2nd Edition June 2024 EQUATORIAL GUINEA ECONOMIC UPDATE 2024 Designing Fiscal Instruments for Sustainable Forestry © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Washington, DC: World Bank.” All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org Cover photo: © Jan / Adobe Stock EQUATORIAL GUINEA ECONOMIC UPDATE 2024 Designing Fiscal Instruments for Sustainable Forestry 2nd Edition This is the second edition of the Economic Update for Equatorial Guinea. This World Bank report presents recent economic developments in Equatorial Guinea, the medium-term economic outlook and risks as well as structural challenges (Chapter 1), followed by a detailed exploration of a specific topic (Chapter 2). This edition focuses on fiscal instruments for sustainable forestry, examining the current socio-economic context of forest policy in Equatorial Guinea. In particular, it discusses the role and current use of forest- related fiscal instruments, and proposes options and trade-offs in the design of forest related fiscal policy reforms to adequately capture resource rents, promote forest based value-addition and employment, mitigate deforestation and forest degradation. The objectives of the Equatorial Guinea Economic Update are to: (i) strengthen the analytical underpinnings of the policy dialogue; and (ii) contribute to an informed debate on policy options to enhance macroeconomic management and development outcomes. Contents List of Abbreviations 5 Acknowlegment 7 Executive Summary 9 Chapter 1. Recent Economic Developments and Outlook 9 1.1 Recent Economic Developments 15 Global and regional recovery remains slow, with divergences across countries 15 Recent Economic 15 Developments and Outlook 15 Equatorial Guinea reentered recession in 2023 amid a decline in hydrocarbon production and domestic demand 16 The fiscal position has deteriorated amid a decline in commodity revenues, and public debt declined and remained sustainable 19 Equatorial Guinea’s external position deteriorated on the back of declining export earnings 21 Credit to the economy decreased significantly amid banking sector vulnerabilities and monetary tightening 21 1.2 Economic Outlook, Risks, Challenges, and Policies 22 Global economic activity is expected to slow while SSA growth is forecast to accelerate in 2024 22 The Equatoguinean economy is projected to remain in recession over the medium term 23 Risks to the outlook are titled to the downside with the main risk being a faster-than-expected decline in the hydrocarbon sector 23 Policy Watch, Structural Challenges, and Reform Priorities 23 Chapter 2 . Designing Fiscal Instruments for Sustainable Forestry 33 2.1 Introduction 33 2.2 The Importance of Forests: State of Forests and Economic contribution 36 State and Trends of Forests in Equatorial Guinea 36 The Role of Forests in Equatorial Guinea’s Economy and Climate Actions 38 2.3 Regional and International Context 42 Financing for Sustainable Forest Management 42 Implementation of the CEMAC Log export ban: a potential solution for increasing value added in the wood industry 43 The EU Law on Deforestation-Free Products: A regulation that promotes sustainable forest management in the region? 45 2.4 The role of Environmental Fiscal Policy: Trade-offs in the Forestry sector 46 2.5 Survey of Forest-Fiscal Policy Instruments in Equatorial Guinea 49 Recurrent Annual Charges 50 Logging Licensing and the Auctioning of Forest Concessions 50 Output taxes: royalties from harvested timber and stumpage yield taxes 50 Business Income Taxes 52 Tax Expenditures for Agriculture and VAT Exemptions for Farm Inputs 52 2.6 Opportunities for Climate-Smart Forest Fiscal Policy Reform in Equatorial Guinea 53 Aligning the tax rates with the sustainability of timber production methods 53 A ‘bonus-malus’ system in forestry: using taxes on non-sustainable production to finance tax benefits for sustainable practices 53 References 59 List of Boxes Box 1. The authorities highlighted their commitments to improve the sustainability of the Equatoguinean economy and public finances in the February 2024 Presidential decree 24 Box 2. The digital economy offers a transformative opportunity for growth but is constrained by significant bottlenecks in Equatorial Guinea 26 Box 3. What is REDD+? 40 Box 4. An indicative trajectory of structural reform to transition from log exports to higher value-added processing 44 Box 5. Cross-cutting issues in sustainable forest management 46 Box 6. The impact of forest-related fiscal instruments on fiscal space 48 Box 7. Lessons learned from fiscal reforms for forestry in Central Africa 55 List of Tables Table 1. Equatorial Guinea – Comparison in projections of key macroeconomic variables 17 Table 2. Structural Indicators, Equatorial Guinea 29 Table 3. Selected short term policy recommendations 31 Table 4. Selected Approaches and Policy Instruments for Sustainable Forest Management 47 Table 5. A selection of fiscal mechanism and their relative impact on incentives for sustainable forest management (SFM) 49 List of Figures Figure 1. Real GDP, percent change from previous year, 2021-2025 17 Figure 2. Equatorial Guinea - Oil and Non-oil GDP growth (in percent), 2013-2023 17 Figure 3. Equatorial Guinea and other CEMAC countries – Real GDP growth (in percent), 2021-2023 17 Figure 4. Equatorial Guinea – Hydrocarbon production (in millions of barrels of oil equivalent), 2022-2023 19 Figure 6. Equatorial Guinea – Contribution to Growth, supply (in percent) 19 Figure 5. Equatorial Guinea – Growth in hydrocarbon production (y-o-y, in percent), 2023 19 Figure 7. Equatorial Guinea – Contribution to Growth, demand (in percent) 19 Figure 8. Equatorial Guinea – Composition and evolution of government spending, 2019-2023 20 Figure 10. Equatorial Guinea – Public debt (in percent of GDP), 2019-2023 20 Figure 9. Equatorial Guinea – Fiscal Balance, 2019-2023 20 Figure 11. Equatorial Guinea – Current Account 21 Figure 12. Equatorial Guinea – Composition of export value (in percent of total exports), 2022 21 Figure 13. Credit to the economy in Equatorial Guinea, growth, 2014-2023 (in percent) 21 Figure 14. Global growth (in percent), 1990-2025 22 Figure 15. GDP growth in SSA and other regions (in percent), 2021-2025 22 Figure 16. Equatorial Guinea and peers - Labor force participation rate, total (% of population ages 15-64), 2000-2022 25 Figure 17. Equatorial