Gabon Economic Update Special Topic: Reforming Fossil Fuel Subsidies Macroeconomics, Trade and Investment April 2023 Gabon Economic Update Special Topic: Reforming Fossil Fuel Subsidies April 2023 Macroeconomics, Trade and Investment Table of contents Overview.................................................................................................................................................1 Chapter 1. Recent economic trends and outlook for Gabon......................................................... 5 1. Global and regional growth has slowed, while CEMAC economies have been supported by high hydrocarbon prices......................................................................................................................................5 2. While faced with global uncertainty, Gabon is experiencing a stronger economic recovery .........................6 3. Despite the recovery, increased inflationary pressures exacerbated household vulnerability.........................8 4. Firms experienced an increased access to credit.........................................................................................9 5. The fiscal balance improved but fuel subsidies are increasingly weighing on the budget..............................9 6. Higher oil prices and the lifting of OPEC+ quotas also resulted in an improved trade balance....................13 7. Economic outlook......................................................................................................................................15 7.1. Global growth is projected to decelerate sharply.............................................................................15 7.2. Gabon has favorable growth prospects but faces important risks to growth and diversification.......16 Special topic: Assessing the impact of fossil fuel subsidies in Gabon and Chapter 2. options for policy reforms............................................................................................. 19 1. Introduction – recent development in fossil fuel subsidies............................................................................. 19 1.1. Evolution of oil prices and related subsidies – Regional overview.....................................................19 1.2. The growing fiscal cost of fossil fuel subsidies in Gabon..................................................................21 1.3. Distributional analysis of fossil fuel subsidies in Gabon....................................................................24 2. General principles from international experience..........................................................................................27 2.1. Calibrating price adjustments by petroleum products......................................................................27 2.2. Adopting a mechanism to move gradually towards market-based pricing.......................................28 2.3. Staggering the reform.....................................................................................................................30 2.4. Stakeholder consultations...............................................................................................................30 3. Accompanying measures............................................................................................................................31 3.1. Reinforcing social safety nets..........................................................................................................31 3.2. Increasing transparency of public financial management.................................................................33 3.3. Increasing social public spending....................................................................................................33 3.4. Supporting the transport sector......................................................................................................34 3.5. Increasing productive structural public investments.........................................................................34 Technical Annex 1 – Fossil fuel types and uses .............................................................................35 Technical Annex 2 – Defining fossil fuel subsidies in CEMAC......................................................36 Gabon Economic Update i List of figures and tables Figure 1. Real GDP growth (percent), 2018-2023...............................................................................................6 Figure 2a. Gabon: Supply-side contribution to real GDP growth (in percent), 2018-2023......................................7 Figure 2b. Gabon: Demand-side contribution to real GDP growth (in percent), 2018-2023...................................7 Figure 3a. Gabon: Oil production (thousand metric tons) and oil price (USD per bbl), 2018Q1-2022Q4................7 Figure 3b. Gabon: Oil vs. non-oil GDP (percent of total GDP), 2018-2023............................................................7 Figure 4. Inflation (monthly, y-o-y, in percent), January 2020-December 2022....................................................8 Figure 5. Oil and non-oil revenues (percent of GDP), 2018-2023.......................................................................10 Figure 6. Current and capital public expenditures (percent of GDP), 2018-2023...............................................11 Figure 7. Budget execution rates (percentage points), 2022.............................................................................12 Figure 8. Fiscal balance and public debt (percent of GDP), 2018-2023.............................................................13 Figure 9. Composition of public debt (percent of total debt), 2022....................................................................13 Figure 10. Gabon: Trade balance, 2018-2023....................................................................................................15 Figure 11. Gabon: Current account balance (percent of GDP), 2018-2023.........................................................15 Figure 12. Global growth prospects (percent).....................................................................................................16 Expected growth in key sectors (real growth in CFAF billion), 2022-2025...........................................17 Figure 13a. World prices for Gabon’s main commodities, 2022-2025...................................................................17 Figure 13b. Figure 14. Crude oil price, Brent (USD/bbl) ........................................................................................................20 Figure 15. Fossil fuel consumption subsidies worldwide (billion USD)..................................................................20 Figure 16. Fiscal cost of fuel subsidies in West and Central African countries (percent of GDP)...........................20 Figure 17. Social Spending in West and Central African countries (percent of GDP)............................................20 Figure 18. Fuel subsidies, by net oil importers and exporters (percent of GDP)...................................................21 Figure 19. Oil revenues and fuel subsidies for net exporters (percent of GDP).....................................................21 Figure 20. Fiscal balance by net oil importers and exporters (percent of GDP)....................................................22 Figure 21. Current account balance, by net oil importers and exporters (percent of GDP)...................................22 Figure 22. Fiscal cost of fuel subsidies in CEMAC and selected Sub-Saharan African countries (percent of GDP)................................................................................................................................22 Figure 23. Distribution of fuel subsidies by product, 2022 (in percentage of total subsidies provided)..................23 Figure 24. Fuel subsidies vs social spending in 2022, in Gabon and selected Sub-Saharan African countries (percent of GDP)................................................................................................................................23 Figure 25. Distribution of fuel consumption by income group (in percentage, by decile)......................................24 Figure 26. Distribution of kerosene consumption, by income group and region (in percentage, by decile)...........25 Figure 27. Distribution of fuel consumption, by gender (in percentage)................................................................25 Figure 28. Proportion of fuel consumption as a percentage of the household budget (by income group and by fuel)............................................................................................................26 Figure 29. Price increase in case of withdrawal of fuel subsidies in Gabon (in selected sectors, in percent).........26 Table 1. Gabon: Selected fiscal indicators.......................................................................................................14 Gabon Economic Update ii Acknowledgments This edition of the Gabon Economic Update was prepared by a World Bank team co-led by Erick Tjong (Economist, EAWM2) and by Sonia Barbara Ondo Ndong (Economist, EAWM2), consisting of Samer Naji Matta (Senior Economist, EAWM2), Daniel Pajank (Senior Economist, EAWM1), Mervy Every Viboudoulou Vilpoux (Economist, EAWPV), Ioana Alexandra Botea (Social Protection Economist, HAWS3), Houda Karafli (Young Professional, ISAE1), Anna Bokina (Operations Officer, IAWE4), Joana Monteiro da Mota (ET Consultant, EAWM2), and Gildas Bopahbe Deudibe (Consultant, EPVGE), under the supervision of Raju Singh (Lead Economist, EAWM2). The report benefited from insights and comments from Steve Loris Gui-Diby (Senior Economist, EAEM2), while chapter 2 benefited from support and comments from Chiara Bronchi (Practice Manager, EGVPI), Chadi Bou Habib (Lead Economist, EMFTX), Gaute Solheim (Senior Public Sector Specialist, EMFTX), Dirk Heine (Senior Economist, EMFTX), Paolo Agnolucci (Senior Economist, DECPG), and the World Bank Energy Sector Management Assistance Program (ESMAP). The team received guidance and advice from Elizabeth Huybens (Acting Country Director), Sandeep Mahajan (Practice Manager, EAWM2), Ashish Khanna (Practice Manager, IAWE4), Keiko Kubota (Manager, Operations, AWCC1), Clelia Kalliopi Helena Rontoyanni (Program Leader, EAWDR), Nathalie Lahire (Program Leader, HAWDR), Ambar Narayan (Lead Economist, EAWPV), Yussuf Uwamahoro (Lead Energy Specialist, IAWDR), Olayinka Mutiat Edebiri (Senior Energy Specialist, IAWE4), Defne Gencer (Senior Energy Specialist, IEEES), Cemile Sancak (Advisor, IMF), Aissatou Diallo (Resident Representative), Marcello Estevão (Senior Adviser, GGEVP), Dena Ringold (Regional Director, HAWDR), and Michal Rutkowski (Global Director, HSJDR). Pinar Baydar (Operations Analyst, EAWM2), Suhair Murad Al-Zubairi (Program Assistant, EMNPV), Irene Sitienei (Program Assistant, EAWM2), and Astrid Greta Gotalowya Ossouka (Team Assistant, AWMGA) supported the team during the preparation of the report. The team gratefully acknowledges the collaboration of the Government of Gabon throughout the preparation of this report. Gabon Economic Update iii Abbreviations and acronyms AFW West and Central Africa BEAC Bank of Central African States (Banque des États de l’Afrique Centrale) bbl oil barrel CAR Central African Republic CAFI Central African Forest Initiative CEMAC Central African Economic and Monetary Community (Communauté Economique et Monétaire de l’Afrique Centrale) CFAF African Financial Community Franc (Franc CFA) COBAC Central African Banking Commission (Commission bancaire de l’Afrique centrale) COVID-19 Coronavirus disease 2019 EITI Extractive Industries Transparency Initiative EMDE Emerging market and developing economies FGIS Gabonese Fund for Strategic Investments (Fonds Gabonais d’Investissements Stratégiques) FSRG Sovereign Wealth Fund of the Gabonese Republic (Fonds souverain de la République gabonaise) GDP Gross Domestic Product GEF Economically Weak Gabonese (Gabonais Economiquement Faible) IEA International Energy Agency IMF International Monetary Fund LPG Liquified petroleum gas NPL Non-performing loans OECD Organisation for Economic Co-operation and Development OPEC Organization of Petroleum Exporting Countries PAT Transformation Acceleration Plan (Plan d’Accélération de la Transformation) PPP Purchasing power parity PSGE Strategic Plan for an Emerging Gabon (Plan stratégique Gabon Émergent) SIHG Gabonese Human Investment Strategy (Stratégie d’Investissement Humain du Gabon) SSA Sub-Saharan Africa TIAO Policy Bid Interest Rate (taux d'intérêt des appels d'offre) UMIC Upper-Middle Income Countries USD United States dollar VAT Value-added tax WB World Bank WDI World Development Indicators y-o-y Year-on-year Gabon Economic Update iv Overview The Gabon Economic Update is an annual World Bank publication that presents an overview of the evolving macroeconomic position in Gabon, followed by a detailed exploration of a specific topic in each edition. The first chapter analyzes recent economic developments, as well as the macroeconomic outlook and risks for Gabon’s future growth. It presents policy actions that could help strengthen fiscal and debt sustainability, contain food inflation, and sustain a resilient growth path. The second chapter of this year’s Economic Update has a special focus dedicated to fossil fuel subsidies, which represent a growing fiscal burden in Gabon. This chapter analyzes the costs of fuel subsidies and discusses policy options for alleviating their fiscal impact while protecting the most vulnerable groups in the country. This report is based on data available as of April 2023. Gabon’s economy, government ments made in the exploitation of new oilfields. The revenues, and exports have all been manganese and wood industries also registered a good performance, while the services sector benefited from benefiting from high oil prices and the removal of pandemic-related restrictions in early strong commodity production 2022. On the demand side, growth was mainly driven Gabon’s economic recovery picked up in 2022, by commodity exports – which benefited from higher supported by stronger global demand for its main prices and stronger demand from China, Gabon’s main commodities, especially oil, wood, and manga- trading partner – as well as private investment, notably nese. Growth is estimated to have reached 3.1 percent in the oil sector. in 2022, strengthening the recovery observed since the 2020 recession caused by the COVID-19 pandemic High oil prices and increased oil production boost- and oil price shocks. Oil production expanded in 2022, ed oil revenues, contributing to the strongest fiscal thanks to the relaxation of OPEC+ quotas and invest- surplus in Gabon since the 2014 oil price shocks. Gabon Economic Update 1 Gabon’s fiscal balance turned from a deficit of 1.9 per- and benefits, partly in an attempt to curb food prices, cent of GDP in 2021 into a surplus, estimated at 3.0 added further pressure to the budget. Tax expenditures percent of GDP in 2022. Over the year, total revenues amounted to CFAF 351.5 billion in 2022 (2.6 percent of increased to 18.6 percent of GDP, up from 15.8 percent GDP), mainly in the form of tax benefits provided to firms of GDP in 2021, thanks to an 82 percent increase in in special economic zones and specific sectors, as well oil revenues but also due to improved non-oil revenue as VAT and customs duties exemptions and reductions performance: tax revenues increased by 48 percent in used to contain living costs. 