDP growth Source: Chadian authorities and World Bank staff estimates Source: Chadian authorities and World Bank staff estimates 6 Chad’s structural peers include DRC and South Sudan, while aspirational peers include Cameroon, Colombia, Kazakhstan, Angola, Suriname, Algeria, Republic of Congo, Azerbaijan, Ecuador, Iraq, Timor-Leste, and Nigeria. CHAD FISCAL MANAGEMENT FOR DEBT SUSTAINABILITY IN THE TIME OF COVID-19 33 Chart 2.7. Public spending in 2020 and in the Chart 2.8. Source of financing of Public investment past 3 years (average) 35.0 32.5 2021(f) 30.6 2020(e) 30.0 2019 25.0 22.6 22.9 2018 21.1 2017 20.0 Percent of GDP 16.1 2016 15.0 2015 2014 10.0 2013 5.0 2012 0.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 Chad Structural Peers Aspirational Peers Percent of GDP 2020-23 2020 Domestic Financed Externally Financed Source: Chadian authorities and World Bank staff estimates Source: Chadian authorities and World Bank staff estimates The recent crisis also exacerbated Chad’s dependency about half of current expenditures between 2014 and on external support to finance investment projects. As 2020. In 2021, wages’ weight in total spending is projected the coronavirus pandemic and subsequent fall of oil price to be maintained at a constant level of 36 percent of total severely have negatively impacted domestic resources, expenditure relative to 2020, while wages share in current public investment will strongly rely on external financing. expenditure will slightly increase to 54 percent. Indeed, in 2020, about 65 percent of total investment was financed by external support, while in 2021 it is projected Goods and services expenditure dropped from 2.1 in to account for 59.0 percent of capital spending (21 percent 2014 to 1.3 percent of GDP in 2019, then increased to 1.9 of total spending in 2020 and 2021) (Chart 2.8). in 2020, raising sustainability concerns. Despite the high pressure for COVID-19-related health service delivery in 2.2.2. COMPOSITION OF PUBLIC EXPENDITURE 2020, public spending on goods and services represented AND SOURCE OF FISCAL PRESSURE only 9.0 percent of total spending. This figure is projected to drop to 8.5 percent in 2021. Spending patterns in goods and services seem linked to increasing insecurity, Budget allocation increasingly dominated by current and as witnessed by the peak at 2.1 percent of GDP in 2014 to security spending recruit militaries and a subsequent decrease to 1.4 percent of GDP in 2015. Since 2014, wages have rapidly increased to become the main component of public spending, first due to Interest payments also rapidly increased due to the increasing security demands, and more recently, to build-up of debt stock. As the external debt stock almost higher pressure from the health sector. Wages expanded doubled (from 10.3 to 26.5 percent of GDP) between 2014 from 5.0 to 7.5 percent of GDP between 2014 and 2020. It and 2020, interest payments on external debt expanded has become the main component of spending, accounting from 0.3 to 0.6 percent of GDP in the same period. They for about 36 percent of total spending in 2020 (compared accounted for 3.3 percent of total expenses in 2020, to 23 percent in 2014). Also, wages have accounted for compared to only 1.4 percent in 2014. 34 CHAD – 2021 ECONOMIC UPDATE Chart 2.9. Budget Allocation by sector as percentage of Total Budget Social protection Defense Economic affairs Finances and budget Public security Petrole and Energy Transport, infrastructure Private Sector Agriculture Health Education 0.0 5.0 10.0 15.0 20.0 25.0 30.0 2020 2019 Source: Chadian authorities and World Bank staff estimates As security is critical for the Sahelian region, Chad of external financing, accounting for 4.4 percent of GDP. dedicates an important share of total spending to In 2021, external financing is projected to account for 63 defense, although the trend has decreased over the past percent of public investment or 4.0 percent of GDP. With years. Over the past 10 years, Chad military’s expenditure increasing pressure for investing in key sectors such as climbed from 23.9 percent of total spending in 2007, peaked health and the slow recovery of oil price, foreign financing at 33 percent in 2009, to gradually decrease to 11.4 percent needs will become more and more pressing. in 2019 and then 10.8 percent in 2020. Nevertheless, the cost of security is mainly financed by domestic resources, Over the past couple of years, the overall budget creating a significant economic cost for Chad as those allocation for public investment was concentrated in resources are not allocated to social sectors, which would transport and infrastructure, agriculture and health, allow the country to unleash its growth potential. Corse with social sectors investment mainly dependent on social spending (education, health, and social protection) external financing. In 2019 the share of public investment