Guinea and peers - Vulnerable employment by gender, (% of female or male employment), 2010-2022 25 Figure 18. Equatorial Guinea and peers - Electricity access, percentage of the population, 2000-2021 26 Figure 19. Equatorial Guinea and peers - Logistics Performance Index, 2018 26 Figure 20. Equatorial Guinea and CEMAC – Worldwide Governance Indicators (percentile), 2022 27 Figure 21. Domestic credit to private sector (in percent of GDP) and GDP per capita, 2021 28 Figure 22. Equatorial Guinea and CEMAC countries - deforestation trend, percentage of total forest area, 2010-2020 37 Figure 23. Equatorial Guinea - deforestation trend and categories, 2000-2022 37 Figure 24. Forestry contribution to GDP in Equatorial Guinea 38 Figure 25. Equatorial Guinea and selected countries - Wood product export value (US$ million), 2022 39 Figure 27. Equatorial Guinea - GHG emissions by sector (million tons), 2020 39 Figure 26. Equatorial Guinea - Wood products export value (US$ million), 2000-2022 39 Figure 28. CAFI Budget transferred to countries million US$, 31 December 2022 42 Figure 29. Equatorial Guinea, forest tax revenue, as a percentage of total tax revenue 51 List of Abbreviations AASB Australian Accounting Standards Board ACTO Amazon Cooperation Treaty Organization AFOLU Agriculture, Forestry, and Land Use AI Artificial Intelligence ANIF Agencia Nacional de Investigación Financiera de Guinea Ecuatorial ASA Advisory Services and Analytics ASYCUDA Automated System for Customs Data BEAC Bank of Central African States CAAF Contrato de Arrendamiento por Aprovechamiento Forestal (Forest Use Lease Contract) CAFI Central Africa Forest Initiative CAR Central African Republic CCEI Caisse Commune d’Epargne et d’Investissement CEMAC Communauté Economique et Monétaire de l’Afrique Centrale CO2 Carbon Dioxide COMIFAC Commission des Forêts d’Afrique Centrale CONTFIN Integrated Expenditure Management System COP Conference of the Parties COVID-19 Coronavirus disease DE4A Digital Economy for Africa DRC Democratic Republic of the Congo EIAs Environmental Impact Assessments EITI Extractive Industries Transparency Initiative EMDEs Emerging Market and Developing Economies EO Earth Observation EU European Union FAO Food and Agriculture Organization FCPF Forest Carbon Partnership Facility FLEGT Forest Law Enforcement, Governance and Trade FPSO Floating Production Storage and Offloading FSC Forest Stewardship Council FY24 Fiscal Year 2024 GCF Green Climate Fund GCP-F Global Challenge Program-Forest GDP Gross Domestic Product GEF Global Environment Facility GFCF Gross Fixed Capital Formation GHG Greenhouse Gases GITGE Gestor de Infraestructuras de Telecomunicaciones de Guinea Ecuatorial Equatorial Guinea Economic Update 2024 2nd Edition 5 HDI Human Development Index ICT Information and Communication Technology ILO International Labor Organization IMF International Monetary Fund INEGE Instituto nacional de Estadísticas de Guinea Ecuatorial ITTO International Tropical Timber Organization LEB Log Export Ban LNG Liquefied Natural Gas LPI Logistics Performance Index MPO Macro Poverty Outlook MRV Monitoring, Reporting, and Verification NDC Nationally Determined Contributions ND-GAIN Notre Dame Global Adaptation Initiative NFA Net Foreign Assets NGOs Non-Governmental Organizations NPLs Non-Performing Loans OCIPEF Oficina de Control, Información y Promoción de Especies Forestales ODA Official Development Assistance OECD Organisation for Economic Co-operation and Development OFAC African Forest Observatory OHADA Organization for the Harmonization of Business Law in Africa ORTEL Organo Regulador de Telecommunications Guinea Equatorial PAFC Pan African Forest Certification PFM Public Finance Management PPP Public-Private Partnership RBF Result-Based Finance REDD Reducing Emissions from Deforestation and forest Degradation SDGs Sustainable Development Goals SDR Special Drawing Rights SFM Sustainable Forest Management SMEs Small and Medium Enterprises SSA Sub-Saharan Africa UMICs Upper Middle-Income Countries UN United Nations UNFCCC United Nations Framework Convention on Climate Change US United States VAT Value Added Tax VPA Voluntary Partnership Agreement WAEMU West African Economic and Monetary Union WB World Bank WDI World Development Indicators WGI Worldwide Governance Indicators XAF Central African CFA Franc Equatorial Guinea Economic Update 2024 6 2nd Edition Acknowlegment The second edition of the Equatorial Guinea Economic Update was prepared by a World Bank team consisting of Djeneba Doumbia (Economist and Task Team Leader, EAWM2), Chris Belmert Katindi Milindi (ET Consultant, EAWM2) and Ryan Rafaty (Governance Specialist, EGVPI), under the supervision and guidance of Cheick Fantamady Kante (Country Director, AFWC1), Sandeep Mahajan (Practice Manager, EAWM2), and Robert Utz (Lead Economist, EAWM2). The team benefited from guidance from Guillemette Jaffrin (Operations Manager, AWCC1), Clelia Rontoyanni (Program Leader, EAWDR), and Aissatou Diallo (Resident Representative, AWMGA). The Economic Update benefited from constructive comments from Raju Singh (Lead Economist, DFCII), Kanta Rigaud (Lead Climate Change Specialist, SAWDR), and Stephen Stretton (Environmental Tax Economist, EMFTX). The team also received support from Pinar Baydar (Operations Analyst, EAWM2), Ifeoma Clementina Ikenye (Program Assistant, EAWM2) and Irene Sitienei (Program Assistant, EAWM2). The team benefited from consultations with key policymakers in Equatorial Guinea, including officials from the Ministry of Planning and Economic Diversification; the Ministry of Finance and Budget; the Ministry of Mines and Hydrocarbons; the National Institute of Statistics of Equatorial Guinea (Instituto Nacional de Estadística de Guinea Ecuatorial, INEGE); and the national BEAC (Bank of Central African States). The team thanks the authorities, including the Ministries of Forests and Environment, Planning and Economic Diversification, and Finance and Budget for providing information on fiscal instruments used in the country for sustainable forestry. Equatorial Guinea Economic Update 2024 2nd Edition 7 photo: © Jan / Adobe Stock Equatorial Guinea Economic Update 2024 8 2nd Edition Executive Summary Recent Economic Developments and Outlook Following only two years of recovery, Equatorial Guinea’s economic activity contracted in 2023 on the back of a decline in the