2022. The good performance of firms in extractive sec- tors, combined with actions taken to support tax col- Thanks to the economic recovery, the public debt- lection and rationalize tax expenditures, contributed to to-GDP ratio declined in 2022; however, cash flow improved collection of income taxes. Meanwhile, grants management issues and the continuous accumu- represented a smaller contribution to the budget, but lation of arrears pose risks for debt management Gabon continued to benefit from environmental conser- and future financing costs. Total government debt vation initiatives. During this period, foreign grants to- decreased from 60.7 percent of GDP in 2021 to 52.0 taled 0.15 percent of GDP, more than half of which was percent of GDP in 2022 and is expected to maintain a provided in support of environment policies, including downward path over the medium term. The latest IMF carbon credit payments made under the UN-led Central Debt Sustainability Analysis performed in July 2022 African Forest Initiative (CAFI) in compensation for forest assessed that public debt was sustainable and that conservation and carbon absorption. risks had moderated compared to previous periods, on account of high oil revenues and expected gover- Fiscal consolidation efforts allowed total public nance reforms. However, the country has continued to expenditure to remain under control, although the accumulate external arrears in 2022 and early 2023, in country has been facing increased pressure de- spite of high oil prices and its improved fiscal balance. rived from costly fuel subsidies. Public expenditures Gabon continues to face difficulties in public financial decreased to 15.6 percent of GDP in 2022, from 17.6 management, which may compromise debt sustain- percent of GDP in 2021. One factor contributing to the ability, especially amid the currently tightening global containment of spending was the public sector hiring financial conditions, where higher interest rates have freeze from 2018 to 2022. In addition, a selective ap- been propelling capital movements towards advanced proach to public investments and a policy to contain economies. current expenditure restrained capital expenditure and spending on goods and services in 2022. Most public Higher commodity prices and strong export per- investments were channeled into roads and other public formance also contributed to an improved trade works, as the Government pursued implementation of balance. Gabon’s trade balance is estimated to have its strategic development plan (Plan stratégique Gabon increased from 11.5 percent of GDP in 2021 to 43.7 Émergent, PSGE), due for 2025. Improvements in infra- percent of GDP in 2022, driven by a significant rise in structure are urgently needed, yet tackling the country’s exports (+40.1 percent y-o-y in nominal value), owing development challenges would also require stronger to high global prices and the expanded production of investments in human capital; as a matter of fact, health oil, manganese, and timber. During this period, imports and education received fewer investments than defense increased by 10.4 percent, on the back of higher im- and security-related areas in 2022. However, while most ports of intermediate and equipment goods, reflecting spending items remained under control, the cost of fuel dynamic private investments being made in the oil and subsidies grew exponentially during this period. Pushed other sectors. As a result, the current account balance by higher global energy prices, public spending on fuel is estimated to have turned from a deficit of 4.7 percent subsidies grew by 138 percent in 2022, bringing total of GDP in 2021 to a surplus of 6.7 percent of GDP in spending on transfers and subsidies to 17 percent of 2022. GDP, more than any other expenditure category except for wages. Moreover, the intensive use of tax exemptions Gabon Economic Update 2 At the same time, high global food of public investments to complete the Government’s and energy prices are increasing strategic plans (PSGE due 2025 and Plan d’Accéléra- inflationary pressures, pushing the tion de la Transformation, PAT, due 2023). Combined with high commodity prices, fiscal consolidation efforts Government to maintain costly would benefit the fiscal balance over the medium term. measures to contain the rise in the The fiscal surplus is expected to narrow to 2.1 per- cost of living cent of GDP in 2023 in view of higher spending during the electoral period and the ongoing high cost of fuel Combined with the impact of the Russian invasion subsidies. However, revenue collection is expected to of Ukraine, the prolonged repercussions of the increase further in 2023, benefiting from still high oil rev- COVID-19 pandemic on global supply chains and enues but also further reforms of tax expenditures and other disruptions have been pushing up global tax collection. On the external front, growth prospects food and energy prices, harming the Gabonese, in China are expected to prop up demand for Gabonese especially the most vulnerable groups. Headline exports, but gradually declining oil prices and produc- inflation is estimated to have reached 4.3 percent in tion are likely to reduce the current account surplus 2022, up from 1.1 percent in 2021. In particular, food going forward. inflation has been undermining living conditions and ex- acerbating vulnerability, in spite of the gradual economic Due to its heavy dependence on volatile commodi- recovery and the resulting gradual decrease in poverty ty prices, Gabon remains exposed to several fiscal levels. In response to inflationary trends, the Gabonese and trade balance risks, such as potential trade Government has maintained a policy to contain the rise shocks or changes in OPEC+ quotas. In the first half in the cost of living by subsidizing and imposing ceilings of 2022, three commodities – oil, wood, and manga- on the prices of fuel, flour, and other food staples. As the nese – represented 90 percent of the country’s exports. country remains strongly dependent on food imports, The high level of market concentration for the country’s the list of tax-exempted and price-fixed basic food exports represents another challenge to building a solid products was updated in October 2022, as part of the economic base. Risks to fiscal sustainability also exist. Lutte Contre la Vie Chère (Fight Against an Expensive Sharp drops in oil prices threaten to undermine reve- Life) program. In addition, government subsidies are nues, but sustained high prices may push up the costs used to maintain low prices for wheat flour and different of fuel subsidies. At the same time, there is a prospect types of fuel. of fiscal slippages owing to the electoral period, such as increased public spending or delays in actions to cut tax benefits and tax exemptions. Gabon’s growth prospects are positive, but strong political The creation of a resilient and diversified econ- omy requires strong institutional reforms and commitment will be needed to major improvements in infrastructure and human create a viable economy in the capital. The Gabonese authorities are aware of the post-oil era country’s expected decline in oil production capacity, as existing oilfields will reach maturity in coming years. Gabon’s outlook indicates modest recovery over Over recent decades, a number of strategies have been the medium term, but external and internal vulner- put in place to diversify the economy. The success of abilities can compromise future growth. Growth is the Government’s goal of promoting a solid, green, projected at 3.1 percent in 2023, driven by extractives and diversified economic base would rely, to a great but also by agricultural production, especially rubber extent, on strong actions to improve the governance of and oil palm. Services and public works would further oil revenues and extractive sectors. Together with im- contribute to growth, pushed by higher public spending provements in access to finance, the business climate, related to the upcoming elections and the acceleration employment opportunities, infrastructure, and basic Gabon Economic Update 3 public services, such steps would be key to ensure that households’ purchasing power, as higher fuel prices the country’s rich natural resources are sustainably used would lead indirectly to higher prices for other products to create an inclusive economy, capable of benefiting all and services, especially in the transport, energy, fishing, Gabonese. and forestry sectors. Therefore, a fuel subsidy reform requires a strong mitigation package aimed at providing targeted support to the most vulnerable segments of Fuel subsidies are posing a serious the population. risk to Gabon’s fiscal health Lessons can be drawn from the experience of – demanding strategic action countries that have carried out fuel price adjust- to rebalance public spending, ments. The international experience shows four best ensuring fiscal sustainability while practices when carrying out a fuel subsidy reform: protecting the poorest through (i) prioritizing price adjustments for fuels that benefit improved and targeted social the richest segments of the population and that repre- protection programs sent the highest fiscal cost, for example by temporarily excluding socioeconomically strategic fuels such as The special focus of this Economic Update looks kerosene from the subsidy reform; (ii) adopting a price at fossil fuel subsidies, which represent a growing smoothing mechanism that allows to move gradually fiscal burden in Gabon. In 2022, the sharp rise in in- towards market-based pricing, while offering a bal- ternational oil prices led to an increase in fuel subsidies, ance between excessive price volatility and fiscal risks; estimated to represent 0.7 percent of GDP. This amount (iii) staggering the reform to allow households to adjust represents two thirds of total public spending allocated and the mitigation measures to be rolled out; and (iv) to health, and more than half of public spending on ed- engaging in stakeholder consultations and carrying out ucation in the same year. In June 2022, the Government communication campaigns to address the concerns of removed fuel subsidies for industrial consumption, in an various population groups. Moreover, targeted mea- effort to reduce their fiscal burden. Nevertheless, sub- sures should be selected to mitigate the impact on sidies continue to represent a fiscal risk as well as an affected groups and sectors. This can be achieved by obstacle to building fiscal buffers needed to support reinforcing social safety nets, increasing transparency of a countercyclical fiscal policy and to respond to the public financial management, increasing social spend- country’s development challenges. Furthermore, fuel ing, supporting strategically affected sectors such as subsidies introduce environmental and market dis- transports, and increasing productive structural public tortions, preventing an efficient use of energy and the investments. Country experiences illustrate a variety development of renewable sources of energy or the of possible accompanying measures to make adjust- adoption of low emitting development solutions, locking ments in fuel prices socially acceptable. They show that countries on a higher emission development pathway there is not a standard single set of actions, but that in the future. these measures need to be discussed, identified, and designed to reflect the concerns and the characteristics Fuel subsidies favor the richest households. While of each country. fuel subsidies aim at supporting consumers’ purchas- ing power, and more particularly the most vulnerable, subsidies are not restricted to kerosene, a fuel more heavily consumed by the poorest. In fact, subsidies to diesel and gasoline largely benefit the richest seg- ments of the population, especially groups living in urban areas. The removal of fuel subsidies (except for kerosene) would have a limited one-time effect on the price level. Such an increase would nevertheless impact Gabon Economic Update 4 Chapter 1 Recent economic trends and outlook for Gabon 1. Global and regional growth has er food and fuel prices fed increased vulnerability and slowed, while CEMAC economies distress. have been supported by high hydrocarbon prices In contrast, CEMAC economies experienced fast- er growth in 2022, thanks to higher hydrocarbon The global economy grew by 3.1 percent in 2022, a prices. Higher hydrocarbon prices, combined with the slowdown compared to the previous year resulting lifting of COVID-19 containment measures, have had an from tighter monetary conditions and global trade overall positive impact on the terms of trade and eco- disruptions. Global growth has been decreasing since nomic growth of the region. CEMAC’s economic growth its peak at six percent in 2021, when it started to re- is estimated to have reached 2.9 percent in 2022, up bound from the COVID-19 pandemic. Trade disruptions from 1.1 percent in the previous year, although both caused by the Russian invasion of Ukraine and tighten- years delivered growth well short of the Sub-Saharan ing monetary policies aimed at containing high inflation- Africa average (Figure 1). However, while oil and gas ary pressures in different regions have been contributing exports have been contributing to improved regional to this slower growth. Advanced economies, including fiscal and external balances, the fiscal costs of fuel sub- the U.S. and Europe, and most emerging markets are sidies have been increasingly weighing on the budget experiencing weaker growth. At the same time, risks of of CEMAC countries and limiting their ability to take ad- debt distress have heightened. vantage of rising oil prices to rebuild fiscal and external buffers (the special focus of this edition provides a more Against this backdrop, economic growth in Sub- detailed discussion of the topic). Meanwhile, rising glob- Saharan Africa has also weakened. Economic activ- al inflation is pushing up domestic prices and impacting ity in Sub-Saharan Africa slowed in 2022 to 3.7 percent real incomes, and tightening global financial conditions (from 4.4 percent in 2021), on account of weaker ex- are also constraining growth. ternal demand for non-energy commodities, tightening global financial conditions, and rising inflation. The cost The Bank of Central African States (Banque des of living has increased across the continent, as high- États de l’Afrique Centrale, BEAC) continued to Gabon Economic Update 5 Figure 1 2. While faced with global Real GDP growth (percent), 2018-2023 uncertainty, Gabon is experiencing a stronger 8 economic recovery 6 Gabon’s economic recovery picked up in 2022, 4 supported by good performance in the oil sec- 2 tor. Following a recession in 2020 caused by the twin COVID-19 and oil price shocks, the Gabonese econo- 0 my expanded by 1.5 percent in 2021 and is estimated -2 to have further grown by 3.1 percent in 2022 (Figure 2a). Despite the temporary stoppage in one important -4 field in 2022Q2, oil production is estimated to have in- 2018 2019 2020 2021 2022e 2023f creased by 6.1 percent in 2022 thanks to the relaxation World SSA CEMAC Gabon of OPEC+ quota restrictions on oil production and the Sources: Global Economic Prospects and World Bank staff exploitation of new fields. In the absence of any major calculations. oil discovery in recent years, oil companies made sig- Note: Preliminary data for 2022; projections for 2023. nificant investments in 2018 and 2019 with the aim of increasing the capacity of the country’s mature oil fields. tighten its monetary policy to contain inflationary Their returns were, however, temporarily compromised, pressures and ensure external viability. Following as Gabon was forced to cut its production both in 2020 an extraordinary Monetary Policy Committee meeting and 2021 in order to comply with OPEC+ requirements on November 25, 2021, the BEAC increased the policy (Figure 3a and Figure 3b). rate (taux d’intérêt des appels d’offre, TIAO) by 25 basis points to 3.5 percent. Further policy rate increases were Manganese and wood production and the services adopted, to 4.0 percent in March 2022, 4.5 percent sector also supported stronger non-oil activities. in September 2022, and 5.0 percent in March 2023. The strong performance of manganese production The BEAC also decreased its weekly liquidity injections sites, the exploitation of new mines, and the good man- from CFAF 160 billion in April 2022 to CFAF 50 billion agement of product delivery in wood exports enabled in December 2022. Moreover, the regional central bank the non-oil sector to further sustain growth in 2022, de- continues to work towards the effective application of spite a difficult international context. In 2022, production a new foreign exchange regulation, strengthening the of manganese and logs increased by 4.5 percent and repatriation of foreign exchange earnings for the ex- 5.9 percent (y-o-y), respectively, thus boosting non-oil tractive sector as agreed in January 2022. Against this activity. Meanwhile, wood-related industries are esti- backdrop, the CFA franc depreciated in real effective mated to have grown by 9.5 percent, down from a 34.5 terms for most of 2022 as the Euro depreciated against percent growth in 2021. Despite the establishment of the US dollar. Improved terms of trade in the region, new factories, wood industry production experienced thanks to higher commodity prices, and tighter fiscal lower growth in 2022 due to the drop in demand