accounted for about 17.8 percent in 2019 and 20.1 percent in the total budget allocated to the Ministry of transport in 2020. and infrastructure and to the Ministries of Agriculture and Livestock were respectively 5.3 and 5.9 percent. Whereas, Public investment is procyclical, inefficient, and mainly the budget share of public investment in the main social funded by donors sectors, education, health and social protection averaged 1 percent. However, in terms of investment composition, Chad’s public investment spending and transfers strongly social protection, agriculture, health and education rely on external financing. In 2020, public investment has were mostly externally financed for around 92 percent, increased to 6.8 percent of GDP from its 2019 value of 75 percent, 64 percent and 63 percent of each sector 4.3 percent of GDP. It will fairly remain stable in 2021 at public investment respectively, while external financing 6.4 percent of GDP. However, unlike in 2019 where about accounted for 46 percent of investment in transport half of these investments was externally financed, the and infrastructure. 2020 public investment has mobilized about 65 percent CHAD FISCAL MANAGEMENT FOR DEBT SUSTAINABILITY IN THE TIME OF COVID-19 35 Chart 2.10. Budget Allocation for public Investment Chart 2.11. Investment financed by external sources by sector by sector Social protection 2020 Defense Economic affairs Finances and budget Public security 2019 Petrole and Energy Transport, infrastructure 0.0 5.0 10.0 15.0 20.0 Private Sector Percent of budget Agriculture Education Health Health Agriculture Private Sector Transport, infrastructure Petrole and Energy Education Public security Finances and budget 0.0 20.0 40.0 60.0 80.0 100.0 Economic affairs Defense Percent of investment Social protection 2020 2019 Source: Chadian authorities and World Bank staff estimates Source: Chadian authorities and World Bank staff estimates In 2020 also, an important share of the budget has percent, respectively. Chad dedicated about 1.1 percent of been allocation to public investment in the Ministry of its budget allocation to Social protection in 2020. However, transport and infrastructure and to the Ministries of spending on education remains concentrated on wages Agriculture and Livestock, for 4.2 percent and 7.2 percent and significantly lower than its peers (2.4 percent of GDP respectively. Each of these two sectors mainly relied on for Chad compared to 3.9 percent of GDP for aspirational external financing, which accounted for respectively 52 peers). As a result, Chad is lagging regarding education percent and 80 percent of sector investment. The demand and health outcomes. Thus, it is essential to rethink the for more investment in the health sector is evidenced by current allocation of public resources to increase spending the sharp increase in the share of health sector investment in social sectors. The overall public finance management in the budget from 1.5 percent to 5.0 percent between (PFM) systems (budget preparation, execution, and control) 2019 to 2020. The need for external funding in the health remain weak, contributing to poor budget execution sector investment also grew considerably 64.3 percent in aggravating inefficiencies of public spending. 2019 to 85.3 percent in 2020. Other social sectors did not experience any change in their budget allocation Public spending cuts have constrained investment. for investment. Public investment spending remains insufficient and dependent on external financing, creating significant Despite recent improvement, significant efforts still need infrastructure gaps and poor outcomes in health and to be made regarding technical and allocative efficiency education, particularly in rural areas. Furthermore, Chad of public spending. Spending on social sectors is among will need more investment in electricity, water, and the lowest, while security spending ranks among the telecommunication as they are key ingredients of any steps highest compared to oil and fragile peer countries. In 2020, in the industrialization and modernization of its economy. resources allocated to the Ministry of Defense accounted Therefore, substantial reforms of the public investment for 10.8 percent of the total budget, while allocations to system are needed, including planning, budgeting, the Ministries of Health and Education represented 9.5 and implementation. 