hydrocarbon sector. GDP growth was estimated at -5.7 percent in 2023 compared to 3.7 percent in 2022 and 0.9 percent in 2021. In 2023, total the production of oil and gas contracted by 21.7 percent and 13.5 percent, respectively on the back of recent incidents that occurred at Zafiro (the country’s largest offshore oil platform) and at the FPSO Serpentina platform, and maturing fields. In contrast, activities in the non-hydrocarbon sector expanded in 2023, driven by an upturn in the construction and service sectors. The fiscal and external positions deteriorated in 2023 while public debt decreased. Hydrocarbon revenues decreased from 27.3 percent of GDP in 2022 to an estimated 19.1 percent of GDP in 2023 due to a decrease in hydrocarbon production and exports. Meanwhile, Government spending to GDP ratio increased to an estimated 19.8 percent of GDP compared to 17.1 percent of GDP in 2022, driven by higher wages and spending on goods and services as a share of GDP. The fiscal surplus decreased to 2.6 percent of GDP, down from 11.6 percent of GDP in 2022, while the non-oil fiscal deficit widened to 16.4 percent of GDP in 2023, compared to 12.7 percent of GDP in 2022. Public debt, mostly domestically owned, decreased as a share of GDP and the overall risk of sovereign stress was assessed as moderate. Equatorial Guinea’s current account surplus is estimated to have decreased, mainly driven by lower commodity export earnings. Inflation decreased thanks to the monetary tightening of the Bank of Central African States (BEAC) and credit growth remained subdued. Inflation in Equatorial Guinea decreased to 2.4 percent in 2023 (below the regional target of 3.0 percent) compared to 4.9 percent in 2022, including owing to ontainment measures by the BEAC, the agreement to import food products from Serbia and the reduction of some import tariffs. The BEAC policy rate was maintained at 5.0 percent following a cumulative increase of 175 basis points between November 2021 and March 2023. The BEAC ended its weekly liquidity injections in March 2023 after steadily scaling them back since June 2021. Meanwhile, credit to the private sector declined significantly by 25.9 percent in end-December 2023 year-on-year on the back the monetary tightening, persistent banking sector vulnerabilities and economic recession. Non-performing loans (NPLs) decreased following the restructuring of CCEI Bank in December 2023 but remained high at 32 percent of total loans. Equatorial Guinea’s economy is projected to remain in recession over the medium-term and there are significant risks to the outlook. Without significant diversification efforts or new substantial discoveries of hydrocarbon reserves, Equatorial Guinea’s economic outlook is projected to be negative with an average real GDP growth of -3.7 percent over the period 2024 Equatorial Guinea Economic Update 2024 2nd Edition 9 to 2026. The projected decrease in hydrocarbon production is expected to continue to weigh on the country’s fiscal and external positions over the medium term. The medium-term outlook is subject to downside risks, including a stronger decline in hydrocarbon production or prices, a further tightening of global financial conditions, lower demand from Equatorial Guinea’s main export partners, and increased global trade disruptions. The Government must enact structural policies to change the current oil-driven model and promote economic diversification and sustainable growth. While the Equatoguinean authorities have adopted several measures in recent years to improve governance, public financial management, and the business environment, significant structural challenges remain. The country’s heavy reliance on the declining non-renewable hydrocarbon sector, weak governance, challenging business environment, low levels of human capital, infrastructure gaps, and banking sector vulnerabilities require bold policy measures. Policies should focus on building the foundations to promote economic and asset diversification and boosting faster and more sustainable growth. These include (i) strengthening governance and institutions, (ii) enhancing public financial management, (iii) leveraging renewable resources like forests (iv) strengthening human capital and the social protection system, (v) promoting economic participation and boosting job creation, (vi) improving the business environment and financial inclusion (vii) improve infrastructure and logistics performance to facilitate trade, and (viii) enhancing digitalization and ecotourism to transform further the economy.  The development and efficient and sustainable use of the forestry sector will require leveraging public financing and attracting additional private investments. Designing and using efficient forest-related fiscal policy instruments can help (a) capture a fair share of forest resource rents for the public sector, enhancing fiscal space, (b) promote industrial policy objectives in the forest sector, such as increased domestic value addition and employment, and (c) foster better environmental management and sustainable forest use. Special topic: Designing Fiscal Instruments for Sustainable Forestry Equatorial Guinea is the second most forested country in Africa, with a dense tropical forest covering about 87 percent of its territory. The forest provides a vital ecosystem services, such as maintaining soil fertility and sequestering carbon dioxide. Forests are also crucial for the nutrition and well-being of the population, especially indigenous peoples, whose lives and culture are closely linked to the forest ecosystem. They are also home to remarkable biodiversity and unique landscapes that offer exceptional tourism potential. Deforestation and forest degradation, the second sources of Greenhous Gaz emissions, are on a concerning upward trend. The deforestation rate reached 0.35 percent between 2010 and 2020, the highest rate in the CEMAC region. Forest degradation has been mainly driven by agriculture, infrastructure development, and the logging industry. Before the discovery of oil, the country’s forests played an important role in the national economy, contributing substantially to tax revenues and foreign exchange reserves through commercial timber harvesting. In 1995, the forestry sector represented 20 percent of GDP, but this decreased to 0.5 percent in 2007 and further to 0.2 percent in 