in the and monetary policies helped to support the buildup wake of the slowdown in global growth. Additionally, the of regional gross reserves, which have been increasing increased energy bill, as a result of higher fuel prices steadily since early 2022 and reached CFAF 6,851 bil- for industrial consumers since June 2022, weighed on lion in December 2022 (up from CFAF 4,779 billion in firms’ operating costs. Wood production, particularly by January 2022). Foreign exchange reserves at the BEAC factories located outside the Nkok Special Economic increased to reach the equivalent of 4.7 months of pro- Zone, also suffered from the low supply of logs. Finally, spective imports of goods and services by end-Decem- the services sector, while seeing its recovery some- ber 2022 (compared to 4.1 months at end-December what hampered by the higher fuel prices for firms, also 2021). contributed to the recovery (with 2.2 percent growth Gabon Economic Update 6 in 2022), thanks to the lifting of all COVID-19-related prices and improved global economic prospects for the restrictions in early 2022. sector, oil companies have increased their investments in order to maximize the profitability of existing oil fields. On the demand side, growth was mainly driven by While the current global economic context has become commodity exports and private investment, no- challenging due to the war in Ukraine, global demand tably in the oil sector (Figure 2b). Private investment for commodities remained strong in 2022, benefiting was supported mostly by the strong dynamism of the Gabonese exports, which are estimated to have in- oil sector. Oil sector and non-oil sector investments are creased by 7.3 percent in 2022. In particular, oil exports estimated to have increased by 11.1 and 3.6 percent (y- and wood exports are estimated to have increased by o-y) respectively in 2022. Boosted by the high level of oil 5.8 percent and 9.5 percent (y-o-y) respectively in 2022. Figure 2a Figure 2b Gabon: Supply-side contribution to real GDP Gabon: Demand-side contribution to real GDP growth (in percent), 2018-2023 growth (in percent), 2018-2023 5 30 4 20 3 10 2 1 0 0 -10 -1 -20 -2 -3 -30 2018 2019 2020 2021 2022e 2023f 2018 2019 2020 2021 2022e 2023f Agriculture Industry Services Private consumption Government consumption Gross fixed capital formation Net exports Change in inventory Real GDP growth Figure 3a Figure 3b Gabon: Oil production (thousand metric tons) Gabon: Oil vs. non-oil GDP and oil price (USD per bbl), 2018Q1-2022Q4 (percent of total GDP), 2018-2023 3000 120 100 90 2500 100 80 70 2000 80 60 1500 60 50 40 1000 40 30 20 500 20 10 0 0 0 T1 T3 T1 T3 T1 T3 T1 T3 T1 T3 2018 2019 2020 2021 2022e 2023f 1 8- 1 8- 1 9- 1 9- 2 0- 2 0- 2 1- 2 1- 2 2- 2 2- 20 20 20 20 20 20 20 20 20 20 Oil GDP Non-oil GDP Oil production (lhs) Crude oil, average price (rhs) Sources: Gabonese authorities, World Bank Commodity Price Data, and World Bank staff calculations. Note: Preliminary data for 2022; projections for 2023. Gabon Economic Update 7 3. Despite the recovery, increased tions aimed at enforcing price controls, to make sure inflationary pressures that economic operators apply the agreed prices for exacerbated household main staple food items. These measures come in ad- vulnerability dition to the Lutte Contre la Vie Chère (Fight Against an Expensive Life) program, which was launched in 2017 Inflationary pressures increased in Gabon in 2022, and was therefore already in place before the onset of a result of high global food and energy prices and the war in Ukraine. This program consists of tax exemp- rising shipping costs. After a modest inflation of 1.1 tions granted to selected imported basic items to pro- percent in 2021, the inflation rate for 2022 is estimated tect the most vulnerable from high food prices. In addi- to have reached 4.3 percent, standing 1.3 points above tion, food subsidies are applied to maintain low prices the regional convergence criteria (Figure 4). Headline for wheat flour. As for energy prices, in April 2021 the inflation stood at 4.5 percent by end-March 2023 (y- Government introduced a price freeze on fuel products. o-y), slightly lower compared to end-2022. During this These policies enabled Gabon to contain energy prices period, food prices rose by 7.6 percent (y-o-y). Prices of in recent months, with a 0.5 percent increase registered imported products were also on the rise (5.1 percent), (y-o-y) in December 2022. While these tax exemptions fueled mainly by disruptions in global supply chains and and subsidies have been useful in containing the rise in rising prices in several economies. living costs, they have been adding important spending pressures to the fiscal position. As a result, actions have However, compared to many economies in the re- been taken since October 2022 to reduce gradually the gion and elsewhere, Gabon’s annual inflation rate list of tax-exempted goods, in order to rationalize tax has remained relatively contained so far, thanks to expenditures and improve the fiscal balance; these may a series of fiscal measures aimed at moderating underlie the continuously high food inflation experienced price pressures. The authorities took several actions in late 2022. to limit disruptions in the supply of imported staple foods and contain the rising cost of living, as Gabon is While the poverty rate is estimated to have de- strongly dependent on food imports. In October 2022, creased in 2022, the COVID-19 pandemic, com- the Government increased the frequency of inspec- bined with the war in Ukraine, exacerbated house- Figure 4 Inflation (monthly, y-o-y, in percent), January 2020-December 2022 10 8 6 4 2 0 -2 -4 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Consumer price index (growth) Food price index (growth) CEMAC’s convergence criteria Source: Gabonese authorities. Gabon Economic Update 8 hold vulnerability. Thanks to the recovery, poverty is in the national economic outlook. As had happened in estimated to have been slowly decreasing. The national 2021, purchases of Government securities by commer- poverty rate is estimated at 32.9 percent at end-2022, cial banks increased in 2022 (+30.4 percent y-o-y) in down from 33.6 percent in 2021.1 Although the gradual order to absorb the increased issuance of bonds and economic recovery started in 2021 and has been in- Treasury bills. This movement has been in line with the creasing its pace in 2022, living conditions have not yet Government’s financing strategy, which relies heavily returned to their pre-crisis level. Vulnerability increased on the regional financial market. As a result, Gabonese as a result of food inflation; almost 37 percent of house- banks’ exposure to sovereign assets increased, with holds reported experiencing high food prices in July bonds and Treasury bills representing 16.6 percent of 2022, based on the World Bank High Frequency Phone banks’ total receivables at end-December 2022. Surveys. The Gabonese Government subsidizes and imposes ceilings on the prices of fuel, flour, and other However, the rise in non-performing loans (NPL) in food staples, but retail prices for several food staples 2022 revealed signs of fragility within the Gabonese have been increasing at marketplaces. With more than financial sector. As a response to the economic 85 percent of households consuming bread, rice, and impacts brought by the COVID-19 pandemic, a tem- refined vegetable oil on a daily basis, inflationary pres- porary regulatory forbearance was applied by COBAC sures brought by the conflict in Ukraine (a major wheat (Commission bancaire de l’Afrique centrale), the region- exporter) and other disruptions affecting global supply al banking regulator, until July 2022. Concomitant to chains have continued to impact the poor and the mid- the end of this forbearance, the volume of NPLs on the dle class. Additionally, the recovery of the private sector, balance sheets of Gabonese banks started to increase, in particular for small and medium enterprises, has been after two consecutive years of decline. NPLs went up by partly hampered by the rise in the price of fuel products 34.8 percent at end-2022 (y-o-y), reaching 10.5 percent – fuel subsidies were removed for industrial consumers of total loans in 2022, against 8.3 percent in 2021. The starting in June 2022. Thus, insufficient job creation rise in NPLs could also be explained by delays in the may have further weakened household consumption in implementation of the authorities’ plan to clear domestic 2022. Private consumption is estimated to have slightly arrears, which has been underway since October 2020. decreased over this period, by 0.2 percent. Despite the adoption of several reforms over the years to improve cash flow management, Gabon has once more accumulated both domestic and external arrears 4. Firms experienced an increased in 2022. access to credit Despite tightening monetary policy and the 5. The fiscal balance improved but Government’s strong reliance on financial mar- fuel subsidies are increasingly kets (both international and regional), financing weighing on the budget available for the private sector was on the rise in 2022, supporting the country’s economic recovery. Fiscal developments Despite rising interest rates, credit to the private sector increased by 13.6 percent in December 2022 (y-o-y), High oil prices and expanding oil production while credit to the Government increased by 9.7 percent boosted oil revenues and led to the strongest (y-o-y) over the same period. This increase in credit to the fiscal surplus in Gabon since the 2014 oil price economy reflects both improvements in Gabon’s public shocks. Since the pandemic, Gabon’s fiscal balance finances (with an estimated fiscal surplus of 3.0 percent had been registering deficits (2.1 percent of GDP in of GDP in 2022) and the confidence of the private sector 2020 and 1.9 percent of GDP in 2021), but in 2022 it 1 Based on the upper middle-income poverty rate (individuals living with less than USD6.85 per day in 2017 PPP). Estimates are calculated based on the 2017 Gabon Poverty Assessment (Enquête Gabonaise pour l’Evaluation et le Suivi de la Pauvreté). Gabon Economic Update 9 turned into a surplus estimated at 3.0 percent of GDP. to register and locate taxpayers who have relocated Over the year, total revenues reached 18.6 percent of their businesses, and promote the payment of taxes GDP (compared to 15.8 percent of GDP in 2021). A and customs duties through bank transfers, checks or major contribution came from oil revenues, which grew electronic transfers. by 82 percent in 2022 and represented 7.1 percent of GDP (Figure 5). The exploitation of new fields and the During 2022, tax revenues were derived mostly relaxation of OPEC+ quotas benefited oil production, from income taxes. Representing 4.8 percent of GDP, while prices remained high throughout the year. these included corporate and personal income taxes and, to a minor extent, taxes on property and invest- Domestic revenue mobilization efforts also con- ment income. In particular, revenues from income taxes tributed to improved non-oil revenue perfor- grew by 75 percent in 2022, as a result of the good mance. As the COVID-19 restrictive measures were performance of firms operating in industries such as fully removed only in the first quarter of 2022, tax policy hydrocarbons, wood, and manganese, coupled with reforms introduced in the 2022 budget law focused on actions to reduce tax incentives. The corporate income broadening the tax base, improving the tax collection tax paid by oil firms represented nearly 40 percent of system, and reducing tax exemptions. Actions taken to all income taxes, highlighting the country’s strong reli- support tax collection and rationalize tax expenditures ance on its hydrocarbon industry. Meanwhile, in 2022 contributed to a 48 percent growth in tax revenues, taxes on trade and on goods and services amounted which reached 11.1 percent of GDP in 2022 (compared to 2.5 percent of GDP and 2.3 percent of GDP, respec- to 9.2 percent of GDP in 2021). Among these actions, tively. The bulk of consumption taxes came from VAT, the Government streamlined CIT and VAT incentives, which amounted to 74 percent of domestic indirect such as by limiting tax benefits for firms in the Nkok taxes and a third of revenues from customs. Excise Special Economic Zone, removing VAT exemptions for duties, the Special Solidarity Contribution (Contribution the construction sector, and increasing VAT rates on ce- Spéciale de Solidarité, CSS, aimed at financing support ment. The Government also pursued its ongoing efforts for vulnerable populations classified as GEF, Gabonais Economiquement Faibles), and an array of other smaller Figure 5 taxes and contributions also apply on domestic con- sumption, imports and exports. The streamlining of VAT Oil and non-oil revenues (percent of GDP), exemptions and reductions, as well as rising spending in 2018-2023 nominal terms due to inflation, contributed to a consid- 25 erable growth in indirect taxation (+50 percent in 2022). 20 Grants and other revenues were expected to 15 have a smaller contribution to the budget, but Gabon continued to benefit from environmental 10 conservation initiatives, showcasing the eco- nomic potential of a well-managed environment 5 protection policy. Non-tax revenues amounted to 0.4 percent of GDP in 2022, most of which came from 0 2018 2019 2020 2021 2022e 2023f investments in social and infrastructure projects and Oil revenues Income taxes general budget support provided by Gabon’s national Taxes on trade VAT and indirect taxes funds, the Sovereign Wealth Fund (Fonds souverain Other taxes Grants and other revenues de la République gabonaise, FSRG), and two funds Sources: Gabonese authorities and World Bank staff calculations. financed by oil firms (the Provision pour investissement Note: Preliminary data for 2022; projections for 2023. Other diversifié, PID, and Provision pour investissement en taxes include items such as tax fines and taxes on forestry. Other revenues include the state’s participation in oil, mining, and other hydrocarbures, PIH). Foreign grants totaled 0.15 per- companies, revenues from licenses, permits, and others. cent of GDP; notably, more than half of these were Gabon Economic Update 10 provided in support of environment policies. Carbon items, except for spending on fuel subsidies.2 The credit payments made under the UN-led Central African increasing cost of fuel subsidies has been consuming Forest Initiative (CAFI) to compensate Gabon for forest the fiscal space; in 2022, the Government spent more conservation and carbon absorption represented one on fuel subsidies and other transfers than on all public fourth of foreign grants. The country also expected to investments. Over the year, a 33 percent rise was reg- receive foreign support for projects such as managing istered in spending on transfers and subsidies, bringing human-elephant conflicts, creating model parks, and it to 17 percent of total expenditures. However, public building a sanctuary for sharks. Although constituting a expenditures as a whole decreased during this period, modest share of the budget at present, foreign support representing 15.6 percent of GDP in 2022 (down from for environmental policies has substantial potential for 17.6 percent of GDP in 2021 – Figure 6). A first fac- Gabon, which can be promoted through the adoption tor contributing to contained spending was the hiring of good governance practices and compliance with freeze imposed on the public sector between 2018 and transparency requirements. 2022 (with a few exceptions for priority sectors such as health, education, and security). This action ensured In spite of actions taken to rationalize tax expen- that the wage bill remained stable, though spending on ditures, total foregone revenues amounted to payroll consumed about a third of total public expendi- CFAF 351.5 billion in 2022 (2.6 percent of GDP). ture in 2022. Tax expenditure include tax benefits provided to certain sectors such as transport, telecom, wood, construc- The authorities continued their selective approach tion, and oil exploration, and to firms located in special to public investment and a policy to contain cur- economic zones. In addition, VAT and customs duty ex- rent expenditure, but there is room for strengthen- emptions and reductions are granted as part of a strat- ing the focus on spending on physical and human egy to contain rising living costs (under the Lutte Contre la Vie Chère, Fight Against an Expensive Life, program). Figure 6 Measures to reduce the fiscal cost of tax expenditures have been strengthened since 2021. For example, a Current and capital public expenditures (percent of GDP), 2018-2023 reduced VAT rate of five percent has been progressively applied on basic imported goods which were previously 25 tax exempt. Corporate income tax benefits have also been reduced. As a result, as a percentage of total tax 20 revenues, the amount of foregone revenues declined 15 from 31.7 percent in 2021 (equivalent to 2.9 percent of GDP) to 23.1 percent in 2022 (2.6 percent of GDP). 