36 CHAD – 2021 ECONOMIC UPDATE Financing a significant fiscal deficit is the main challenge for the most vulnerable victims of disasters has been to the 2021 budget. created, with a total allocation of XAF 100 billion. These reforms strengthen reforms adopted since 2017, such as Chad faces liquidity challenges in the first half of 2021 the law to design and implement a mechanism to smooth as the main oil taxes will be paid in May-June 2021. the volatility of oil revenue enacted in November 2019. Moreover, the government exhausted the oil revenue of Moreover, budget documents such as annual and quarterly 2020 to mitigate the impact of COVID-19 on the population. budget execution reports are not audited and published These liquidity challenges have already been illustrated promptly. This creates significant challenges in terms of by the growth of new payment arrears, leading to a civil the quality and timeliness of these reports. Besides, given servants’ general strike that began on January 11th – which the extremely summarized nature of the reports, their was temporarily suspended until February 28th following usefulness is minimal. religious leaders’ mediation – to ask the Government to honor its commitments to pay suspended wage benefits. It also increased its digital payment platforms for Substantial fiscal financing requirements should be met. revenue collection, intending to prevent losses and The 2021 unidentified financing requirement is projected frauds. In partnership with Airtel Money, the Government at XAF 70 billion (1.1 percent of GDP). Chad plans to finance is increasing its digital payment offices by three folds from this by issuing about XAF 45 billion in treasury bonds on six to 18 offices by the end of this year. The Minister of the CEMAC market (65 percent of the need) and to garner Finance officially launched this initiative on October 21st, the remaining from debt restructuring. 2020. Taxpayers would now pay their customs duties and taxes via the Airtel Money service. This innovation will also The Government recently took action to improve prevent the physical transportation of tax revenue from governance and transparency of public finance. The one locality to another and help save tax recipes and Chamber of Accounts validated a new strategic plan for tax collectors’ lives. This digitalization will be accounted communication in September 2020, aiming to improve for in 2021. Digitalization will modernize the government the High Institution for Public Finance Control (ISC) payment system, reduce revenue losses, and improve visibility and performance. A National Solidarity Fund financial inclusion. CHAD FISCAL MANAGEMENT FOR DEBT SUSTAINABILITY IN THE TIME OF COVID-19 37 2.3. SIGNIFICANT DEBT SERVICE THREATENS DEBT SUSTAINABILITY Chad’s public and publicly guaranteed (PPG) external (DSSI), which benefitted Chad with US$13 million in debt debt consists of a broadly equal share of multilateral, service relief in 2020 with an additional US$8.4 million bilateral, and commercial debt. In 2020-21, external debt available in the first half of 2021. was dominated by commercial debt, mostly owed to Glencore, followed by multilateral and official bilateral, the A debt restructuring will be needed as Chad’s debt service bulk of which is owed to non-Paris club official creditors, needs cannot be realistically filled by external financing notably China and Libya, see Chart 2. 13. and the regional financial market. Chad’s debt service- to-revenue ratio rises above 14 percent starting in 2021 Public debt reached 47.6 percent of GDP in 2020, of which due to lower revenue and associated higher borrowing 29.7 percent of GDP is external. Following a sustained in response to the pandemic. However, it stays below decline from 49.8 percent of GDP in 2017 to 44.4 percent in 18 percent, the target level for the 2018 Glencore debt 2019, it rebounds back in 2020 at 47.3 percent (see Chart 2. renegotiation. The ratio is not expected to drop below its 14), mainly due to new loans from the IMF and a drop in threshold of 14 percent until 2027 when the Glencore debt nominal GDP. Although public debt will remain at around matures. This highlights the importance that discussions 47 percent of GDP in 2021-22, difficulties paying debt around the implementation of the Common Framework service led the country in debt distress, despite Chad’s would address debt treatment parameters and creditors’ participation in the Debt Service Suspension Initiative commitment to providing sound financing packages. 4+14+6841542D Chart 2.12. Composition of external debt 2020 Chart 2.13. Debt Service (percentage of total revenue) ADB 25 IMF Commercial 4% 20 14% IDA 15 6% 42% 10 8% Other Mult. 4% 5 8% France 5% 8% 1% 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 China Other Bil. Most Extreme schock 1 Threshold India Libya Baseline Historical scenario Source: Public debt statistics bulletin Q1, October 2020 Sources: Chadian authorities, selected creditors, and World Bank and IMF staff estimates 38 CHAD – 2021 ECONOMIC UPDATE Box 2.1. Debt Restructuring under the G20 Common Framework The Common Framework is an agreement between the G20 creditors with claims on a debtor country will participate in the and Paris Club creditors. It aims to address sovereign debt debt treatment of that country. All G20 and Paris Club creditors with challenges and ensure