Chad: Debt Sustainability Analysis

26 mai 2018Wathinote Diversification économie

Author (s) :
International Monetary Fund (IMF) and the International Development Association (IDA)

Date of publication: June 19, 2017

With the accumulation of external debt arrears, Chad is currently in debt distress and the debt sustainability analysis shows that debt is unsustainable without external commercial debt restructuring. Two external debt indicators exhibit protracted breaches of their indicative thresholds. The debt service to revenue ratio continues to be significantly above the threshold until 2021. Domestic debt has increased in recent years but is projected to decline starting in 2017.

Preserving debt sustainability requires that the authorities maintain fiscal prudence to gradually improve the primary fiscal balance, and implement prudent debt management policies, including a comprehensive strategy for domestic arrears clearance. The debt restructuring currently being pursued by the authorities will be critical to reducing debt to sustainable levels and lowering the risk of debt distress. Progress in economic diversification would also strengthen debt sustainability.

Background

The composition of Chad’s public debt has changed significantly over the past decade. Over the last few years, Chad has increasingly relied on domestic and regional banks, non-Paris Club creditors (e.g., China, Libya, and India), and commercial credits to address its financing needs. There is no recorded external private debt in Chad.

Public External Debt

After stabilizing at around 20 percent, the external public debt-to-GDP ratio increased to 29 percent in 2014 following two non-concessional oil sales’ advance operations with a commercial creditor, Glencore. In 2013, the authorities signed two agreements for a total of US$600 million with Glencore to cover revenue shortfalls. In 2014, a new commercial borrowing operation for US$ 1.4 billion was contracted by SHT (a state-owned oil company) to finance the purchase of Chevron’s shares in Chad’s largest oil consortium in June of that year.

In late 2015, a rescheduling agreement with Glencore consolidated the two oil sales’ advance operations, extending their maturities. The rescheduling agreement provided much needed debt service flow relief by extending maturity from 4 to over 6 years. However, the imposition of restructuring fees led to an increase in the present value of the debt. Repaying the Glencore loan using oil receipts, however, continues to place an excessive burden on the budget. The authorities have publicly announced their plan to reschedule this debt again.

Following the achievement of the HIPC completion point in April 2015, Chad was able to secure at least US$756 million in debt relief. This amount includes MDRI relief from International Development Association (IDA) and African Development Bank (AfDB), forgiveness from the IMF, and a hundred percent cancellation from the Paris Club. Regarding non-Paris Club members, the authorities signed a new agreement with Saudi Arabia in July 2015 which reschedules their remaining amount on IDA comparable terms.

Public Domestic Debt

The stock of domestic public debt rose to about 24 percent of GDP in 2016, in part reflecting the authorities stepping up their domestic debt issuance program in the CEMAC market (Text Table 3). In 2016, Chad issued CFAF 174 billion (net) in Treasury Bonds, with maturities of two to five years, and CFAF 67 billion (net) in Treasury Bills bringing the combined stock of Treasury Bonds and Bills to CFAF 470 billion or 7.9 percent of GDP. This has exposed the government to significant rollover and interest rate risk. The stock of debt also includes sizeable advances by BEAC (the regional central bank), loans from commercial banks, Development Bank of Central African States (BDEAC), Republic of Congo (in 2012), Equatorial Guinea (in 2013), and Cameroon (2016), as well as verified domestic arrears of CFAF 168 million or 2.8 percent of GDP at end 2016.

Following at least 5 years of increase, the stock of domestic debt is projected to fall in 2017 under the proposed ECF program. The fall is driven by the repayment of domestic arrears and an exceptional advance received from the BEAC in late 2016, together with the projected payment of arrears to banks, arrears to suppliers, and other maturities on domestic currency debt. The program does not assume any new domestic borrowing; the authorities will only seek the rollover of maturing T-bills and Tbonds.

DSA Assumptions

The DSA incorporates historical information on external debt until 2016. The historical information on external debt is based on the World Bank-DRS database and information provided by Chadian authorities.

The DSA’s baseline scenario assumes fiscal adjustment under the proposed ECF program but does not include debt restructuring. It includes a stable path for oil price, a recovery in oil production, and policies to stabilize the fiscal position and support a sustainable recovery in non-oil activity. It assumes clearance of external arrears within the program period, substantial budget support from donors but does not assume the restructuring of commercial debt, which is necessary to reestablish debt sustainability and fill the financing gap that emerges under the proposed program.

Oil production

Chad’s medium- and long-term macroeconomic outlook is characterized by gradual increase in oil production over the period 2017–21, but a steady decline over the longer term.

Oil export is expected to rise from 122,000 bpd in 2016 to about 153,000 bpd in 2021. Proven reserves in the new fields are much smaller than in the original Doba basin and will also likely be nearly exhausted around 2030. Hence, oil production and exports are projected to decline steadily to negligible levels beyond 2030. These prospects might change with new oil exploration activities or with the use of new oil extraction techniques.
Chad’s oil trades below the WEO reference price, reflecting a quality discount and transport cost of US$ 4-12 per barrel. For the medium term (five-year horizon) the price of a barrel of Chadian oil is assumed to average about US$50 in 2017–21, in line with the trend projected in the WEO. From 2021 onward, the price is assumed to increase, on average, by around 2 percent per year in U.S. dollar terms

Fiscal policy

The analysis assumes that the substantial fiscal adjustment of the past two years will be broadly preserved, with additional adjustment gradually implemented over the medium term through improvement in non-oil revenue. The non-oil primary deficit (NOPD) is expected to improve from 4.4 percent of non-oil GDP to 2.8 percent in 2021. Oil revenue is projected to increase to 6.4 percent of non-oil GDP in 2017 from 3.5 percent last year and then moderate over the medium and long term. 3 Over the longer term, in transition to the post-oil era, it is assumed that dwindling oil revenues will be partly offset by a stabilization of total government primary spending at around 19 percent of GDP, while the primary balance will be adjusted gradually to reach a small deficit of less than 2 percent of non-oil GDP by the end of the projection horizon.