10 During 2022, the tax authority carried out an initial study on the effective use of tax incentives in certain sectors 5 and, as a next step, plans to expand the study to more sectors and take action to limit the undue use of these 0 2018 2019 2020 2021 2022e 2023f incentives. As they still represent a considerable loss in Public investments Wages and compensation revenues, further measures to improve the control and Goods and services Transfers and subsidies verification of incentives, as well as to rationalize their Interest payments Other expenditures use, would be a relevant step to secure revenue mobili- zation over the coming years. Sources: Gabonese authorities and World Bank staff calculations. Note: Preliminary data for 2022; projections for 2023. Other expenditures include spending on social assistance and health- Meanwhile, the pursuit of fiscal consolidation re- care (Caisse nationale d’assurance maladie et de garantie sociale, CNAMGS), VAT refunds, COVID-19 response, earmarked expendi- sulted in a stable wage bill and other expenditure tures, and other items. 2 Please refer to the thematic chapter of this Economic Update for a detailed analysis of fiscal costs and other aspects of fuel subsidies in Gabon. Gabon Economic Update 11 capital. In 2022, capital expenditures and public ary allocations of the revised budget law, and public spending on goods and services represented about investments were executed at a lower rate (74 percent). ten percent of total spending each; compared to 2021, However, spending on goods and services and on fuel they decreased by, respectively, fifteen percent and subsidies were higher than foreseen by the authorities eight percent. According to the Government’s invest- – with, respectively, an execution rate of 110 percent ment plans, most public investments would be directed and a 125 percent (Figure 7). Nevertheless, during this to roads and other public works. These amounted to period, the performance of oil revenues was consider- CFAF 98 billion in 2022 (44 percent of self-financed ably above the official predictions, while non-oil revenue investments), as the Government pursued the imple- performance also surpassed budgetary predictions. mentation of its strategic development plan (PSGE). Together, this revenue windfall was able to offset the During this period, the Government also expected to higher-than-expected spending on goods and services invest heavily in defense and security-related areas, and and fuel subsidies, allowing Gabon to end 2022 with a items such as army equipment, rescue centers and positive fiscal balance. improvements in a naval base amounted to eleven per- cent of self-funded investments. This amount was more Figure 7 than the combined capital expenditures allocated to Budget execution rates (percentage points), social sectors: investments in school constructions and 2022 other education-related projects were planned to reach 140 four percent of investments, while constructions and improvements of hospitals and all other health-related 120 investments would reach five percent of public invest- 100 ments. Lastly, in 2022 about seven percent of spending 80 for goods and services was directed to cover utilities 60 and telecom services, followed by operational expenses in different line ministries, public agencies, and sectors. 40 20 Measures are being taken to reduce the fiscal risks 0 arising from expanded fuel subsidies, but deeper es s ies s roll s s vice ent ent nue enu bsid reforms are still needed in view of still high oil pric- Pay ym stm eve ser rev l su t pa Inve r es. To reduce the fiscal weight of fuel subsidies, in June and Oil Tax Fue res ds Inte 2022 the Government limited them to households, by Goo starting to remove subsidies for industrial consumption. Nevertheless, current spending with subsidies reached Sources: Gabonese authorities and World Bank staff calculations. Note: Preliminary data for 2022. Execution rates based on actual CFAF 100.6 billion at end-2022, greatly surpassing revenues and actual spending, indicated as a percentage of reve- the CFAF 8.5 billion allocated in the initial budget law nues and expenditures allocated in the 2022 revised budget law. for the year, due to higher than anticipated oil prices in the context of the war in Ukraine and other global Debt trade disruptions. Fiscal risks related to fuel subsidies remain high, constraining the availability of public funds Thanks to the economic recovery, government to tackle the country’s development challenges (a more debt declined as a percentage of GDP in 2022, detailed discussion is provided in the next chapter). giving the country more room for maneuver re- garding potential recourse to external financing. In terms of budget execution, higher than expect- Between 2021 and 2022, the debt stock in absolute ed revenues (especially from the oil sector) and terms grew from CFAF 6.8 trillion to CFAF 7.1 trillion, in lower investments compensated for the increased part due to the appreciation of the USD against the CFA fiscal cost of fuel subsidies. In 2022, actual spending franc, as a significant share of Gabon’s debt stock is on payroll and interest payments matched the budget- dollar-denominated. A stronger growth in nominal GDP, Gabon Economic Update 12 however, reduced the debt-to-GDP ratio from 60.7 Figure 9 percent to 52.0 percent (Table 1 and Figure 8). As of Composition of public debt (percent of total end-March 2023, external debt represented about 63 debt), 2022 percent of total debt, consisting mostly of debt owed to multilateral creditors and Eurobonds. On the domestic Domestic - Treasury bills side, regional financial markets and local banks were 3% Domestic - loans External - bilateral the main sources of Gabon’s domestic debt (Figure 9). 12% 12% Gabon’s debt trajectory is deemed sustainable in Domestic - bonds External - view of high oil revenues. The country’s public debt (regional markets) multilateral surpassed the CEMAC’s regional threshold of 70 per- 21% 27% cent of GDP only once in recent decades, during the External - commercial 2020 COVID-19 pandemic shocks. Its debt-to-GDP 3% External - Eurobonds ratio has been declining since then and is expected to 22% maintain a downward path in the medium term. The latest IMF Debt Sustainability Analysis performed in July Sources: Gabonese authorities and World Bank staff calculations. 2022 assessed that the public debt was sustainable Note: Data as of December 31, 2022. and that risks had moderated compared to previous as- sessments. More recently, in February 2023, the credit agement, which can compromise debt sustainability. rating agency Fitch Ratings classified Gabon as B- with Even in a context of high oil prices and amid an improved a positive outlook, thanks to expected governance re- fiscal situation, the Government continued to accumu- forms and growth prospects. late external arrears. As of end-March 2023, external arrears amounted to CFAF 81.4 billion, equivalent to 0.6 Still, liquidity pressures and important risks related percent of GDP, raising concerns over cash flow man- to poor cash flow management should not be ne- agement and increasing risks to the country’s financing glected, as Gabon continued to accumulate both costs. Regarding domestic arrears, a medium-term plan external and domestic arrears in 2022 and early for their clearance was adopted in December 2020, to 2023. Gabon faces difficulties in public financial man- reduce them gradually from CFAF 747.5 billion in 2020 to zero in 2025. While facing a delay, this plan is now Figure 8 gradually being implemented. Clearing domestic arrears Fiscal balance and public debt (percent of as well as taking strong measures to eliminate external GDP), 2018-2023 arrears and avoid their accumulation remain essential 90 4 to mitigate the risks and vulnerability of Gabon’s debt 80 profile. 3 70 2 60 50 1 6. Higher oil prices and the lifting 40 0 of OPEC+ quotas also resulted in 30 an improved trade balance -1 20 10 -2 In 2022, Gabon’s trade balance was strengthened 0 -3 by both higher commodity prices and higher ex- 2018 2019 2020 2021 2022e 2023f port volumes. Higher oil prices combined with the External debt (lhs) Domestic debt (lhs) lifting of OPEC+ quotas on oil production led to a signifi- Overall balance (rhs) cant increase in export revenues in 2022 (+40.1 percent Sources: Gabonese authorities and World Bank staff calculations. y-o-y in nominal value). As in 2021, Gabon benefited Note: Preliminary data for 2022; projections for 2023. from favorable prices for manganese, which increased Gabon Economic Update 13 Table 1 Gabon: Selected fiscal indicators Percent of GDP (unless otherwise stated) 2020 2021 2022e 2023f Total revenue and grants 17.6 15.8 18.6 19.1 Revenues 17.6 15.7 18.2 18.7 Oil revenues 6.8 4.8 7.1 5.7 Tax revenues 9.9 9.2 11.1 13.1 Non-tax revenues 0.9 0.6 0.0 0.0 Other revenues 0.0 1.1 0.0 0.0 Grants 0.0 0.1 0.4 0.4 Total expenditures 19.8 17.6 15.6 17.1 Current expenditures 16.2 13.3 11.5 12.5 Wages and compensation 7.7 6.1 5.0 5.5 Goods and services 2.3 2.1 1.5 1.8 Interest payments 3.4 2.8 2.4 2.8 Transfers and subsidies 2.8 2.4 2.6 2.5 Other expenditures 0.8 1.9 2.4 2.3 Public investments 2.7 2.4 1.7 2.3 Overall balance (commitment basis) -2.1 -1.9 3.0 2.1 Primary balance 1.2 0.9 5.4 4.8 Total public debt 77.4 60.7 52.0 51.8 Total external debt 46.0 37.6 31.1 31.6 Memo Nominal GDP (CFAF billions) 8,816 11,211 13,731 12,810 Sources: Government and World Bank staff calculations. Note: Preliminary data for 2022; World Bank projections for 2023. by 15.2 percent in 2022. Exports of manganese also bution to regional reserves also significantly in- recorded an increase in volume in 2022 (+1.3 percent). creasing. Gabon’s trade balance is estimated to have Furthermore, despite a fall in timber prices (-8.0 percent increased from 11.5 percent of GDP in 2021 to 43.7 in 2022), the volume of timber exports increased by 9.5 percent of GDP in 2022 (Figure 10). The current account percent in 2022. On the other hand, imports increased balance is estimated to have strongly improved, from a by 10.4 percent in 2022 (y-o-y), driven by the rise in im- 4.7 percent of GDP deficit in 2021 to a 6.7 percent of ports of intermediate and equipment goods, reflecting GDP surplus in 2022 (Figure 11). Foreign direct invest- dynamic private investments being made in the oil and ment remained a dynamic driver of external financing other sectors such as agriculture, forestry, fishing, and flows in 2022. Gabon increased its contribution to the aquaculture. In addition to the increase in volumes, high regional foreign exchange reserves at the BEAC, reach- import prices also contributed to higher import values ing an estimated CFAF 6,851 billion (or the equivalent of recorded in 2022. The fact that some countries needed about 4.7 months of imports of goods and services) at to redirect their oil imports following the war in Ukraine end-December 2022. also benefited Gabon. As a result, Gabon’s trade balance and current account balance are estimated to have improved considerably in 2022, with the country’s contri- Gabon Economic Update 14 Figure 10 Figure 11 Gabon: Trade balance, 2018-2023 Gabon: Current account balance (percent of GDP), 2018-2023 10,000 50 50 9,000 45 40 8,000 40 30 7,000 35 20 6,000 30 10 CFAF billion % of GDP 5,000 25 0 4,000 20 -10 3,000 15 -20 2,000 10 -30 1,000 5 -40 0 0 -50 2018 2019 2020 2021 2022e 2023f 2018 2019 2020 2021 2022e 2023f Exports (lhs) Trade balance (rhs) Trade balance Primary and secondary incomes Imports (lhs) Oil exports (lhs) Current account balance Sources: Gabonese authorities and World Bank staff calculations. Note: Preliminary data for 2022; projections for 2023. 7. Economic outlook 3.7 percent in 2022) before picking up to about four per- cent on average in 2024-2025 (Figure 12, right panel). 7.1. Global growth is projected to Per capita income in the region as a whole is expected decelerate sharply to grow by only about one percent a year on average in 2023-2025, half a percentage point below its trend rate Global economic activity is set to decelerate sharply before the pandemic. In the CEMAC region, economic in 2023 as a result of synchronized monetary policy growth is projected to slow down marginally, with an av- tightening to contain high inflation, less favorable erage real GDP growth of 2.7 percent in 2023 and 2.9 financial conditions, and ongoing disruptions from percent in 2024-2025. Even though an expected moder- the war in Ukraine. Global growth is expected to de- ation of global commodity prices should temper increas- celerate sharply to 2.1 percent in 2023 (from 3.1 percent es in the cost of living, tighter policy stances to address in 2022) (Figure 12, left panel). The sharp downturn in elevated inflation and public debt will weigh on domestic growth is expected to be widespread. The United States demand. Subdued growth will make it difficult to reverse and the Euro area are undergoing a period of pronounced increases in food insecurity and poverty. Meanwhile, weakness, and the resulting spillovers are exacerbating weakening growth in advanced economies is expected to other headwinds faced by emerging market and develop- pose headwinds for external demand, particularly among ing economies. The combination of slow growth, tighten- exporters of industrial commodities. Risks are tilted to the ing financial conditions, and heavy indebtedness is likely downside. A more pronounced weakness in major econ- to weaken investment and trigger corporate defaults. omies, further increases in global interest rates, higher Further negative shocks — such as higher inflation, even and persistent inflation, fragility, and increased frequency tighter monetary policy, financial stress, deeper weakness and intensity of adverse weather events could further slow in major economies, or rising geopolitical tensions — growth across the region, exacerbating poverty and lead- could push the global economy into recession. ing to debt distress in some countries. In Sub-Saharan Africa, growth in 2023-2025 is Despite these challenging global and regional con- projected to remain below long-term averages in texts, considerable growth in Asia’s largest econ- several economies. Economic growth in the region is omies is expected to benefit Gabonese exports. In projected to remain modest in 2023 at 3.2 percent (from the first half of 2022, nearly three quarters of Gabon’s Gabon Economic Update 15 Figure 12. Global growth prospects (percent) Global growth 6 5 4 3 2 Pourcentage 1 0 -1 -2 -3 -4 1990 1995 2000 2005 2010 2015 2020 2025 GDP growth in SSA GDP growth in Gabon’s main export markets 6 10 9 5 8 4 7 6 3 5 4 2 3 1 2 1 0 0 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 Sub-Saharan Africa Angola, Nigeria, Other SSA China India and South Africa 2000-2019 average Source: Global Economic Prospects. Note: Data for 2023 and onward are forecasts. For global growth, the sample includes up to 37 advanced economies and 144 emerging market and developing economies. Aggregate growth rates are calculated using real U.S. dollar GDP weights at average 2010-19 prices and market exchange rates. Other SSA excludes Angola, Nigeria, and South Africa. exports were directed to countries in Asia. Seven out of strong growth rates, at about 6.4 percent in 2023-2024. the ten top destinations for Gabon’s exports were locat- These favorable growth prospects are expected to ben- ed in Asia, including China and India, which absorbed, efit Gabon’s economy. respectively, 34 percent and 11 percent of Gabon’s exports in the same period. After having experienced 7.2. Gabon has favorable growth reduced growth in 2022 – at 3.0 percent, the second prospects but faces important risks weakest growth rate since the 1970s – the Chinese to growth and diversification economy is expected to grow by about five percent in 2023 and in 2024, benefiting from the lifting