broad participation of creditors with fair claims on the debtor country, as well as any other willing official burden sharing. It facilitates coordination of debt treatments bilateral creditor with claims on the country, will coordinate their tailored to the specific situation of the debtor country. It requires engagement with the debtor country and finalize jointly the key that participating debtor countries seek treatment on comparable parameters of the debt treatment, consistent with their national or better terms from other creditors, including the private sector. laws and internal procedures. The joint creditors negotiation shall The participation of the private sector ensures fairer burden be held in an open and transparent manner and before finalization sharing and is essential to unlock support for deeper debt relief of the key parameters, due consideration shall be given to the by bilateral official creditors. The coordination of debt treatments specific concerns, if any, of all participant creditors and the by official and private creditors through the framework will enable debtor country. more comprehensive and timely debt resolutions. The key parameters will include at least: i) the changes The process is initiated at the request of a debtor country. in nominal debt service over the next ten-year period; ii) The need for debt treatment, and the restructuring envelope that the debt reduction in net present value terms; and iii) the is required, will be based on a joint WB-IMF Debt Sustainability extension of the duration of the treated claims. In principle, Analysis (DSA) and the participating official creditors’ collective debt treatments will not be conducted in the form of debt write- assessment. Debt eligible to the treatment will include all public off or cancellation. If, in the most difficult cases, debt write-off or and publicly guaranteed debts which have an original maturity cancellation is considered necessary and the participating official of more than one year. The debtor country requesting a debt creditors’ collective assessment, specific consideration will be treatment will provide to the IMF, the WBG as well as creditors given to the fact that each participating creditor shall fulfill its participating in the debt treatment, the necessary information domestic approval procedures in a timely manner while keeping regarding all public sector financial commitments (debt), while other creditors informed of progress. respecting commercially sensitive information. All official bilateral Source: Statement -- Extraordinary G20 Finance Ministers and Central Bank Governors’ Meeting November 13, 2020 CHAD FISCAL MANAGEMENT FOR DEBT SUSTAINABILITY IN THE TIME OF COVID-19 39 Chad has benefitted from several debt restructuring to regional peers; yet, it does not fully reflect actual risks, in recent years. Debt stock was reduced in 2015 in the as creditors (two-thirds domestic banks and one-third of context of the HIPC Completion Point and a total nominal Cameroon’s banks) have to roll over their existing holdings debt service relief of US$1,024 million in total HIPC and at a price determined by the Treasury. MDRI Assistance. In late 2015, the authorities signed a rescheduling agreement with Glencore to consolidate the The Government took action to improve debt oil sale advances and extend their maturities. However, transparency in 2020. The April 2020 WB’s Debt Reporting while the rescheduling agreement provided some flow heatmap showed a very poor performance under all relief, it led to an increase in the present value of the debt. dimensions of debt management and transparency. Since In February 2018, the authorities reached an agreement in then, the Chadian public finances observatory (OTFiP) principle with Glencore for a deeper restructuring which published the public debt bulletin for the first trimester of helped to improve debt sustainability temporarily. 2020 in October, for the first time since 2016. The continued publication of debt bulletins will significantly improve In January 2021, Chad authorities requested from its debt transparency. creditors a debt restructuring under the G20 common framework; as such, Chad became the first country to However, weaknesses remain in debt transparency and do so. The Creditor committee is expected to take place management. First, due to weak governance and capacity, in April. The restructuring process is expected to be fully debt-management decisions are heavily influenced by completed in the coming months with the participation of political considerations. Second, several ministries are all bilateral and commercial creditors. involved in the management of Chad’s public debt. Weak coordination between them undermines the Government’s The Government is looking into reprofiling domestic debt ability to manage its debt portfolio effectively. Third, with the support of the BEAC. Chad