2023, partly due to the failure to process wood locally. Commercial logging occupies 40 percent of forest area but does not fully realize its economic potential in terms of job creation. It is estimated that there are 5,000 formal jobs in the forestry sector (excluding informal employment), with most of these jobs related to tree harvesting rather than wood processing. In 2022, wood represented about 2 percent of the country’s exports, and nearly 80 percent of forest products exported by Equatorial Guinea are made of unprocessed round logs, which have limited value addition. To meet both Equatorial Guinea Economic Update 2024 10 2nd Edition Equatorial Guinea’s economic diversification and forest preservation commitments, the country needs to develop a robust and inclusive commercial forestry sector that focuses on domestic value-added processing. CEMAC countries have moved towards implementing a ban on the export of round logs as part of an effort to promote local timber processing within these countries and aligning themselves with a global movement towards sustainable forest management. This significant policy shift, initially slated for commencement in 2022, has been postponed to 2028, allowing countries involved ample time to adapt to this transformative agenda. Recently, CEMAC concluded that member countries, including Equatorial Guinea, were not ready to enforce the timber export ban by the initially set date of January 2023. There are concerns over significant fiscal costs and the need for measures to mitigate these impacts. Notably, when Gabon implemented the ban, it led to substantial fiscal losses, suggesting similar potential economic impacts for other member countries. This strategic postponement reflects a careful consideration of economic stability and the readiness of domestic industries to shift towards increased local processing of timber. Developing a domestic timber processing industry in Equatorial Guinea requires substantial investments in infrastructure, technology, and training. This will require leveraging public financing, and attracting additional investments by enhancing public financial management and creating an enabling business environment. Recent years have seen an uptick in international funding for sustainable forest management in the Congo Basin region, but international commitments are still insufficient. Global commitments still tend to lack quantifiable and transparent targets, leaving a gap between pledges and results. The situation is further complicated when considering the distribution of these funds. Funding allocated to local communities, communal forests, and indigenous populations remain palpably inadequate. This shortfall extends to other vulnerable groups, such as rural women and smallholder farmers. Part of the solution could thus come from fiscal reforms and increased value addition in the wood industry to optimize forest resources, as a means to secure higher public revenues and environmental goals. Despite the abundance of forest resources, Equatorial Guinea has struggled to maximize revenue from its forestry sector. Revenue from forest taxes accounted for only 1.4 percent of total tax revenues in 2021. The main sources of revenue came from wood export duties and land area fees. Going forward, fiscal reforms could be designed to further integrate climate-smart fiscal policy instruments, which can be cost-efficient and lead to significant results. Forest-related fiscal policy instruments can complement forest conservation and management strategies, enabling policy makers to fulfill environmental and climate goals more affordably, while generating more revenues for the state. Fiscal policies such as subsidies for sustainable practices, adjusting forest taxes with the ecological footprint of the wood production method, tax rebate for forestry certification and agroforestry, reinvestment of natural resource revenues, fiscal transfers, and grants can play a crucial role in protecting Equatorial Guinea forestland. But taxation on forests needs to be applied with careful consideration of economic, social, and environmental factors. Ensuring that taxes are equitable, transparent, and effectively used to promote sustainable forest management and conservation. Balancing the need to discourage harmful practices with the need to support and incentivize sustainable livelihoods will help achieve long-term forest conservation goals. For insistence, area fees reveal the complex, often unpredictable, effects of forest taxes on logging behavior. The response of loggers to these fiscal pressures reveals that increased fees sometimes beckon towards more intensive logging. This is because area fees impose a fixed cost that forestry operators must pay regardless of the volume of timber extracted. Equatorial Guinea Economic Update 2024 2nd Edition 11 The integration of sustainability certification into forest-related tax rates represents a forward-thinking approach to environmental fiscal policy, one that combines fiscal and economic goals with preserving natural assets for the benefit of future generations. Forest certification promotes sustainable forest management and facilitates access to international markets and finance while ensuring social benefits for local communities and legal compliance, as well as supporting ethical branding through transparency and traceability. Through the adoption of a national REDD+ plan in 2021, Equatorial Guinea has shown intentions to reform. Going forward, addressing the multifaceted challenges facing Equatorial Guinea’s forestry sector, a coherent set of solutions is proposed, focusing on both fiscal reforms and measures for the long-term sustainability of forest management and conservation: • Adjust forest tax rates to reflect the ecological footprint of timber production methods. By leveraging the detailed assessments conducted by forest certification agencies, fiscal authorities can align tax rates more closely with the environmental impact of production methods. • Encourage forest certification and, like Gabon, experiment the implementation of a “bonus- malus” system where non-certified concessions are taxed more than certified ones. • Rationalize tax expenditures for agriculture to improve their targeting and align them with environmental goals. • Promote digital services for the forestry sector, including processes for