of pandem- Gabon’s outlook remains favorable over the me- ic-related restrictions. India is also expected to maintain dium term but is subject to several downside Gabon Economic Update 16 risks, due to factors such as its heavy reliance to 2.1 percent of GDP in 2023 owing to higher spending on volatile commodity markets. Despite the risks of (17.1 percent of GDP) in the context of upcoming elec- global low growth or recession, Gabon’s growth is pro- tions and the high cost of subsidies. However, revenue jected to average 3.0 percent in 2023-2025, thanks to collection is still expected to increase, reaching 19.1 a strong performance forecast for its extractive sectors percent of GDP in 2023, because of still high oil reve- (Figure 13). Oil production is projected to increase by nues and the tax reforms introduced in the 2023 budget 3.1 percent (y-o-y) in 2023 but would start to decline law. Among the measures adopted in the budget law, gradually from 2025 onwards due to the natural maturity the single property tax started to be effective in January of existing oil fields, an issue that highlights the need 2023, replacing previous property taxes and is expect- for a strong reform agenda for a successful transition ed to generate higher revenues. Short- to medium-term to a post-oil economy. In the meantime, the wood and plans mentioned in the law for taxation include the manganese sectors are expected to remain strong streamlining of tax expenditures, the implementation of growth drivers, with an average increase in production VAT on e-commerce, an increased taxation of tobacco of 8.6 percent and 7.6 percent, respectively, over 2023- products, improvements in tax administration, and ef- 2025. Agriculture (especially rubber and oil palm) and forts to promote digital tax payments. In terms of expen- services would also sustain growth, as well as public ditures, the 2023 budget law lists measures to contain works, pushed by higher public spending in view of the spending, such as imposing a ceiling of 102,388 public upcoming elections and by an increase in investments agents, slightly below the ceiling adopted for 2022. to finalize the implementation of the PSGE, expected to Other planned efforts include improvements in the con- be completed in 2025. trol over public entities and in budget execution. Combined with high commodity prices, public However, risks of fiscal slippages are high in view policies to promote domestic revenue mobiliza- of the upcoming elections, with fuel subsidies tion and contain both debt and expenditures are and tax expenditures posing challenges to fiscal expected to benefit the fiscal balance over the soundness. Tax expenditures and fuel subsidies repre- medium term. The fiscal surplus is expected to narrow sent an important cost for public finances, amounting to Figure 13a Figure 13b Expected growth in key sectors (real growth in World prices for Gabon’s main commodities, CFAF billion), 2022-2025 2022-2025 1000 800 900 700 800 600 700 600 500 500 400 400 300 300 200 200 100 100 0 0 Oil Agriculture Wood Mining Crude oil, Brent Sawn wood Manganese (USD/barrel) (USD/cubic meter) (USD/ton) 2022 2023 2024 2025 2022 2023 2024 2025 Sources: Gabonese authorities and World Bank staff calculations. Note: Estimates for 2022; projections for 2023-2025. Data for the wood, mining and agriculture sectors include the respective extractive sectors (primary sector) and industrial transformation. Data for the oil sector includes oil extraction, refinery, and exploration and oil industry services. Gabon Economic Update 17 2.6 percent of GDP and 0.7 percent of GDP respectively expenditures, as well as a sudden drop in oil prices, in 2022. While these policies are intended to protect the could also compromise Gabon’s fiscal health. poorest, they fall short of achieving this goal. Fuel subsi- dies mostly benefit the wealthiest and urban segments Sustained economic growth and diversification of the population and alternative policy options do exist would depend on strong institutional reforms, but to protect more effectively the most vulnerable (a more these could be stalled by factors such as high detailed discussion is provided in the next chapter). oil prices and the upcoming elections. A leader in net zero emission initiatives, Gabon – the first country On the external front, Gabon is highly exposed to in Africa to receive a payment for cutting carbon emis- price volatility and other potential shocks, given sions – has plans to further mobilize climate financing. strong export concentration in terms of products The country expects to sell credits from 90 million tons and markets. Over the coming years, growth prospects of carbon absorption, thanks to forest conservation. in China and India are expected to benefit Gabonese However, deeper reforms are yet to be achieved, to exports, especially oil, manganese, and wood. In 2023, mobilize its economic potential and reduce reliance on high oil prices are expected to keep contributing to a oil. Ensuring good governance, particularly at the Fonds trade surplus. However, gradually declining oil prices Gabonais d’Investissements Stratégiques (Gabonese are expected to translate into reduced current account Fund for Strategic Investments, FGIS), the entity tasked surpluses over the years. To reduce vulnerabilities and with managing carbon credits, will be key. However, develop a more solid economic base, it would be im- high oil revenues and the distraction surrounding the portant for Gabon to diversify not only its basket of elections could delay the implementation of reforms, exported goods but also its trading partners. Efforts to with negative consequences for the economy. On debt reduce the level of market concentration could prove policy, a debt strategy is in place to contain public debt, invaluable to sustain the country’s long-term economic but the continued accumulation of arrears remains a objectives. major concern. Gabon’s financing costs could increase in the absence of strong measures to improve cash flow Economic diversification efforts are underway, management. Access to finance might be further com- but Gabon’s growth prospects, fiscal position, and promised by tightening monetary policies. trade basket all remain dependent on a few se- lected commodities, notably oil. OPEC+ decisions To achieve Gabon’s diversification, competitive- on production quotas could have a significant impact ness, and climate change adaptation goals, major on the country’s macroeconomic performance. At the improvements in infrastructure and human capital same time, rising uncertainty linked to the international are needed. Strengthening transport and energy in- context represents a risk to Gabon’s outlook. A weaker frastructure would be essential. Gabon’s only railway, growth in China or trade disruptions caused by a pro- for example, was blocked for weeks due to landslides tracted war in Ukraine or other geopolitical tensions at end-December 2022, compromising shipments of could negatively impact the demand for and prices of wood and manganese as well as the supply of basic Gabonese products. While conflicts could still lead to goods in affected areas. In addition, the Gabonese high oil prices, they would cause growing disadvan- population, especially the young generations, need a tages for Gabon, such as higher spending on fuel and more conducive business climate, expanded access to food subsidies over time. Risks to fiscal sustainability credit, and improved provision of healthcare, education, remain, from the high costs of subsidies as well as the and vocational training, to be able to fully participate in removal of the public sector hiring freeze and the fore- and contribute to resilient growth. seen increases in capital expenditures and in spending on goods and services. Spending is expected to rise in 2023, ahead of the upcoming elections and as invest- ments are carried out in line with the PSGE. Delayed initiatives to increase tax collection and rationalize tax Gabon Economic Update 18 Chapter 2 Special topic: Assessing the impact of fossil fuel subsidies in Gabon and options for policy reforms This chapter provides policy options for gradually re- 1. Introduction – recent development forming fossil fuel subsidies in Gabon. While fuel sub- in fossil fuel subsidies sidies imply significant fiscal and environmental costs, they benefit mainly the richest households. In addition, 1.1. Evolution of oil prices and related fuel subsidies divert fiscal resources from sectors, subsidies – Regional overview households, and firms that might need them more. International experience would suggest that the reform The recent surge in international oil prices has led is most successful when fuel subsidies are phased out to an increase in fuel subsidies across the world. in a sequenced and gradual approach. This approach After a price decline induced by slower economic activi- should be designed in consultation with key stakehold- ty and reduced demand due to the COVID-19 pandem- ers and accompanied by compensation mechanisms ic, energy commodity prices have been rising since late that minimize potential short- and medium-term shocks 2020 and reached new heights in 2022 amid the war in on households and firms. Ukraine (Figure 14). As governments around the world introduced measures to ease the impact of these high This chapter focuses on subsidies for kerosene, diesel, energy costs on households and businesses, energy gasoline, and LPG (see Technical Annex 1 for more in- consumption subsidies rose sharply in 2022, reaching formation on their use and see Technical Annex 2 for nearly USD 700 billion for oil, natural gas and coal, the more information on the definition and quantification highest level ever recorded (Figure 15). These subsidies methodology of subsidies). are mostly broad-based, instead of being targeted towards vulnerable groups, and come with significant fiscal costs.3 3 Recently published estimate from IEA based on data from 51 countries, covering the OECD, G20 and 33 other major energy consuming and producing economies. Gabon Economic Update 19 Countries in West and Central Africa, including sidies in CEMAC countries reached CFAF 1,243 billion in the CEMAC region, have seen a similar devel- in 2022, equivalent to about 1.8 percent of the region’s opment. The fiscal cost of energy subsidies in AFW GDP, above the average of West African countries at 1.5 more than doubled compared to their pre-COVID levels percent of GDP. While some CEMAC countries have in- (Figure 16). In contrast to rising energy subsidies, pub- creased retail fuel prices in early 2023, subsidies (except lic spending on social sectors has stagnated or even for CAR) are still substantial.4 decreased (Figure 17). The fiscal cost of fossil fuel sub- Figure 14 Figure 15 Crude oil price, Brent (USD/bbl) Fossil fuel consumption subsidies worldwide (billion USD) 120 800 700 100 600 80 500 60 400 300 40 200 20 100 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 1 2 3 4 5 6 7 8 9 0 1 2 201 201 201 201 201 201 201 201 201 201 202 202 202 Oil Natural gas Coal Figure 16 Figure 17 Fiscal cost of fuel subsidies in West and Central Social Spending in West and Central African African countries (percent of GDP) countries (percent of GDP) 2.5 7 6 2.0 5 1.5 Percentage Percentage 4 1.0 3 2 0.5 1 0.0 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Education Health Social protection Social spending Sources: National authorities and World Bank staff calculations. Note: Due to data availability, in these graphs “West and Central African countries” refers to the following countries: Burkina Faso, Cabo Verde, Cameroon, Central African Republic, Republic of Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, Ghana, Mauritania, Nigeria, Senegal, The Gambia, and Togo. 4 In early 2023, Cameroon increased retail fuel prices (diesel +25 percent, gasoline +15 percent, kerosene to industries +60 percent), as well as CAR (diesel +70 percent, gasoline +50 percent) and Congo (diesel +5 percent, gasoline +5 percent). Gabon Economic Update 20 CEMAC economies are exposed to oil price vol- opportunity as these resources could have been used atility and have not managed to translate their for other purposes and perhaps to a greater benefit. natural wealth into sustainable development. Oil accounted in 2022 for more than 25 percent of GDP in 1.2. The growing fiscal cost of fossil CEMAC economies and covered roughly 80 percent of fuel subsidies in Gabon the region’s exports of goods. Tax and non-tax revenues related to oil contributed to about 55 percent of total Fossil fuel subsidies represent a growing fiscal revenues. Many crude oil exporters rely to a great extent burden in Gabon, even if the country is a net oil on imports of refined products because of constraints exporter. High oil prices have been benefiting Gabon, in refining capacity. Given the size of the oil sector and representing a net gain for its fiscal balance. However, the its importance in commanding public resources, these potential gains for the country are being increasingly re- countries are highly exposed to the volatility in interna- duced by the rising cost of fuel subsidies. Between 2021 tional oil prices. Their fiscal space is less predictable and and 2022, public spending on fuel subsidies increased they have been facing challenges in the use of oil reve- from 0.38 percent of GDP to an estimated 0.73 percent nues to invest in physical and human capital to lay the of GDP (Figure 22). The bulk of fuel subsidies in Gabon foundations of more sustainable and inclusive growth. is provided in the form of budgetary transfers made to SOGARA, the national refinery, to compensate it for local Both oil importers and exporters have increased fuel sales below international market prices; in addition, their fuel subsidies, although oil exporters have a VAT exemption also applies for LPG sales. Subsidies larger buffers. Fuel subsidies have been rising in both are, since June 2022, restricted to household consum- net oil exporting and net oil importing countries (Figure ers. The most subsidized petroleum product in 2022 was 18). A share of the oil windfall in oil exporting countries diesel (45.4 percent of the subsidies provided, Figure 23), has been used to finance subsidies and protect their a fuel mainly consumed by the richest households (Figure population from the higher international prices for oil 25). Kerosene ranks second, representing 33.8 percent (Figure 19). These countries have nevertheless larger of the total subsidies provided. Gasoline, used in personal external and fiscal buffers than oil importing countries, vehicles, ranks third, accounting for 20.8 percent of total with on average narrowing current account and fiscal subsidies provided. LPG represents only 0.1 percent of deficits (Figures 20 and 21). However, subsidizing fuel, subsidies provided in 2022. even for oil exporters, is a story of an expensive missed Figure 18 Figure 19 Fuel subsidies, by net oil importers and Oil revenues and fuel subsidies for net exporters (percent of GDP) exporters (percent of GDP) 2.0 12 1.8 10 1.6 1.4 8 1.2 1.0 6 0.8 4 0.6 0.4 2 0.2 0.0 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Exporters Importers Fuel subsidies Oil revenues Sources: National authorities and World Bank Staff calculations. Gabon Economic Update 21 Figure 20 Figure 21 Fiscal balance by net oil importers and Current account balance, by net oil importers exporters (percent of GDP) and exporters (percent of GDP) 3 0 -1 2 -2 1 -3 0 -4 -1 -5 -2 -6 -3 -7 -4 -8 -5 -9 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Exporters Importers Exporters Importers Sources: National authorities and World Bank Staff calculations. Figure 22 Fiscal cost of fuel subsidies in CEMAC and selected Sub-Saharan African countries (percent of GDP) 4.0 3.5 3.0 2.5 Percentage 2.0 1.5 1.0 0.5 0,0 Cabo Verde Central Gabon Equatorial The Burkina Faso Nigeria Congo Senegal Mauritania Cameroon African Guinea Gambia Republic 2019 2020 2021 2022 Sources: National authorities and World Bank staff estimates. The Government of Gabon has made several at- intermediate solution. The first few months following the tempts at reform, but subsidies remain a source introduction of the automatic price adjustment mecha- of risk to the budget. In 2015, the Government fully nism saw a rise in general price levels, with inflation ris- liberalized fuel prices, with the exception of kerosene ing from 2.1 percent in December 2016 to 3.6 percent and LPG. However, the scale of the fuel price increases in August 2017. Concerned by that, the authorities then and the lack of clear communication around the reform temporarily froze the automatic fuel price adjustment. made it challenging for the Government to maintain the Prices remained frozen from March to September 2017, policy, leading to an adjustment to the reform in 2016. In at a fiscal cost of 25 billion CFAF in 2017. The automatic particular, faced with growing discontent among trans- fuel price adjustment mechanism has proven challeng- port unions, in early 2016 the authorities introduced ing to sustain since its reintroduction in September 2017. an automatic fuel price adjustment mechanism as an In the absence of an effective and well-targeted social Gabon Economic Update 22 Figure 23 187.5 billion were allocated to these sectors in the 2022 revised budget law). Furthermore, Gabon spends the Distribution of fuel subsidies by product, 2022 (in percentage of total subsidies provided) least on non-contributive social assistance among other countries at similar income levels: 0.5 percent of GDP 50 in 2021, four times less than the Upper-Middle Income 45 Countries’ (UMIC) average,5 primarily on scholarships, 40 healthcare subsidies and safety nets, and family 35 allowances. 