The latter is projected to be achieved mainly by: (i) gradually increasing non-oil revenues (from about 8 percent of non-oil GDP at present to about 14 percent of non-oil GDP by 2037); ii) maintaining total investment outlays around 8 percent of non-oil GDP in the long term; and (iii) keeping recurrent spending at relatively low levels by streamlining transfers and subsidies to public enterprises and improving wage bill management. The analysis also assumes a comprehensive strategy for clearing domestic arrears and avoiding further accumulation going forward.

Arrears

The authorities’ strategy is that arrears to external creditors will be paid within the program period. Arrears accumulated in 2017 are assumed to be repaid in the next few months. Clearance of arrears to official external creditors is programmed within the next 12 months. Arrears to other creditors are programmed to be cleared within the program period. The authorities are making good faith efforts to reach collaborative agreement with the bank from Taiwan province of China. The baseline scenario also includes a gradual reduction in the stock of verified domestic arrears. An audit of domestic arrears is planned to start in 2017 and depending on its outcome, the stock of domestic arrears and the path of repayment may change.

The DSA baseline remains subject to downside risks. Implementation challenges related to planned government reforms could weigh on growth prospects, particularly in the medium and longer run. Risks stem from additional domestic debt and arrears that may be off the books but remain to be identified through increased monitoring efforts, including planned audits in 2017. The SOE portfolio may add fiscal exposure. There is also uncertainty around future oil prices and the security situation. A further fall in oil prices would put additional pressure on fiscal accounts and compromise the government’s ability to finance its planned expenditure and deb. In addition, unexpected security costs and increased expenditure demands of addressing economic disruptions could divert resources away from priority social and structural programs as well as institutional capacity-building. At the same time, a negative climatic shock would affect the prospects for agricultural growth and significantly reduce GDP growth.

External DSA

The evolution of external debt is driven by the government’s borrowing strategy which envisages a reasonable volume of project and budget support loans and no further usage of commercial loans. Under the ECF-supported program, external financing is assumed to be on concessional terms over the medium to long term mostly financed by disbursements from multilaterals such as the IMF, WB, AfDB, Islamic Development Bank, and Arab Bank for Economic Development in Africa, and from other development partners. This leads to a grant element of an average of 36.7 percent over the projection period.

Without debt restructuring, debt is unsustainable as reflected in particular by the large breach of the debt service to revenue threshold over the next four years. Without debt restructuring, debt service is projected to be about 40 percent of revenue in 2017–18 and average above 30 percent per year during 2019–21.4 Burdened by a high debt service and weak budgetary resources, the country accumulated significant domestic and external payment arrears in 2016 despite significant fiscal contraction. The country would not be able to continue to sustain such a high burden of debt service, which would lead to further fiscal contraction and a likely disorderly adjustment with severely adverse social and economic consequences.

Public DSA

Domestic debt has increased in recent years, but is projected to decline. With the accumulation of domestic arrears and the increased issuances of debt securities in the regional market, the PV of debt-to-GDP ratio shows a breach in 2017–20 under the baseline scenario. Under the requested ECF arrangement, with prudent fiscal policies, the domestic debt component would fall from 22 percent of GDP in 2017 to 17 percent of GDP in 2020. Beyond 2020, domestic debt to GDP continues to decline steadily until it reaches about 12.6 percent of GDP in 2037. Altogether, the public debt stock would decrease from about 50 percent of GDP in 2017 to 30 percent of GDP in 2022 until it stabilizes around an average of 23 percent of GDP in 2023–37.

Conclusion

Chad is in debt distress and debt is unsustainable without external commercial debt restructuring. The burden of external commercial debt service is taking a heavy toll on government finances. The government has accumulated significant domestic and external arrears despite significant fiscal adjustments. Without commercial debt restructuring, debt service to revenue ratio breaches the indicative threshold for the next four years by a significant margin. However, with the rescheduling of debt in line with parameters of the newly requested ECF arrangement, and the projected recovery in the oil and non-oil sector, debt ratios can decline significantly over the near and medium term, significantly reducing the risk of debt distress. With the appointment of financial and legal advisors, discussions with the creditor are set to begin soon. Given the exhaustible and volatile oil revenues, it is also necessary to strengthen fiscal and debt management, maintain a prudent external and domestic borrowing policy, and make further progress in diversifying the economy. Effective inter-agency coordination will be important for strengthening the capacity to record and monitor public debt.

The authorities broadly concur with the staff assessment. They agreed that the burden of debt service, particularly of the external commercial loan, was weighing heavily on the budgetary resources and on debt sustainability. They agreed that a debt restructuring is necessary to make debt sustainable. They have announced their intention to restructure the debt with Glencore and are firmly committed to achieve a restructuring that restore debt sustainability and is in line with the proposed program parameters. They are committed to a prudent borrowing policy, including seeking external loans on concessional terms in line with program assumptions. They have taken steps to improve debt management practices, including by improving interagency coordination and through technical assistance to improve their cash flow and debt management databases. They have started issuing annual debt management reports (with support from Fund TA), and will undertake institutional improvements in the management of domestic payment arrears in line with Fund TA recommendations. In addition, they also recognize the importance of diversifying their economy, and are finalizing a National Development Plan that strives to do so.

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