attribution and verification of permits and payment of all charges, taxes, and fees to increase efficiency, transparency, and traceability. • Expand and strengthen the implementation of REDD+ initiatives across Equatorial Guinea’s forests to maximize carbon sequestration and support community livelihoods. • Implement comprehensive legal reforms to strengthen forest governance and law enforcement. • Foster international partnerships and secure increased funding for forest conservation and climate resilience projects. • Promote agroforestry and sustainable land management practices as key strategies for reducing agriculture pressure on forests. • Enhance community engagement and participatory forest management to ensure the sustainability of conservation efforts. • Increase efforts to develop a robust local wood processing industry, which can add value to forest products, create more jobs, and generate more revenue compared to exporting raw timber. Fiscal strategies, however, are not standalone solutions but components of a comprehensive policy mix that addresses the multifaceted challenges of forest conservation. From regulatory measures to economic instruments and informational campaigns, the success of forest conservation and sustainable development strategies and efforts hinges on the ability to implement a coherent, integrated strategy that leverages the strengths of each approach. The role of governance, in this context, cannot be overstated. A robust governance framework is essential not only for the effective implementation of tax policies but also for fostering the collaboration and transparency necessary for sustainable forest management. Equatorial Guinea Economic Update 2024 12 2nd Edition photo: © Freepik CHAPTER 1 Recent Economic Developments and Outlook 1.1 Recent Economic Developments Global and regional recovery remains slow, with divergences across countries The global economy decelerated slightly in 2023 amid the lingering effects of fast monetary policy tightening, worsening financial conditions, and trade disruptions.1 Global economic activity is estimated to have grown by 2.6 percent in 2023, a 0.4 percentage point decrease compared to 2022 (Figure 1). GDP growth in advanced economies has deteriorated amid the lingering impact of the sharp rise in interest rates, tighter monetary policy weighing on demand, and high energy prices. GDP in Emerging and Developing Economies (EMDEs) is estimated to have grown by 4.0 percent in 2023, up from 3.7 percent in 2022. However, growth in EMDEs excluding China is estimated to have decelerated to 3.2 percent. The spillovers from weaknesses in advanced countries are exacerbating domestic headwinds in many EMDEs where exports and domestic demand have dampened due to subdued demand for goods in advanced economies and high interest rates, respectively. Against this backdrop, economic growth decreased in Sub-Saharan Africa (SSA). GDP growth decreased to 2.9 percent in 2023 (Figure 1), on account of various country-specific challenges, including, for example an energy crisis in South Africa, increased input prices for businesses in Nigeria, lower oil production on the back of maturing oil fields in Angola, and increased political instability and violence in some low-income countries, including Niger and Sudan. Weakening external demand and domestic monetary policy tightening to contain persistent inflation also contributed to the economic slowdown in SSA. The recent overlapping crises, including the COVID-19 pandemic and the war in Ukraine and the ensuing rise in living costs, have led to rising debt levels and a shift in government spending away from investment toward shorter-term support for firms and households. Indebtedness has risen across countries in the past decade. In SSA, government debt was estimated at 65 percent of GDP in 2023, on average, higher than the pre-pandemic decade average of 37 percent. Borrowing costs increased well above nominal growth rates in many SSA countries, particularly those with weak credit ratings, due to rising interest rates. These countries face high financing costs and lacks access to market-based issuance. Economic activities in the CEMAC (Economic and Monetary Community of Central Africa) region decreased with a GDP growth of 1.7 percent in 2023, down from 3.1 percent in 2022. The negative growth in Equatorial Guinea and the modest growth in Gabon contributed to the overall low regional growth. Conversely, Cameroon, which has a relatively higher level of economic diversification and lower dependence on hydrocarbons, emerged as the fastest- 1  The global economic developments are based on the Global Economic Prospects (January 2024). Equatorial Guinea Economic Update 2024 2nd Edition 15 growing economy in the CEMAC region over the past three 2023, approximately 31.1 percent of the region’s population years, with an average GDP growth of 3.6 percent in 2021- lived with less than US$2.15 (2017 PPP) per day. 2023. The region’s external and fiscal positions deteriorated between 2022 and 2023 on the back of lower oil prices and Declining oil prices in 2023 negatively affected CEMAC’s revenues. During this period, crude oil prices declined from Net Foreign Assets (NFA), whose dynamics prompted US$ 97.1 to US$ 80.8. As a result, the current account surplus the Central Bank to step up its efforts to strictly enforce is estimated to have decreased to an average of 2.2 percent the forex regulations. Despite the positive momentum in of GDP in 2023, compared to 5.9 percent of GDP in 2022.2 accumulation of forex reserves in 2022 which carried into CEMAC’s gross reserves are estimated to have decreased the first half of 2023, NFAs plummeted thereafter due to to 4.8 months of imports in 2023 (down from 5.2 months declining oil price (average month-on-month decline of 7.6 in 2022). On the fiscal front, an increase in non-oil revenues percent between May and October 2023). To reverse this allowed the region to sustain fiscal revenues at an average trend, the BEAC stepped up the enforcement of 2018 forex stable ratio of 21.2 percent of GDP between 2022 and 2023. regulations, especially regarding the repatriation of funds On average, resource revenues still represented 46 percent set aside for the rehabilitation of oil sites and currently of total revenues in the CEMAC zone, highlighting the high located abroad. Discussions