30 25 20 Reducing spending on fuel subsidies would free 15 fiscal resources for urgently-needed investments 10 in physical and human capital. Gabon has a weak- 5 er performance in terms of human development and 0 physical infrastructure compared to other upper-middle Diesel Kerosene Gasoline Butane gas (LPG) income countries. In the 2020 Human Capital index, Source: World Bank and IMF calculations based on data from the which measures the contribution of health and educa- Gabonese authorities. tion to future productivity, Gabon scored 0.46 out of 1, compared to an UMIC average of 0.56. 85 percent of protection program capable of supporting the most vul- the adult Gabonese population is literate, below the av- nerable in a context of rising prices, the Government erage of 96 percent of adults in UMIC. Life expectancy opted to suspend its application in 2021, amid rising at birth in Gabon is also below the UMIC average, at 67 international oil prices following the COVID-19 pan- years against 76 years. In terms of infrastructure, Gabon demic. A clear and clearly communicated timetable for revising the price adjustment formula based on studies Figure 24 conducted when the reform was introduced would have given the Government greater flexibility. More recently, Fuel subsidies vs social spending in 2022, in Gabon and selected Sub-Saharan African in June 2022, in an effort to contain this rising fiscal countries (percent of GDP) cost, the Government decided to liberalize gradually fuel prices for industrial consumers, while maintaining 14 prices for households unchanged. Moreover, as part 12 of a broader effort to contain rising living costs, a VAT 10 exemption for the sales of LPG was also maintained in the 2022 budget law. 8 6 In Gabon, fuel subsidies represent one fourth of 4 total public expenditure allocated to key social 2 areas such as health or education. In 2022, the Government of Gabon spent an estimated 0.73 percent 0 ia so l a R rde n ga of GDP with fuel subsidies, while the total public social eri bo CA tan Fa ne Ve Nig Ga uri na Se bo expenditure foreseen in the budget law represented 2.8 Ma rki Ca Bu percent of GDP (Figure 24). Estimated to have reached Fuel subsidies Social spending CFAF 100.6 billion by the end of 2022, fuel subsidies represented two thirds of total public spending allocat- Sources: National authorities and World Bank staff calculations. Note: Fuel subsidies exclude subsidies to gas and electricity. Social ed to health, and more than half of total spending on spending includes government expenditure on health, education, education (respectively, CFAF 149.4 billion and CFAF and social protection. CAR: Central African Republic. 5 World Bank, ASPIRE database. Gabon Economic Update 23 ranked 150th out of 163 countries in the World Bank energy, with adverse effects on the environment. Such 2018 Logistics Performance Index, which measures distortions might prevent countries from reducing reli- challenges to trade logistics. ance on the subsidized fossil fuels and from developing renewable sources of energy or adopting low emitting Fuel subsidies also prevent the country from development solutions, locking them on a higher emis- building needed buffers. Past experience has shown sion development pathway in the future. In addition, that Gabon and other CEMAC countries have adopted such market distortions may lead to unlawful market procyclical budgetary policies – as public expenditure practices, such as the creation of an informal parallel increases in times of high oil prices and decreases when market or cross-border smuggling. Such practices prices drop, exacerbating economic crises instead of could generate domestic energy supply shortages, fur- mitigating their impacts.6 In this context, fuel subsidies ther deteriorating the domestic market dynamics and add to the country’s development and public financial local economy. management challenges, as they absorb the current revenue windfall from high oil prices, preventing the 1.3. Distributional analysis of fossil Government from allocating resources to investments fuel subsidies in Gabon in critical areas for development, including education, health, social protection, and infrastructure, or even to Fuel subsidies are mostly captured by male-head- build up a fiscal buffer to support a countercyclical bud- ed rich households living in urban areas and getary approach in preparation of future lower oil prices. consuming gasoline and diesel, rather than ker- osene or butane gas (LPG). Subsidies on petroleum In addition, fuel subsidies introduce environmen- products (excluding kerosene) benefit mainly the richest tal and market distortions. By preventing domestic segment of the population in Gabon. 96 percent of gas- retail prices from being aligned with international prices, oline and diesel are consumed by the richest 50 percent fuel subsidies distort the actual cost of energy. This dis- of the population, and the two richest deciles account torted pricing does not encourage an efficient use of for 63 percent of this consumption (Figure 25). In other Figure 25 Distribution of fuel consumption by income group (in percentage, by decile) 40 35 30 25 20 15 10 5 0 The poorest 2 3 4 5 6 7 8 9 The richest Kerosene Diesel and gasoline Butane gas (LPG) Sources: National authorities and World Bank staff calculations. Note: Estimates are based on data from the 2017 Gabon Poverty Assessment (Enquête Gabonaise pour l’Evaluation et le Suivi de la Pauvreté). 6 World Bank. 2022. CEMAC Quarterly Economic Barometer: Vol. 2. February. Washington, D.C.: World Bank; World Bank. 2022. Gabon Country Economic Memorandum: Toward More Inclusive and Greener Growth. Washington, D.C.: World Bank. Gabon Economic Update 24 terms, the majority of public spending on subsidies on sene than the poorest decile, hence capturing most of gasoline and diesel are actually captured by the wealthi- the subsidies. Looking at the distribution of subsidies est. Against the commonly-held view that fuel subsidies in terms of gender, male-headed households consume have primarily a social goal of protecting the poorest, in the most fuel (Figure 27). In other terms, fuel subsidies fact the most vulnerable people in the country consume provide a limited support for the poorest Gabonese. a substantially smaller amount of these two types of fuel. Furthermore, low-income households also spend An increase in fuel prices could have direct and a smaller share of their budget on fuel, compared to indirect effects, implying a limited increase of wealthier ones, further highlighting the inefficiency of the general price level.7 Directly, households are this non-targeted support in protecting the poorest. affected through their own consumption of fuels such Only 0.05 percent of the monthly budget of the poor- as gasoline or diesel. However, they are also indirectly est ten percent of the population goes to diesel and affected, since petroleum products are used as inter- gasoline, whereas the top decile spend about 36 times mediary products in many sectors. A fuel price hike more as a share of their budget on these fuels (Figure therefore feeds into the price of the final good pro- 28). The same goes for LPG: the 20 percent richest duced by other sectors. A preliminary analysis would households spend two times more of their budget on suggest that, based on the price structure observed at LPG, compared to the bottom 20 percent. Kerosene end-December 2022, a complete removal of subsidies is an exception, as its consumption tends to be more for all petroleum products except kerosene would imply equally distributed throughout socioeconomic groups. an increase for gasoline and diesel prices of about 88 Geographically, kerosene (used mainly for lighting) is percent and 96 percent, respectively, and lead to a one- used mostly in rural areas, with 66 percent of kerosene time adjustment of about 3.4 percent in the overall price consumed by rural households (Figure 26). Yet, the level (Figure 29). Because subsidies for kerosene do not richest decile still consumes almost 4 times more kero- account for the bulk of the fiscal costs, excluding them Figure 26 Figure 27 Distribution of kerosene consumption, by income Distribution of fuel consumption, by gender group and region (in percentage, by decile) (in percentage) 25 100 90 20 80 70 15 60 50 10 40 30 5 20 10 0 0 The 2 3 4 5 6 7 8 9 The Kerosene Other fuels poorest richest Urban Rural Male Female Sources: National authorities and World Bank staff calculations. Sources: National authorities and World Bank staff calculations. Note: Estimates are based on data from the 2017 Gabon Poverty Note: “Other Fuels” includes diesel, gasoline and butane gas (LPG). Assessment (Enquête Gabonaise pour l’Evaluation et le Suivi de la Pauvreté). 7 The hypothesis considered is of a complete removal of fuel subsidies (for gasoline and diesel). The analysis is based on a CGE (computable general equilibrium) model. Gabon Economic Update 25 Figure 28 Proportion of fuel consumption as a percentage of the household budget (by income group and by fuel) 8 7 6 5 4 3 2 1 0 The poorest 2 3 4 5 6 7 8 9 The richest Kerosene Diesel and gasoline Butane gas (LPG) Sources: National authorities and World Bank staff calculations. from a price adjustment would not erode much the po- Figure 29 tential fiscal savings of this action. Price increase in case of withdrawal of fuel The removal of fuel subsidies would nevertheless subsidies in Gabon (in selected sectors, in percent)  impact some important sectors. The wood industry would be strongly impacted. The sector plays a vital role 14 in the Gabonese economy, as the wood sector is the 12 country’s largest private sector employer and the source 10 of its second most exported good, after oil. Prices for construction activities and the fishing industry, two sec- 8 tors highly promoted by the Government, would also be 6 substantially impacted. As far as locally produced food 4 products are concerned (except for fish products), their 2 prices would not be affected very much if subsidies were to be removed. However, food security is a key concern 0 es r try on on ts g od given Gabon’s high dependency on imported food. eri ate res ati cti uc nin Fo Fis h w Fo rt str u pr od Mi and spo n ity n Co od ic Tra wo The removal of fuel subsidies would nevertheless ctr e, Ele itur rn add to the inflationary pressures in the country Fu and, if not accompanied by mitigation measures, Price increase by sector General price level could push some households into poverty. While Source: World Bank calculations based on data from the national representing a very small share of their income (as authorities. measured by consumption), the elimination of fuel Note: This graph indicates the estimated impact of the complete removal of fuel subsidies on selected sectors, based on the share subsidies erodes nevertheless the purchasing power of and intensity of fuel consumption for each sector. households. The removal of fuel subsidies could also exacerbate the severity of living conditions for those Gabon Economic Update 26 who are already poor. International experience shows 2. General principles from that even small losses risk triggering negative coping international experience mechanisms, such as pulling children out from school or selling productive assets, that erode human capital and International experience shows that removing contribute to the intergenerational transmission of pov- fuel subsidies has been difficult. In many countries erty. Therefore, a fuel subsidy reform requires a strong with limited social safety nets, a generalized subsidy mitigation package aimed at providing targeted support is seen as a part of the social contract. This could be to the most vulnerable segments of the population. particularly true for oil producing countries. As further developed below, transparency and trust between the The Government’s use of the fiscal resources authorities and the population are crucial to convincing freed up by the removal of subsidies is critical for the population about a credible mitigation package. A the ultimate outcome of poverty, employment, and couple of general principles could be drawn from the growth. Governments can reduce the fiscal burden of experience of countries that have carried out fuel price energy price subsidies and allocate the new fiscal space adjustments. These principles could frame a discussion to more sustainable and equitable uses. The various op- for Gabon. tions include paying down debt, investing in public infra- structure and in people, protecting specific population 2.1. Calibrating price adjustments by groups, and targeting assistance to certain industries. petroleum products Simulations using economy-wide models tend to show that building or protecting human and physical capital Depending on the consumer profile of each fuel lead usually to higher employment and growth rates.8 In (e.g., income group, area, gender, usage, etc.), it the case of China, for instance, these simulations would can be envisaged to prioritize the reform of fuels suggest that removing all energy subsidies (estimated that benefit the richest segments of the population to be 1.4 percent of GDP in 2007) without redistribution and represent the highest fiscal cost. For instance, of the savings would have been detrimental to growth some countries have decided to exclude (at least tem- and employment. The more the savings from subsidy porarily) from the subsidy reform socioeconomically removals are reallocated to certain sectors (agriculture, strategic fuel(s) which (i) are used by the most vulnerable services, and light industry), the greater the positive households and/or (ii) have a universal use (both from effects on these macroeconomic variables.9 Investing a geographic and a socioeconomic perspective) and/ in a country’s people, in their health, their skills, and or (iii) are used in a systemic segment of the economy their resilience to shocks, is critical to fostering more (agriculture, industry). inclusive growth, especially for CEMAC countries where the average child born today will be only 37 percent as For example, kerosene tends to be consumed productive as he or she could be. more by poorer households and in rural areas. In many developing countries, petrol and diesel are con- sumed mainly by wealthier households with private cars and/or power generators, as well as by the industrial sector. Eliminating (or substantially reducing) subsidies for the most regressive fuels could limit the fiscal cost, while mitigating the impact on low-income households. 8 Burns, Andrew; Djiofack Zebaze, Calvin; and Prihardini, Dinar. 2018. Energy Subsidy Reform Assessment Framework: Modeling Macroeconomic Impacts and Global Externalities. Washington, D.C.: World Bank. 9 Lin, B., and Z. Jiang. 