has discontinued the capacity is very limited, and the operational debt issuance of bonds since 2018, given the lack of demand management framework is poor, resulting in technical for securities with a maturity longer than 1 year, and has delays in servicing the debt or providing accurate data focused on the roll-over of the existing stock of T-bills. The to stakeholders. current yield on T-bills (6.5 percent p.a.) is high compared 40 CHAD – 2021 ECONOMIC UPDATE 2.4. ASSESSMENT OF THE PUBLIC FINANCE MANAGEMENT SYSTEM 2.4.1. WEAK CONNECTION BETWEEN PLANNING institutions to move towards relative autonomy at a level required for the accountability of decision-makers. In AND BUDGETING IS A SOURCE OF INEFFICIENCY other words, it is difficult to hold managers or decision- makers accountable for their performance/results when Chad’s budget planning process has been inefficient, they have no control over a large part of their resources. with an inadequate connection between planning and budgeting. This is partly due to low compliance with Budget formulation is limited to administrative and budgetary rules and procedures, which presents risks economic classifications. In 2016, the Government to the sustainability of the fiscal framework. Moreover, implemented the CEMAC directive related to the budgetary there are significant delays in the budget preparation at nomenclature. Under this directive, Chad committed to the various ministries. The letter outlining the framework adopting the mandatory classification by nature and for budget preparation often reaches the ministries source of financing for revenue and administrative, in September or October. With such short notice, the economic, programmatic, functional, and by the source different departments don’t always have enough time to of funding for expenditures. However, in practice, budget prepare their budget and negotiate the proposed amount. formulation, execution, and presentation are still limited There are also substantial delays with the availability of to administrative and economic classifications, with very the credit lines once the budget is approved, as they may few reports being extracted. This impedes any optimal be available in March or April at the earliest. Hence, some analysis of resource allocations at the strategic level. public institutions will rely on donors’ funding during the months where the budget is unavailability. 2.4.2. PUBLIC FINANCIAL MANAGEMENT Forward estimates of fiscal aggregate are prepared for CHARACTERIZED BY POOR BUDGET EXECUTION some ministries, but they are not used in annual budget WEAK EXPENDITURE CONTROLS formulation. Line ministries are required to submit their revenue and expenditures forecasts to allow the Ministry Inconsistencies across budget data represent a serious of Finance and Budget to prepare the overall medium- constraint to measure budget execution performance term expenditure framework. However, given that the and shed light on inefficiencies associated with budget budget preparation and discussions focus on the fiscal reporting. As the 2017 PEFA report pointed out, the and macroeconomic for next year and no discussions on Circuit Intégré de la Dépense (CID) does not include all the N + 2 and N + 3 envelopes occur, budget envelopes for effective spending as a large part is executed by extra- N+2 and N+3 are provided for information only. budgetary funds. For instance, the CID does not include externally financed spending. In addition, the budget The lack of fiscal decentralization undermines the allocation reported by the CID does not match with the autonomy and accountability of the different ministries. budget allocation in the Finance Law. Over the 2013-2018 The Minister of Finance is the only authorizing officer in period, budget allocation inputted in the CID system was charge of the public expenditure circuit - from commitment on average 10 percent lower than the budget allocation to pay. Such monopoly does not allow other ministries/ from the Finance Law. The difference between the two RETHINKING PUBLIC FINANCE IN A WORLD WITH COVID-19 41 allocations was noticeable in 2015 and 2016 since the Chad would benefit from strengthening institutions budget allocation reported only 76.7 and 53.6 percent of related to public investment management. The the budget allocation from the Finance Law. Although transparency of budget execution, the openness of the the exact percentage cannot be determined, the level of procurement process, and cash management efficiency unreported extra-budgetary expenditure for 2020 would are critical to the stability and predictability of investment likely constitute a significant portion of total expenditures. and to reduce opportunities for rent-seeking. In 2017, Chad ranked among the 10th percentile of worst performers in The CID data reveals that Chad’s budget execution terms of government efficiency and