are ongoing between the exposure of public finances and of the overall economy to BEAC, CEMAC’s Ministries of Finance and Hydrocarbons, volatile commodity markets. Meanwhile, total spending in and oil companies on the scope of these funds and the CEMAC increased to an average 20.1 percent of GDP in 2023 legal framework that will govern the repatriation process from 18.3 percent in 2022, and the fiscal surplus decreased and the management of related accounts which will be to 1.1 percent of GDP from 2.9 percent. Public debt in the created in the Central Bank’s books. Furthermore, the region increased to 52.8 percent of GDP in 2023 from 51.5 upcoming log export ban (expected for 2028) has the percent in 2022. In this context, reforms capable of improving potential to put some pressures on forex reserves, as wood the efficiency of tax collection, including in the forestry represents one the most exported goods in three CEMAC’s sector, government expenditure, and debt management countries. Without deepening regional integration with the remain crucial. Moreover, targeted investments focused on development of regional value chains of wood which have promoting entrepreneurship and labor skills that are adapted the potential to reduce demand for imported manufactured to market needs, along with other measures to support wood products, the upcoming logs export ban could have economic diversification, are critical. Improving business adverse effects on foreign reserves. conditions, with better roads, energy, access to financing, and more efficient trade, is essential to boost private sector Equatorial Guinea reentered recession in 2023 growth and job creation. amid a decline in hydrocarbon production and domestic demand The Bank of Central African States (BEAC) maintained its tight monetary policy stance during 2023 to contain After two years of recovery, the Equatoguinean economy inflationary pressures and support the exchange rate fell back into recession in 2023, driven by the decline in arrangement. The BEAC policy rate was maintained at 5.0 the hydrocarbon sector. Equatorial Guinea’s oil dependent percent following a cumulative increase of 175 basis points economy has contracted for over a decade amid a shrinking between November 2021 and March 2023.3 Moreover, the hydrocarbon sector, lower investment, and external and BEAC ended its weekly liquidity injections in March 2023 domestic shocks. Between 2013 and 2023, economic activity after steadily scaling them back since June 2021. Average contracted by 4.1 percent per year, on average (Figure 2). The (year-on-year) inflation in the CEMAC region decreased to hydrocarbon sector declined at an average rate of 6.2 percent 4.7 percent in 2023Q3 (down from the 6.3 percent recorded per year between 2013 and 2023 amid maturing oil fields and in December 2022) amid lower prices of most commodities multiple recent incidents in both gas and oil production sites. thanks to global supply chain recovery, national policy actions, In 2023, Equatorial Guinea was the only CEMAC country and BEAC containment measures. However, it remains above with negative real GDP growth (Figure 3). The country’s GDP the regional target of 3.0 percent and high consumer prices growth was estimated at about -5.7 percent (compared to a continue to impact living conditions and food security in the positive growth of 3.7 percent in 2022), 2 percentage points region. Against this backdrop, the CEMAC region continues higher than last year projections amid a stronger-than- to face high, persistent, and stagnant poverty rates: as of expected decline in hydrocarbon production (Table 1). 2 World Bank. CEMAC Economic Barometer. Vol. 6. June 2024 3  The BEAC plans to keep the policy rate at 5.0 percent at least until the 3rd quarter of 2024 to cope with inflationary pressures linked to the upward revision of fuel prices due to the reduction of fuel subsidies in Cameroon, Congo, and Chad (BEAC, March 2024 report). Equatorial Guinea Economic Update 2024 16 2nd Edition Figure 1. Figure 1. Real GDP, percent change from previous year, 2021-2025 8 6 7 4 6 2 5 4 0 3 -2 2 -4 1 0 -6 2021 2022 2023e 2024f 2025f 2021 2022 2023e 2024f 2025f World Advanced Economies EMDEs SSA CEMAC Equatorial Guinea Source: World Bank, Global Economic Prospects, January 2024 and MPO Spring Meetings 2024. Note: Weighted average is used for CEMAC. Figure 2. Figure 3. Figure 2. Equatorial Guinea - Oil and Non-oil GDP growth (in Figure 3. Equatorial Guinea and other CEMAC countries – percent), 2013-2023 Real GDP growth (in percent), 2021-2023 4 6.0 2 4.0 0 2.0 -2 0.0 -4 -2.0 -6 -4.0 -8 -6.0 -10 -8.0 Rep. 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023e Chad Cameroon Gabon Congo, CAR Equatorial Guinea Oil GDP Non-oil GDP Real GDP Growth 2021 2022 2023e Source: National Institute of Statistics (INEGE), Equatoguinean authorities, and World Bank staff calculations. Note: CAR=Central African Republic. Table 1. Equatorial Guinea – Comparison in projections of key macroeconomic variables 2023 Economic Update 2024 Economic Update Comparison 2023f 2024f 2023e 2024f GDP growth (%) -3.7 -6.0 -5.7 -4.3 Inflation (%) 3.5 2.2 2.4 4.0 Fiscal balance (% of GDP) 2.1 0.6 2.6 1.2 Source: Equatorial Guinea Economic Updates using Macro Poverty Outlook and government data. Note: Green means that the indicator has improved, red means it has deteriorated. Equatorial Guinea Economic Update 2024 2nd Edition 17 photo: © Freepik Despite the positive impact of increased liquefied natural 2023, respectively, while the industrial sector (excluding gas (LNG) production from the Alen field, hydrocarbon construction) registered a 12.6 percent contraction. Economic production continued declining in 2023. Total oil production activities in the forestry and logging sectors declined by 10.2 contracted by 21.7 percent on the back of recent incidents percent in 2023. The exports of wood decreased by 47.3 at the country’s largest offshore oil platform – Zafiro (in percent in 2023Q3 year-on-year, reflecting lower production. September 2022), which led to the disconnection of two On the demand side, lower exports (which are predominantly production facilities, one of which was reconnected only in hydrocarbons) contributed to the contraction (Figure 6). May 2023. Crude oil production shrank by 32.4 percent (year- on-year) to about 54.8 thousand barrels per