2011. “Estimates of Energy Subsidies in China and Impact of Energy Subsidies Reform.” Energy Economics Vol 33, p.273–83. Gabon Economic Update 27 Box 1 International country case – Indonesia • Since 1967, Indonesia had been subsidizing retail prices of fuel, a policy facilitated by its status of net oil exporter – lost in 2003 as the country needed to increase its oil imports to meet domestic demand. • The Indonesian Government subsidized mainly two categories of fuel: cooking gas in the form of LPG, and two other petroleum products used for transportation – gasoline and diesel (the latter being used for public transportation, fisheries, and small and medium-sized enterprises).10 • This fuel subsidy policy was favoring mainly the richest households, as over 50 percent of subsidized fuel was bought by the richest 20 percent of the population in 2014.11 • In addition, the fiscal and social opportunity cost of energy subsidies (LPG, petroleum products and electricity) had become particularly heavy, accounting for 20 percent of Indonesia’s central government budget from 2008 to 2014, surpassing by far government expenditure on health and infrastructure over the same period.12 • In November 2014, President Joko Widodo launched a reform of gasoline and diesel subsidies (prices for gasoline were increased by 31 percent and 36 percent for diesel in 2014, prices of kerosene were kept unchanged).13 The price gap was further narrowed by a decrease in international oil prices. As a result of the reform, the Revised State Budget 2015 saved USD 15.6 billion (IDR 211 trillion) on fossil fuel subsidies, equivalent to 10.6 percent of government expenditure.14 • As of January 2015, the Government fully removed the subsidy on gasoline, but introduced a fixed sub- sidy on diesel, because it was used by public transporters (mostly used by the most modest segments of the population) and by SMEs. Domestic diesel prices were allowed to fluctuate, while benefiting from a fixed subsidy of 1,000 rupiah per liter. • This temporary measure in favor of diesel should have been part of a longer-term agenda aimed at phas- ing out subsidies more broadly, but is still in place. 2.2. Adopting a mechanism to move risks and very often have faced financial difficulties re- gradually towards market-based quiring support from the budget, especially in times of pricing steadily rising oil prices.10 11 12 13 14 While eliminating subsidies and allowing national Adopting a mechanism to move gradually toward mar- retail prices to reflect international prices, many ket-based pricing is an option to mitigate the impact of countries have opted to keep some smoothening commodity price volatility while managing fiscal risks. mechanism in place to protect their population Limiting a full pass-through of price changes to domes- and their economy from wide swings in fuel pric- tic consumers entails significant volatility in tax revenues es. While appealing, stabilization funds carry high fiscal and potentially high fiscal costs, especially during pe- 10 Tumiwa, Fabby; Tara Laan; Kerryn Lang; and Damon Vis-Dunbar. 2011. A citizen’s guide to energy subsidies in Indonesia. International Institute for Sustainable Development, Global Subsidies Initiative and Institute for Essential Services Reform. 11 Pradiptyo, Rimawan; Akbar Susamto; Abraham Wirotomo; Alvin Adisasmita; and Christopher Beaton. 2016. Financing development with fossil fuel subsidies – The reallocation of Indonesia’s gasoline and diesel subsidies in 2015. International Institute for Sustainable Development and Global Subsidies Initiative. May. 12 Government of Indonesia. 2019. Indonesia’s effort to phase out and rationalize its fossil fuel subsidies: A self-report on the G20 peer review of inefficient fossil fuel subsidies that encourage wasteful consumption in Indonesia. G20 2019 Japan. Ministry of Finance and Ministry of Energy and Mineral Resources of the Republic of Indonesia. 13 Nguyen, Andy. 2015. President Jokowi’s Economic and Energy Reforms: A Year in Review. The National Bureau of Asian Research. October 23, 2015. Available at: https://www.nbr.org/publication/president-jokowis-economic-and-energy-reforms-a-year-in-review/ 14 Pradiptyo, Rimawan; Akbar Susamto; Abraham Wirotomo; Alvin Adisasmita; and Christopher Beaton. 2016. Financing development with fossil fuel subsidies – The reallocation of Indonesia’s gasoline and diesel subsidies in 2015 – IISD, Global Subsidies Initiative, P2EB - May 2016. Gabon Economic Update 28 riods of sustained increases in international prices. In prices to catch up gradually to international price levels. this context, adopting an explicit fuel pricing formula Another common price smoothing mechanism is the that smooths price variations but allows for the pass- establishment of a moving average mechanism. This through of international prices to domestic consumers, mechanism defines domestic retail price adjustments both increases and decreases, may offer a balance based on changes in the average of past import costs. between excessive price volatility and fiscal risks. The The longer the average period of import costs used (for adoption of such automatic pricing mechanisms should example, the past three or five months of imports), the be viewed as the first step towards a fully liberalized and smoother the price changes, but the higher the fiscal competitive fuel market. risk. The first pillar of such an option is to design a fuel The second pillar of this measure is the adoption price adjustment formula. Several price smoothing of a calendar to review the price adjustment for- mechanisms are possible.15 One of the most com- mula. For instance, the margins defined in a formula mon price smoothing mechanisms is the establishment can be updated based on the findings of studies to be of a price band mechanism. This mechanism sets a cap commissioned regularly. on the magnitude of possible retail price changes (either defined as a percentage of current retail prices or as an The third pillar of this measure is the creation of absolute amount). At a pre-defined interval (for exam- a technical autonomous body in charge of the ple, monthly), the retail price will be determined based implementation and supervision of the automatic on the average import cost of the previous month and pricing mechanism. The intention is that price chang- will be allowed to increase within the limits of this cap, es do not result from a political decision but rather re- either in a one-shot or in successive increases allowing flect international market price fluctuations.16 17 Box 2 International country case – Morocco16 • In the early 2010’s, a multi-year subsidy reform strategy was launched to reform retail fuel prices in Morocco (excluding LPG, deemed socioeconomically strategic). • The strategy comprised three stages: a preparation phase characterized by incremental increases in retail prices to gradually reduce subsidies; a partial indexation phase whereby prices were defined according to an automatic pricing mechanism with smoothing rules aimed at gradually eliminating sub- sidies; and a final phase of price liberalization.17 • In 2013, following a preparation phase which introduced differentiated ceilings on unit subsidies (higher ceilings for diesel), the government introduced an automatic pricing mechanism for diesel and gasoline. This mechanism was based on a moving average of international prices in the previous two months. The adjustment frequency was monthly and was later adjusted to become more frequent (bi-monthly) until subsidies were fully eliminated (in January 2014 for gasoline and fuel oil and December 2014 for automo- tive diesel). 15 IMF. 2012. Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, Implementation and Fiscal Implications. IMF Fiscal Affairs Department, December. 16 IMF. 2020. The time is right! Reforming Fuel Product Pricing Under Low Oil Prices. IMF Fiscal Affairs Department, July. 17 A phased approach to energy subsidy reform: The Morocco experience. World Bank Energy Subsidy Reform Online Community (ESROC) Practitioner Exchange Series. Energy Sector Management Assistance Program (ESMAP). 2017. Washington, D.C.: World Bank. Gabon Economic Update 29 2.3. Staggering the reform change their behavior and adopt more energy efficient alternatives.18 Many countries have not eliminated fuel subsi- dies in one go but sequenced and gradually im- 2.4. Stakeholder consultations plemented the reform. This allows households and firms time to adjust, which, accompanied by mitigation Countries that have successfully reformed energy measures, supported both groups in the transition pro- subsidies have undertaken extensive consultations cess. A review of cases of fuel subsidy reforms shows and communication campaigns to address the con- that subsidy reforms are less subject to rejection and/ cerns of various population groups. Consultations have or reversal when prices are raised in an incremental helped the Government identify differentiated measures manner, over periods ranging from a few months to a according to each group’s vulnerability. Communication few years. This approach slows down the passthrough has emphasized the urgency of the reform, as well as of the impact, allowing the population to adjust gradu- the Government’s commitment to reallocating resources ally, hence reducing risks to social stability, especially made available by the reform to programs that benefit when combined with strengthening social safety nets, most of the population. These sessions are also the occa- including temporary, targeted transfers, and support- sion to unbundle misconceptions about fuel prices, sub- ed by consistent communications to raise awareness sidies, and compensation mechanisms. They can be the of the benefits of reform. Transparency, including clear opportunity to discuss the magnitude, timing, and relevant communication and managing expectations, is critical mitigation measures of the subsidy reform. Organizing throughout the reform process. A staggered reform consultations with key stakeholders gives them a platform opens the possibility of announcing the timing of price to express their views, reducing the risk for an abrupt re- increases to prepare citizens, allowing them time to jection of the reform during its implementation. Box 3 International country case – The Philippines18 • The Philippines is an example of a successful sequenced reform, having phased out fossil fuel subsidies in the late 1990s following several policy milestones. • Before fully liberalizing fuel prices, the Philippines went through several stages ranging from (i) 1984: imple- menting an oil stabilization fund (intended to smooth international price volatility); (ii) 1996-1997: transitional subsidies assisted by the stabilization fund; (iii) 1996-1997: implementing an automatic pricing mechanism adjusting monthly prices, with a special attention given to the three most socially sensitive products (LPG, kerosene and regular gasoline); and (iv) 1998: market-based fuel pricing. • The impacts of these fuel subsidy reforms were mitigated using targeted cash transfers, as well as tran- sitionary targeted regulated subsidies aimed at low-income households, specific sectors, and socially sensitive fuels. • In parallel to the fuel subsidy reform, an electricity sector reform also took place as part of a comprehen- sive energy sector policy strategy. This reform was designed to deregulate the sector while protecting the most vulnerable customers (a lifeline rate for low-income users cross-subsidized by high-income groups, targeted subsidy providing discounted electricity prices to senior citizens, a one-off cash transfer for mar- ginalized electricity consumers to cushion the impact of rising electricity and fuel prices). 18 Mendoza, Maria Nimfa. 2014, Lessons Learned: Fossil Fuel Subsidies and Energy Sector Reform in the Philippines. Global Subsidies Initiative Report. International Institute for Sustainable Development and Global Subsidies Initiatives. March. Gabon Economic Update 30 Box 4 International country case – Ukraine19 • In 2015, Ukraine undertook a subsidy reform for gas, electricity and district heating. • In addition to providing strong mitigation measures such as strong social protection measures, the reform significantly relied on dialogue with key stakeholders (especially end-consumers) to (i) explain the objective of the reform (common good), as it was largely misunderstood; (ii) guide the sequencing of reform policy at a pace deemed acceptable; (iii) revitalize access to compensatory social safety net mechanisms, little known or understood. • The communication strategy was successful in (i) mapping key stakeholders as 2,000 citizens were polled, in 20 strategic cities; (ii) informing these stakeholders through the organization of 40 dialogue groups as well as reaching-out campaigns (advertisements were broadcasted 400 times a week through 19 credible and popular TV channels); (iii) co-designing the reform with citizens. 3. Accompanying measures19 vide a temporary, targeted financial support to protect the purchasing power of affected groups, especially the Country experiences illustrate the variety of pos- poorest households. The success of these measures sible accompanying measures to make adjust- greatly depends on several factors, such as the modal- ments in fuel prices socially acceptable and with ity of their design (scope, conditionality, roll-out) as well minimized impacts to the population. They show as their adequacy with the local capabilities (such as that there is not a standard single set of actions, but that fiscal space, existence of a complete and up-to-date these measures need to be discussed, identified, and social registry, administrative management). Such sup- designed to reflect the concerns and the characteristics port can be provided through a social safety net system of each country. (Box 5). 3.1. Reinforcing social safety nets The 2005 cash transfer program in Indonesia shows that logistics matter. The Government of International experience shows that social safe- Indonesia launched a cash transfer program in October ty nets can play an important role in mitigating 2005 to support the poor and vulnerable in adapting the adverse effects of the subsidy reform on the to the effects of higher gasoline, diesel and kerosene poor.20 Most countries spend 1–2 percent of GDP on prices. First, the timing of the program was key in re- safety net programs (excluding subsidies). Safety nets ducing protests against the reform, as the program was are effective and efficient at supporting the poor and designed and deployed in less than five months, provid- vulnerable by: (i) redistributing income, with an immedi- ing timely support to affected groups. Second, using an ate impact on both poverty and inequality, (ii) enabling existing delivery system (the national postal system), the households to make better investments in their future cash transfer program was able to reach those most in – both in the human capital of their children and in their need with limited delay. Last, the amount provided (Rp livelihoods, and (iii) helping households manage risk and 100,000, equivalent to 20 percent of the 2005 national cope with shocks. To mitigate the immediate impact of minimum wage) was significant enough to improve out- fuel subsidy reform, measures can be designed to pro- comes.21 The transfers were mainly used for purchasing 19 Worley, Heather; Sara Bryan Pasquier; and Ezgi Canpolat. 2018. Designing Communication Campaigns for Energy Subsidy Reform. Energy Subsidy Reform Assessment Framework (ESRAF) Good Practice Note 10. Energy Sector Management Assistance Program (ESMAP) Paper. Washington, D.C.: World Bank. 20 Social safety nets are non-contributory transfer programs targeted to the poor, including cash transfers, income support through public works programs, or in-kind transfers such as school feeding. 21 International Labour Organization. 2015. Indonesia – Trends in wages and productivity January 2015. Gabon Economic Update 31 Box 5 Reinforcing social safety nets as a mitigation measure22 Social safety nets can play a key role in mitigating the negative effects of a fuel price adjustment. Depending on the state of development of the social safety programs, various options are possible: 1. Increase the benefit levels of existing social safety net programs. This is the preferred, most direct and most effective option if – and only if – the programs already cover the majority of the poor and have the capacity to absorb a reasonable number of new eligible households. This option is particularly relevant in countries where there are existing programs with high coverage, but low benefit levels (e.g. Azerbaijan, Egypt, the Philippines, Russia). 