control of corruption. performance is poor and has deteriorated during the oil Finally, greater transparency and accountability regarding and security crisis. Budget execution in Chad significantly project management, monitoring, and evaluation would decreased from 107.1 to 14.1 percent between 2013 and 2018, be needed to strengthen incentives to deliver projects on reaching its lowest point in 2018. However, the difference time and budget and ensure value for money and integrity between paid and committed severely highlights the in the use of public resources. building of arrears as only 20 percent of committed spending is paid to the provider. Wages execution is 2.4.3. PUBLIC PROCUREMENT SYSTEM IS very poor as less than 5 percent of the wages budgeted is effectively committed. Except in 2014, wages execution BEING RENOVATED TO IMPROVE increased to 55 percent as the government recruited ITS EFFICIENCY additional military to face the Boko Haram insurgency. Budget execution for investment was heavily affected by Chad’s public procurement system faces many challenges the oil crisis as it declined from 68.4 to 7.2 percent between in terms of transparency, integrity, and efficiency. 2014 and 2016. Both transfers and spending on goods and Weak governance, driven by political rents, impedes the services have a higher execution rate (about 90 percent on functioning of procurement systems. Direct contracting or average between 2013 and 2018). The dual COVID-19 and single-source contracts remains the main way to award fall of oil price has forced the government to revise the contracts. The lack of strong accountability systems has 2020 budget in August 2020 and will likely hamper budget led to opaque public procurement systems. Therefore, execution in various areas. significant progress towards integrity and transparency in the management of public resources is necessary for Poor budget execution is partly explained by poor budget the efficient execution of public procurement functions. planning combined with the lack of internal and external Moreover, the review and approval process, regardless controls. The 2017 PEFA report pointed out several issues of the procurement methods, is time-consuming and regarding the management of public finances in Chad, cumbersome. The public procurement process takes an among which: (i) weak budget planning as sectorial average duration of more than one year. This is mainly ministries are little involved in the budget planning because any project above XAF 10 million (US$ 17,000) process; (ii) poor reporting tools and practices as budget requires the approval of the Presidency. Late payments and allocation from the Finance are not reported correctly, arrears are such that they cause distortions, jeopardizing and the reporting tools used by the Treasury do not public works companies and local banks. Indeed, Chad is include all spending; and (iii) lack of internal and external still facing substantial delays in the country’s procurement audits. Also, many payments (40 percent in 2016) are not system, which impedes the delivery of key public services complying with the standard or simplified procedures. As a and the effectiveness of projects. result, the weak financial management of public finances contributed to the build-up of arrears. 42 CHAD – 2021 ECONOMIC UPDATE However, in recent years, Chad has taken relevant of the COVID-19 health crisis, the Government adopted steps towards improving public procurement system in May 2020 temporarily derogations to the procurement efficiency. In 2015, the Government adopted a new Code. These emergency procedures have helped expedite Public Procurement Code, which, among other things, the procurement of goods and services for the COVID-19 separates the regulation, control, and execution of emergency response. Through the General Directorate public procurement functions. The Code was updated in of Public Procurement Control, the Government is also 2020 to raise contract approval thresholds and ensure creating a website to improve transparency, equity, and gender promotion. The implementing texts for the new integrity in public procurement. While these measures are provisions have not yet been published. To improve the important, they are not sufficient to significantly improve procurement of medical supplies and mitigate the effect integrity and efficiency in managing public resources. 43 POLICY PRIORITIES Given the lack of fiscal space and large financing requirements, bold actions are needed to increase, improve, and diversify chad’s sources of revenue. 