day in 2023 (from Inflation decreased in Equatorial Guinea in 2023 thanks to a peak of 321 thousand barrels per day in 2004), the lowest lower commodity prices. According to the national institute production level ever registered in the country. Meanwhile, of statistics (INEGE), the prices of food products increased gas production, including LNG, methanol, propane, and other by 7.1 percent between March 2020 and September 2023, gases decreased by 13.5 percent including due to a damage which represents an average loss of the purchasing power of in the gas compressor at the FPSO Serpentina that occurred households of 4.5 percent. In 2023, inflation is estimated to in July 2023 (Figure 4 and 5). Overall, hydrocarbon production have decreased to 2.4 percent, 1.1 percentage points lower decreased by about 19 percent in 2023 (year-on-year). than projected in June 2023 (Table 1) and down from 4.9 percent in 2022, including owing to containment measures Meanwhile, activities in the non-hydrocarbon sector by the BEAC, the agreement to import food products from expanded in 2023, driven by an upturn in the construction Serbia and the reduction of some import tariffs. In April and service sectors. On the supply side, the construction 2024, the average inflation rate stood at 2.0 percent, down and service sectors grew by 3.1 and about 2.7 percent in from 5.0 percent in April 2023. Equatorial Guinea Economic Update 2024 18 2nd Edition Figure 4 Figure 5 Figure 4. Equatorial Guinea – Hydrocarbon production (in Figure 5. Equatorial Guinea – Growth in hydrocarbon millions of barrels of oil equivalent), 2022-2023 production (y-o-y, in percent), 2023 120 0 100 -5 -10 80 -15 60 -20 40 -25 20 -30 0 -35 2022 2023 Crude Propane Butane LNG Condensate Methanol Crude Condensate Propane Butane Methanol LNG Source: INEGE, Equatoguinean authorities, and World Bank staff calculations Note: LNG = Liquefied Natural Gas. y-o-y = year-on-year. Figure 6 Figure 7 Figure 6. Equatorial Guinea – Contribution to Growth, Figure 7. Equatorial Guinea – Contribution to Growth, supply (in percent) demand (in percent) 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -10 2020 2021 2022 2023 2020 2021 2022 2023e Agriculture, forestry, and fishing Services Net Exports Private consumption Government consumption Industry (including construction) Real GDP Growth GFCF Change in inventories Source: INEGE, Equatoguinean authorities and World Bank staff calculations. Note: GFCF = Gross Fixed Capital Formation. The fiscal position has deteriorated amid a 2022). Government spending increased to an estimated 19.8 decline in commodity revenues, and public debt percent of GDP (from 17.1 percent of GDP in 2022), on the declined and remained sustainable back of higher wages and spending on goods and services as a share of GDP (Figure 8). The increase in government A decrease in hydrocarbon production and revenues spending was mostly driven by higher spending on goods resulted in a decline in Equatorial Guinea’s fiscal balance. and services (26.1 percent growth) and capital expenditure The decline in hydrocarbon production and exports, (21.6 percent growth). While the country recorded a high caused by incidents that occurred at the Zafiro and FPSO fiscal surplus of 11.6 percent of GDP in 2022 owing to the Serpentina platforms and maturing fields, led to a decrease oil windfall, it declined to 2.6 percent in 20234 (Figure 9). in hydrocarbon revenues, which are estimated at 19.1 Meanwhile, the non-oil fiscal deficit widened to 16.4 percent percent of GDP in 2023 (down from 27.3 percent of GDP in of GDP in 2023, compared to 12.7 percent of GDP in 2022. 4  The 2023 fiscal surplus is slightly higher than previously projected in the June 2023 Economic Update (see Table 1). Equatorial Guinea Economic Update 2024 2nd Edition 19 Figure 8 Figure 9 Figure 8. Equatorial Guinea – Composition and evolution of Figure 9. Equatorial Guinea – Fiscal Balance, 2019-2023 government spending, 2019-2023 16 2500 14 11.6 12 2000 10 12 Ivvn percentage of GDP 2.6 8 CFAF Billions 1500 1.9 6 8 2.6 4 1000 2 4 0 500 -1.7 -2 0 0 -4 2019 2020 2021 2022 2023e 2019 2020 2021 2022 2023 Current Transfers Interest Payments Total Revenues (lhs) Goods and Services Wages and Compensation Total Expenditures (lhs) Current Expenditures Capital Expenditures Fiscal Balance (rhs) Source: Equatoguinean authorities and World Bank. In 2023, the public debt to GDP ratio decreased and is CFAF 65.3 billion (1.1 percent of GDP) was paid using the IMF expected to remain sustainable in the medium term. Public Special Drawing Rights (SDR) allocation.5 In August 2023, the debt was modest at 32.75 percent of GDP in 2023 (down audited net debt owed to construction companies (the gross from 37.6 percent in 2022) (Figure 10). About 69 percent value minus fiscal obligations), stood at CFAF 479.3 billion (or of the debt is domestic, while multilateral and bilateral 7.9 percent of GDP). The overall risk of sovereign stress was foreign creditors hold the remainder. The authorities’ efforts assessed as moderate by the IMF amid the implementation to reduce domestic arrears continued in 2023, particularly of fiscal adjustment measures and the clearance of part with construction companies. Between 2019 and 2023, of domestic arrears.6 The composition of the debt has a construction companies received a total of CFAF 572.2 relatively lower-risk profile with low levels of foreign currency billion (9.5 percent of GDP) out of outstanding arrears of denominated debt and an increasing share of medium and CFAF 1,382.5 billion (20.8 percent of GDP). Of this amount, long-term debt. Figure 10 Figure 10. Equatorial Guinea – Public debt (in percent of GDP), 2019-2023 60 50 40 30 External Debt 20 Domestic Debt 10 0 2019 2020 2021 2022 2023 Source: Equatoguinean authorities and World Bank. 5  IMF 2023 Equatorial Guinea Article IV. 6  Ibid. Equatorial Guinea Economic Update 2024 20 2nd Edition Equatorial Guinea’s external position deteriorated of GDP (compared with 18.6 percent of GDP) on the back of on the back of declining export earnings higher capital spending. Equatorial Guinea’s export performance deteriorated As a result, the current account balance decreased in on the back of lower commodity prices and production. 