2. Introduce a new dedicated program directly linked to the subsidy reform. This program should be able to expand very quickly to cover the poor and vulnerable. This is often the most difficult option, but sometimes it is the only viable strategy. Examples of the use of this option include subsidy reform in Indonesia in 2005-2008, subsidy reform in India in 2013, or, more recently, temporary compensation in Jordan as part of the 2012 and 2018 reforms. This option requires significant administrative, implementa- tion and coordination capacity, which may not be readily available. 3. Reform and extend the coverage of an existing program to cover a significant share of the poor and vulnerable. International experience shows that this expansion and increase in benefit adequacy can happen relatively quickly: for example, programs in Tanzania, Senegal and Indonesia have moved from 5-10 percent coverage of the poor to more than 50 percent coverage of the poor within 2-4 years. The reform in the Dominican Republic is another example: a pre-existing cash transfer program was substan- tially expanded to mitigate the impact of the subsidy reform on the poor. rice, kerosene, and health services as well as repaying For the first time, the Government identifies “ensuring debt and led to slight improvements in labor, education the sustainability of a targeted and equitable social and health outcomes. While two-thirds of the benefits protection system” as a top development priority. In went to the poorest 40 percent of the population, the addition, there is high-level recognition of the need for cash transfer program encountered, nevertheless, sev- improved equity and targeting when it comes to sub- eral challenges, including the lack of transparency in the sidies.23 There are ongoing reforms to strengthen the selection of beneficiaries (some households receiving Gabonese social protection system, by redefining the transfers should not have been eligible), increasing the status and cleaning the database of economically weak fiscal cost of the program.22 Gabonese (Gabonais Economiquement Faibles, GEF), to be followed by the creation of a special fund (Fonds The Gabonese Government has increasingly rec- 4) dedicated to informal sector workers at the Social ognized the role of social protection in achieving Security Fund (Caisse Nationale d’Assurance Maladie its development objectives. The 2021-2023 Plan et de Garantie Sociale, CNAMGS). The ultimate goal d’Accélération de la Transformation (PAT) goes beyond would be the creation of a social registry, including all a strategy for economic diversification to acknowledge social groups and allowing for the universalization of the need to strengthen social protection in the country. social protection. However, to this date existing social 22 Yemtov, Ruslan; and Moubarak, Amr. 2018. Assessing the readiness of social safety nets to mitigate the impact of reform. Energy Subsidy Reform Assessment Framework (ESRAF) Good Practice Note 5. Energy Sector Management Assistance Program (ESMAP) Paper. Washington, D.C.: World Bank. 23 “Until now, the gasoline subsidy has benefited a government official or a large company boss who drives a big car, as much as it has benefited a modest family man. That is not fair. That is why I will make sure that more social justice is injected into the system.” President Ali Bongo’s Speech to the Nation, August 2022. Gabon Economic Update 32 protection programs remain largely underfunded. By 3.2. Increasing transparency of public matching the spending level of its peers24 — an addi- financial management tional 1.2 percent of GDP, or USD 180 million annually — the Government could provide every poor household Some countries have chosen to reinforce trust in with monthly transfers of USD 110 and immediately cut public action and public financial management. poverty by a third, to 24 percent.25 This measure alone This stronger trust was achieved by promoting greater would allow the Government to achieve the target set in transparency as part of the mitigation measures offered the PAT for poverty reduction, of reducing the poverty in the compensation package. Concrete, attributable rate to under 25 percent. and monitorable actions were taken, targeting one or several segments of public resources management. A fuel subsidy reform would create an opportuni- Azerbaijan provides an interesting example, where ty for the Government to launch a flagship safety fuel subsidy reform (2006-2007) was accompanied by nets program. Gabon’s social assistance system is not reforms to improve the transparency of oil revenues only underfinanced, but also highly fragmented, with 19 and investments to improve electricity services. More interventions applied for seven vulnerable groups across specifically, post-reform compensatory measures have four pillars, as set out in the Stratégie d’Investissement gone hand in hand with increased transparency in the Humain du Gabon (SIHG). Consolidating cash transfer management of social safety net mechanisms, includ- initiatives into a single, flagship safety nets program ing social insurance and targeted social assistance targeting poor households26 would not simply facilitate administrations. In Gabon, initial steps are being taken implementation and reduce administrative costs, but to improve the transparency and management of nat- also improve effectiveness. It would constitute a visible ural resources, as the country rejoined the Extractive measure to demonstrate the Government’s strong com- Industries Transparency Initiative (EITI) in October mitment to poverty reduction and social inclusion, while 2021. Enforcing the compliance with EITI requirements, at the same time building political acceptability for the including the publication of reports and adoption of subsidy reform and preserving social stability. international good practices in revenue management, would send a positive sign to society, towards the most There are several examples of countries that have socially beneficial application of savings obtained from a either introduced a new cash transfer program or fuel subsidy reform. expanded an existing one in response to a fuel subsidy reform. For instance, Ukraine revamped its 3.3. Increasing social public spending Housing and Utility Subsidy (HUS) to mitigate the impact of its one-shot increase in energy tariffs. The reform fo- An additional channel to rebuild trust between a cused on minimizing exclusion errors and was accompa- government and its constituencies – especially nied by a strong communication campaign to increase during critical times of a subsidy reform – is to re- take-up and set clear rules and expectations. Similarly, target fiscal policy towards social spending, nota- Jordan introduced compensatory transfers before its fuel bly in a context where out-of-pocket expenditure subsidy reform in 2012. It also introduced a large-scale for social services is high. This could generate a dou- cash transfer scheme to support the food subsidy reform ble beneficial effect: (i) support the purchasing power of in 2018 and the electricity subsidy reform in 2022. affected groups, especially low-income groups; and (ii) 24 UMIC countries spend 1.7 percent of GDP on safety nets, on average. Among Gabon’s income level peers in the region, Botswana spends 1.3 percent of GDP, while Namibia, South Africa, and Mauritius spend between 3.0 percent and 3.4 percent of GDP. 25 Impact on poverty reduction based on the UMIC poverty rate (individuals living with less than USD 6.85 per day), under the following assumptions: 121,230 poor households covered by the program, with a 100 percent targeting accuracy, 10 percent administrative costs, and an exchange rate of USD 1 to CFAF 543. 26 The program should rely on three principles to maximize its impact on poverty reduction and ensure value for money: (a) poverty, or GEF status (Gabonais Economiquement Faibles), as the primary eligibility condition, with additional social vulnerability criteria potentially used to further tailor the support package; (b) the household as the unit of targeting, not only because poverty is estimated at household level, but also to reduce overlaps and implementation complexity; and (c) integrated targeting, distribution, and monitoring and evaluation (M&E) systems. Gabon Economic Update 33 allow citizens to easily trace the use of savings realized highlight the risk of capture of transfers by private op- thanks to the reform. Morocco, for instance, reinvested erators, without the benefits being passed through to the savings it achieved through its fuel subsidy reform in end-users. As a general principle, the closer the benefit the early 2010’s in social sectors. These savings were is to end-users the highest chance of success of the redirected to (i) targeted support for poor households selected measure. For the case of Gabon, where the through several mechanisms (conditional cash transfers, gratuity of public transportation in Libreville was adopt- free medical care for low-income groups, financial sup- ed since the COVID-19 pandemic hit the country, an ex- port for widows, orphans, and people with disabilities); panded support to other transportation services in the and (ii) investment projects in the education sector. The country could be considered, as a potentially-needed Government of Morocco took the opportunity of these mitigation measure. mitigation measures to also support the implementation of other sectoral reforms, by conditioning some of its 3.5. Increasing productive structural aid to specific items (e.g., school enrollment, and the public investments establishment of a social security number). In Gabon, public spending on social sectors, such as education, As with higher social spending, allocating addi- health, and skills promotion, could be boosted by the tional resources to productive structural public resources derived from an eventual fuel subsidy reform, investments can serve the double purpose of re- thereby greatly contributing to an improved human cap- inforcing trust in public action as well as contrib- ital and to the nation’s development goals. uting to a positive structural transformation. The 2015 subsidy reform in Indonesia was combined with 3.4. Supporting the transport sector increased spending on health, education, and transfers to local governments.27 This spending was provided Providing temporary compensation for the trans- through several mechanisms, such as increased bud- port sector could help prevent higher fuel prices getary allocations to particular ministries (Education, from translating into higher prices for other goods Agriculture, Transport, Public Works and Housing), and services. Examples of short-term measures in- capital increases of key state-owned enterprises in the clude the temporary implementation of subsidies to transport and agriculture sectors, and investment proj- carriers to limit higher fuel prices from being passed on ects in key sectors at the local level (health, mobility, to travelers, especially the most vulnerable households. local economy). In line with Gabon’s strategic devel- Such subsidies could be implemented through various opment plans, the funds derived from a fuel subsidy mechanisms, such as direct financial support to trans- reform could be partially allocated to increased public porters or travelers, or tax relief targeting the transport investments in infrastructure and other productivity-en- sector. Examples include the support for the adoption of hancing spending, a much-needed action for tackling energy efficient modes of transportation, the improve- the country’s development challenges. ment of transport infrastructure which would positive- ly impact the maintenance cost of vehicles, and the implementation of public policies aimed at facilitating mobility (e.g., mass transportation, congestion control through transportation and urban planning). However, such measures can carry high risks of leakage. The Dominican Republic has prevented such abuses by limiting compensation to truck drivers whose vehicles were officially registered with the tax authority. Country experiences with transfers to the transport sector also 27 Pradiptyo, Rimawan; Akbar Susamto; Abraham Wirotomo; Alvin Adisasmita; and Christopher Beaton. 2016. Financing development with fossil fuel subsidies: The reallocation of Indonesia’s gasoline and diesel subsidies in 2015. International Institute for Sustainable Development and Global Subsidies Initiative. May. Gabon Economic Update 34 Technical Annex 1 – Fossil fuel types and uses28 Fuel type Sub-category Common uses Gasoline Automotive (light and medium duty, including motor bicycles), aviation, and marine transportation, limited use in very small-scale electricity generation. Bioethanol Automotive (usually blended with gasoline). Kerosene Heating, cooking, lighting, aviation. Oil Diesel Automotive (medium and heavy duty), rail, marine transportation, aviation, heavy equipment, electricity generation, irrigation. Biodiesel Automotive and aviation (usually blended with petroleum diesel fuel), electricity generation, heavy equipment. Fuel oil Electricity generation, industrial production, marine transportation. Natural gas (methane) Electricity generation, industrial production, space and water heating, cooking, refrigeration, automotive, marine Gas transportation. Liquified Petroleum Gas (LPG, Cooking, heating (water, spaces, industrial processes), butane gas) lighting, refrigeration, automotive. Lignite (brown coal), anthracite, Electricity generation, industrial heating, space heating, Coal bituminous and sub-bituminous cooking. 28 Kojima, Masami. 2017. Identifying and quantifying energy subsidies. Energy Subsidy Reform Assessment Framework (ESRAF) Good Practice Note 1. Energy Sector Management Assistance Program (ESMAP) Paper. Washington, D.C.: World Bank. Gabon Economic Update 35 Technical Annex 2 – Defining fossil fuel subsidies in CEMAC A fossil fuel subsidy can be broadly defined as a deliberate policy action by the government that specifically targets fossil fuels and that results in at least one of the following effects:29 • It reduces the net cost of fuel purchased • It reduces the net cost of fuel produced or delivered • It increases the revenues retained by those engaged in fuel production and delivery This definition excludes (i) government inaction (such as weak capacity to implement regulations or tax administra- tions); and (ii) policy actions which would affect the whole economy, such as lowering the corporate income tax rate or the general income tax rate. The cost of subsidies can be either covered by direct budgetary transfers (such as direct support to oil producers), foregone fiscal revenues (such as tax exemption at any point of the fuel supply chain), or other implicit channels (such as the underpricing of government or government-regulated inputs to the fuel production and supply chain, transfer of the cost of subsidies from one category of customer to another, as is the case in cross-subsidization, etc.). In CEMAC, fossil fuel subsidies are distributed through various mechanisms30 such as: CEMAC country Fossil fuel subsidy provision mechanism Cameroon Budgetary transfers, tax exemption Government-induced transfers between importers and distributors, Central African Republic underpricing of services Congo, Republic of Budgetary transfers, tax exemption Equatorial Guinea Budgetary transfers, tax exemption Budgetary transfers, tax exemption, Government-induced transfers between Gabon consumers This chapter focuses on the result of fossil fuel subsidies, taking the form of price distortions whereby the price set by the government or charged by the fuel seller (retail price) is purposely maintained below the price that would prevail 29 This definition is based on the Energy Sector Management Assistance Program (ESMAP) Good Practice Note 1 – Identifying and quantifying energy subsidies, by Masami Kojima. 30 These mechanisms are based on the nomenclature presented in the Energy Sector Management Assistance Program (ESMAP) Good Practice Note 1 – Identifying and quantifying energy subsidies, by Masami Kojima. Gabon Economic Update 36 in a competitive market (reference price). This notion leaves aside indirect forms of subsidies to producers (such as credit guarantees or financial assistance, which eventually lower the production cost and/or sale price). However, it allows for an easier cross-country comparison and is commonly used throughout specialized literature.31 31 Including by the International Energy Agency and the International Monetary Fund. Gabon Economic Update 37 Macroeconomics, Trade and Investment