3 44 CHAD – 2021 ECONOMIC UPDATE 3.1. STRENGTHENING ECONOMIC DIVERSIFICATION TO ENLARGE THE FISCAL BASE Agriculture, including livestock, could drive export (streamlining administrative processes, strengthening the diversification. Specifically, reducing the bottlenecks to rule of law, modernizing the tax administration, facilitating livestock exports by aligning Chad with CEMAC regulations access to finance) to render the business environment and expediting customs paperwork would enable herders more friendly to initiate the takeoff of the formal to exploit the sector’s greater potential. A well-functioning private sector. internal market could help establish value chains, such as integrating the livestock market with light manufacturing Improving road, electricity, and digital infrastructure in meat and leather (shoes and bag) processing. An will help to mitigate the current and future impact of export diversification strategy may expand the tax base the frequent shocks on Chad’s economy. Chad should with a larger menu of goods and services, with growth- undertake reforms to expand infrastructure networks accelerating and job-creation potential. and increase access to services. These services and infrastructure are essential for income-generating Expanding the formalizing the economy. Informality activities of households and business owners who mainly remains pervasive in agriculture and services, despite operate in the informal sector and whose activities employing the largest share of Chadians (over 90 percent). have been disrupted by the current crisis. Therefore, The Government should design and implement programs reforms to improve access to electricity, road, and digital for capacity building in these sectors. Moreover, these infrastructure would boost productivity and help reducing programs could benefit from a collaborative component poverty. Reform should seek that infrastructure adapts to that would enhance the synergies between actors from the increasing challenges of climate change. For example, Agriculture and livestock sectors, thus implicitly help to the greater use of technology can help deliver better address existing operational conflicts between the services to people, from direct payments of social security two groups. payments to VAT refunds or early warning systems for natural disasters. More distributed electricity networks Achieving regional integration and a business-friendly might help to deliver power to remote communities etc. environment would help improve competitiveness. Chad is part of the CEMAC, one of Africa’s least integrated Strengthening the collection of existing taxes. The regions. Chad should work with other CEMAC countries to Government could mobilize more non-oil revenue by improve infrastructure, logistics, and regulation along the improving the personal income tax (PIT) and Value Added main regional corridors to remove major bottlenecks such Tax (VAT) policies and administration. It could also ensure as illegal taxation, poor road quality, and inefficient post that more revenues are extracted from the oil industry logistics. Regional integration should also be pursued with by strengthening transparency and management of oil Lake Chad’s neighboring countries to create an internal contracts. Oil proceeds will remain the main source of market in Northern Nigeria, Northern Cameroon, Niger, and government revenue in the foreseeable future. Chad. Moreover, the government should continue reforms 45 3.2. IMPROVING SPENDING EFFICIENCY TO DELIVERY MORE SERVICE WITH DECLINING RESOURCES Improving public spending efficiency in health and Enhancing the selection process and improving the education to achieve higher outcomes. Although there planning and coordination of investment projects are has been a sharp increase in health-related expenditures required to raise public investment efficiency. Substantial to address the COVID-19 pandemic, this increase hides reforms of the public investment system are needed, Chad’s health system challenges. The population suffers including planning, budgeting, implementation, and from acute epidemics but receives poor health care due transparency. The Government has taken considerable to government underinvestment and heavy dependence steps towards improving the efficiency and effectiveness on external financing. Meanwhile, most of the education of public investment management, creating the Public budget is allocated to wages. To improve access to health Investment Management National Commission, and and education, Chad would need to: i) reform the education improving investment projects’ selection process. budgetary system with a public expenditure strategy that However, further efforts are required to implement this goes beyond wages to ensure that services are delivered reform successfully. to populations more evenly across the country, and ii) enhance efforts to increase domestic health care coverage and its capacity to fight pandemics. 