On January 11, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the 2012 Article IV consultation with Equatorial Guinea.¹

Background

Driven by hydrocarbon extraction, which accounts for about three-quarters of estimated gross domestic product (GDP), Equatorial Guinea has the highest level of per capita income in sub-Saharan Africa. Over the last five years, a burst in public investment under the 2008–20 National Development Plan (NDP), largely financed by hydrocarbon revenue, has upgraded transport and power infrastructure and established several national prestige facilities. The resulting stimulus to construction is estimated to have helped raise average growth rates in the non-hydrocarbon sector to about 15 percent.

Reducing poverty and generating sustained productive private sector activity remain urgent challenges. The most recent poverty estimates suggest that three-quarters of the population were living below the national poverty line in 2006. Reflecting high government sector demand and limited production capacity, inflation has remained above the regional convergence criterion (3 percent), eroding external competitiveness.

Higher oil prices restored the overall fiscal balance to a small surplus in 2011 despite government capital spending levels that continued to exceed non-hydrocarbon GDP. The external current account also improved, but remained in deficit because of high imports of capital goods and hydrocarbon earnings to overseas parent companies. The external deficit was largely financed by foreign direct investment. The government deposited CFAF 474 billion at the Bank of Central African States (BEAC) and other government foreign currency deposits, held at commercial banks in contravention of regional surrender requirements, fell sharply.

Perceptions of an unwelcoming business climate continue to deter investment in the non-hydrocarbon sector and broader governance issues remain of considerable concern to the international community. Limitations on civil society participation undermined Equatorial Guinea’s unsuccessful candidacy in the Extractive Industries Transparency Initiative (EITI). Macroeconomic and socio-demographic data are also deficient in quality, timing and coverage, and even the most basic data are very hard for the public to access.

With hydrocarbon production now past its peak, according to official projections, the outlook for GDP is slow or negative growth over the medium term. To address fiscal and external sustainability concerns, fiscal policy will need to target a declining path for the non-resource primary fiscal deficit, which stood at 130 percent of non-hydrocarbon GDP in 2011. There should nevertheless be room for higher pro-poor current spending because government investment is expected to be significantly lower in the next phase of the NDP.

Executive Board Assessment

Executive Directors noted that, despite substantial revenues from oil, natural gas, and derivative production, reducing poverty remains an urgent challenge. Accordingly, Directors encouraged the Equatorial Guinea authorities to improve policy frameworks and undertake further reforms in a variety of areas to promote inclusive growth and bolster the business environment.

Directors considered that the adoption of a transparent medium-term fiscal framework would anchor spending decisions in the face of oil price volatility and the expected decline in hydrocarbon production. They recommended targeting a path for the non-resource primary balance that would establish fiscal buffers and reflect financing and absorption constraints. In this context, Directors saw the need to reduce public investment levels, rebalance public spending toward social programs, better target subsidies, broaden the revenue base, and enhance tax collection. More broadly, they encouraged the authorities to strengthen public financial management.

Directors agreed that scaling down public works after the recent surge would safeguard external stability. They observed that infrastructure-related imports are a major factor in the high deficit in the external current account. At the same time, the pressure on domestic demand has kept inflation rates above those in other Central African Economic and Monetary Community (CEMAC) member countries, leading to a substantial appreciation of the real effective exchange rate and a loss of external competitiveness.

Directors welcomed Equatorial Guinea’s recent contributions to the regional pool of official foreign exchange reserves, but noted that the bulk of the government’s foreign currency deposits remains outside the BEAC. They urged the authorities to hold these deposits at the BEAC to comply with the monetary union’s surrender obligations.

Directors underscored that improving the business climate is critical to fostering private sector participation in the economy and broad-based growth. They called for stepped up efforts to strengthen governance and improve workers’ skills and health. Promoting greater access to credit for small- and medium-sized enterprises should also be a priority. Directors looked forward to Equatorial Guinea’s reinvigorated efforts to participate in the Extractive Industries Transparency Initiative.

Noting the persistent inadequacy of economic statistics, Directors encouraged the authorities to participate in the General Data Dissemination System and establish a publication timetable for macroeconomic data.