46 CHAD – 2021 ECONOMIC UPDATE 3.3. IMPROVING DEBT AND FINANCIAL SUSTAINABILITY Improving debt sustainability, management, and implemented in 2020. Hence, the Government should: i) transparency would help to create fiscal space. The create a consolidated and comprehensive database of rationalization of public spending, mainly through debt contracts, for better debt service monitoring and prudent increases in current expenditures and accurate and consistent numbers on debt stock; ii) update improvements in public investment efficiency and debt and frequently maintain the current debt reporting system management, will help to reduce the risk of debt distress. SYSGADE (Système informatisé de Gestion et d’analyse de Significant weaknesses remain in debt transparency and la Dette) for timely provision of relevant management, despite improvements through reforms reporting documents. POLICY IMPLICATIONS 47 ANNEX: SELECTED ECONOMIC AND FINANCIAL INDICATORS Table A.1. Chad – Key Macroeconomic Indicators, 2017–23 2017 2018 2019 2020(e) 2021(p) 2022(p) 2023(p) Income and Economic Growth (annual percentage change unless otherwise specified) Real GDP -3.0 2.4 3.2 -0.9 1.2 2.7 2.9 GDP per capita- nominal (US$) 665.9 726.1 709.5 603.6 610.7 642.5 681.9 Private Consumption (% of GDP) 73.5 72.3 71.0 71.9 71.6 71.6 71.3 Gross Fixed Investment (% of GDP) 13.6 14.0 14.4 13.1 12.9 14.3 16.1 Gross Fixed Investment – Private (% of GDP) 11.1 11.0 10.9 8.2 8.3 9.7 11.2 Gross Fixed Investment – Public (% of GDP) 2.4 2.9 3.6 4.9 4.6 4.6 4.8 Fiscal Accounts (percentage of non-oil GDP unless otherwise specified) Overall Fiscal Balance- incl. grants, commitment (% of -0.8 1.5 -0.6 1.1 -1.1 -0.5 2.2 GDP) Primary Fiscal Balance (% of GDP) 0.8 3.0 1.0 2.9 0.4 0.3 3.3 Total Public Debt (% of GDP) 49.8 48.3 44.4 47.3 46.9 47.0 47.0 External Public Debt (% of GDP) 37.5 37.1 24.8 26.5 23.5 22.9 20.2 Money and Prices (annual percentage change unless otherwise specified) Inflation, consumer prices (annual %, end of year) -0.9 4 -1 3.5 3.0 3.0 3.0 Nominal Exchange Rate (Period average) 580.7 555.5 586.0 586.0 586.0 586.0 586.0 Real Exchange Rate Index (2005=100) 98.6 93.5 97.2 96.2 95.3 93.0 90.8 External accounts (percentage of GDP unless otherwise specified) Export Growth (%, yoy) 1.3 4.6 6.0 1.1 4.8 0.7 0.4 Import Growth (%, yoy) -1.3 1.4 4.0 2.0 4.0 4.1 4.1 Merchandise exports (current US$ millions) 2465.8 3324.3 3349.8 2406.6 2899.8 4390.7 6648.1 Merchandise imports (current US$ millions) 2161.4 2471.3 2594.4 2599.6 2742.6 2860.5 3046.4 Current account balance (BoP, including current -659.3 -533.3 -550.2 -926.3 -805.9 -970.7 -1135.9 transfers, current US$ millions) Current account balance (including current transfer, % -6.6 -4.7 -4.9 -9.3 -5.9 -6.2 -7.3 of GDP) External debt, total (% of GDP) 37.5 37.1 24.8 26.5 23.5 22.9 20.2 Population, Employment and Poverty 48 CHAD – 2021 ECONOMIC UPDATE 2017 2018 2019 2020(e) 2021(p) 2022(p) 2023(p) Population, total (millions) 15.0 15.5 15.9 16.4 16.9 17.4 17.9 Poverty headcount ratio at national poverty line (% of 39.9 40.1 40.1 41.4 41.8 41.6 41.6 population) Population Growth (annual %) 3.1 3.1 3.0 3.0 3.0 3.0 2.9 Life Expectancy Memo GDP (current LCU, billions) 5,807 6,243 6,630 5,809 6,053 6,556 7,160 GDP (current US$, billions) 10.0 11.2 11.3 9.9 10.3 11.2 12.2 Source: Chadian authorities; IMF and Bank staff estimations and projections 49 Table A.2. Chad – Fiscal operations of the central government, 2017–23 2017 2018 2019 2020(e) 2021(p) 2022(p) 2023(p) Income and Economic Growth (in percent of GDP unless otherwise specified) Total Revenues and Grants 14.2 14.6 13.3 22.2 18.3 16.7 19.9 Tax Revenues 6.4 6.0 6.9 7.5 7.9 8.2 8.5 Non-Tax Revenues 0.8 0.5 0.3 0.3 0.3 0.3 0.3 Commodity Revenues 3.4 5.4 4.9 9.6 5.6 4.7 4.4 Grants 3.5 2.8 1.2 4.8 4.4 3.4 3.4 Other revenues 0.0 0.0 0.0 0.0 0.0 0.0 3.3 Expenditures 15.0 13.1 13.9 21.1 19.4 17.5 17.7 Wages and Compensation 6.5 5.1 5.4 7.6 7.0 6.8 6.5 Goods and Services 1.5 1.6 1.3 1.8 1.6 1.6 1.5 Interest Payments 1.6 1.5 1.6 1.8 1.6 1.1 1.1 Current Transfers 1.8 1.7 2.0 3.9 3.4 2.9 2.7 Capital Expenditures 3.6 3.6 4.3 6.8 6.4 6.1 6.2 Other Expenditures 0.0 -0.4 -0.6 -0.7 -0.6 -1.0 -0.4 Overall balance (incl. grants, commitment) -0.8 1.5 -0.6 1.1 -1.1 -0.8 2.2 Overall balance (excl. grants, commitment) -4.3 -1.3 -1.8 -3.7 -5.6 -4.2 -1.2 Primary Balance, LCU 0.8 3.0 1.0 2.9 0.4 0.3 3.3 Financing Requirement 0.8 -1.5 0.6 -1.1 1.1 0.8 -2.2 Total Financing (External and Domestic) 1.9 1.7 1.7 1.1 -0.7 -2.2 -2.2 External Financing (Net) 1.4 1.3 1.2 -0.3 -0.4 -0.5 -0.6 Amortization 2.2 2.0 1.9 1.8 2.0 2.1 2.1 Disbursement 2.8 2.5 2.4 1.0 1.2 1.2 1.2 Other External Financing 0.8 0.7 0.7 0.4 0.4 0.5 0.4 Domestic Financing (Net) 0.5 0.5 0.5 1.4 -0.3 -1.7 -1.6 Financing Gap -1.1 -3.2 -1.1 -2.2 1.8 3.0 0.1 Total Public Debt 49.8 48.3 44.4 47.3 46.9 47.0 47.0 External Debt 37.5 37.1 24.8 26.5 23.5 22.9 20.2 Domestic Debt 12.3 11.2 19.6 20.8 23.4 24.2 26.8 Source: Chadian authorities; IMF and Bank staff estimations and projections 50 CHAD – 2021 ECONOMIC UPDATE REFERENCES IMF and World Bank. 2020. 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