2023 mainly driven by a significant decrease in the Hydrocarbon exports (in volume) are estimated to have country’s trade balance. Lower exports and higher imports decreased by 23 percent in 2023. Average prices of crude resulted in a significantly smaller trade surplus estimated oil declined from US$ 97.1 in 2022 to US$ 80.8 in 2023 while at 6.9 percent of GDP in 2023. The current account surplus prices of natural gas decreased by 64 percent, on average.7 is estimated to have also decreased to 1.4 percent of During this period, exports (in value) decreased by 36 percent, GDP in 2023 (down from 2.1 percent of GDP in 2022). driven by lower hydrocarbon prices and production (Figure The deterioration of the balance of payments resulted in 11). Fuels and mineral oils accounted for the bulk (about a decrease in external reserves which stood at 4.8 months 91 percent) of the total exports value in 2022 (Figure 12). of imports of goods and services in 2023, down from 6.8 Meanwhile, the value of imports increased to 28.8 percent months of imports in 2022. Figure 11 Figure 12 Figure 11. Equatorial Guinea – Current Account Figure 12. Equatorial Guinea – Composition of export value (in percent of total exports), 2022 60 35 30 50 25 40 20 15 30 10 20 5 0 10 -5 0 -10 2019 2020 2021 2022 2023 Mineral fuels and oils products Organic chemicals Wood, charcoal and wood products Other Exports Imports Machinery and mechanical appliances Trade Balance (rhs) Current Account Balance (rhs) Copper, iron, aluminum, zinc, and steel Source: BEAC, INEGE, and World Bank staff calculations. Figure 13 Credit to the economy decreased significantly Figure 13. Credit to the economy in Equatorial Guinea, amid banking sector vulnerabilities and monetary growth, 2014-2023 (in percent) tightening 20 Banking sector weaknesses coupled with monetary 10 tightening and economic recession contributed to a significant contraction of the credit to the economy. 0 Despite a decrease in non-performing loans (NPLs) following the restructuring of CCEI Bank in December 2023, NPLs -10 remain high at 32 percent of total loans in 2023Q4 (down from 56 percent in 2022) and remain a source of banking -20 system vulnerability. As a result, credit to the economy declined markedly by 25.9 percent in end-December 2023 -30 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 year-on-year (Figure 13). 7 Source: BEAC and World Bank staff calculations. 7  Prices of natural gas (US), natural gas (Europe) and LNG (Japan) decreased by 60 percent, 67 percent, and by 23 percent, respectively. Equatorial Guinea Economic Update 2024 2nd Edition 21 1.2 Economic Outlook, Risks, in China, further trade fragmentation, and climate change- related disasters. Challenges, and Policies In SSA and the CEMAC region, growth is expected to Global economic activity is expected to slow rebound in 2024 thanks to lower inflationary pressure and while SSA growth is forecast to accelerate in improved financial conditions. SSA growth is expected 2024 to reach 3.8 percent in 2024 and accelerate further to 4.1 percent in 2025, approaching its average rate of 4.5 recorded Global growth is projected to decelerate in 2024 as a result during the past two decades (Figure 15). With the expected of widespread tightening of monetary policy to contain relaxation of monetary policies across the region, banks will inflation, restrictive financial conditions, and weak global be able to play their role of supporting consumption and trade growth. After a slowdown in 2022 and 2023, global investments, thereby fostering positive growth dynamics. growth is expected to decelerate again in 2024 and reach Per capita income in the SSA region is expected to grow 2.4 percent, down from about 2.6 percent in 2023 (Figure by an estimated 1.2 percent in 2024, up from 0.3 percent in 14). Short-term growth forecasts vary, with moderate growth 2023. However, growth in the largest SSA economies is set to expected in major economies, while EMDEs with strong lag the rest of the region, while non-resource-rich economies fundamentals show favorable prospects for growth recovery. are forecasted to maintain a growth rate above the regional In EMDEs, aggregate growth is projected to remain steady average. In the CEMAC region, growth is anticipated to at 3.9 percent over 2024-25. Excluding China, economic rebound to 2.3 percent in 2024 and 2.6 percent in 2025, much activity in EMDEs is set to grow at 3.5 percent in 2024 and lower than the 4.2 percent growth recorded in the decade 3.8 percent in 2025, compared to 3.2 percent in 2023, driven preceding the pandemic. Meanwhile, WAEMU is expected by higher trade and domestic demand in large economies to achieve one of the highest growth rates, with 6.9 percent as well as a decline in inflation and interest rates. Risks to growth expected in 2024 and 6.6 percent projected in 2025. the global outlook remain titled to the downside and include In addition to the aforementioned global risks , specific risks uncertainty about the evolution of the conflicts in the Middle to the SSA outlook include a rise in political instability and East and Ukraine and the evolution of energy and commodity violence and a higher risk of government defaults due to prices prices, financial stress related to elevated real interest weak fiscal positions. rates, persistent inflation, weaker-than-expected growth Figure 14 Figure 15 Figure 14. Global growth (in percent), 1990-2025 Figure 15. GDP growth in SSA and other regions (in percent), 2021-2025 6 7 2000-19 average 5 6 4 3 5 2 4 1 0 3 -1 2 -2 1 -3 -4 0 1990 1995 2000 2005 2010 2015 2020 2025 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 SSA Nigeria, South WAEMU CEMAC Africa, Angola Source: Global Economic Prospects January 2024, World Bank and MPO Source: Global Economic Prospects January 2024, World Bank and MPO Spring Meetings 2024. Spring Meetings 2024. Equatorial Guinea Economic Update 2024 22 2nd Edition The Equatoguinean economy is projected to upside, the authorities are continuing their efforts to optimize remain in recession over the medium term hydrocarbon reserves and their objective of transforming Equatorial Guinea into a gas processing center through the Without major structural reforms, the economy is Punta Europa facilities. Planned projects mentioned include projected to remain in recession over the medium term. (i) the development and processing of transboundary gas Equatorial Guinea is projected to remain in recession in resources in the Douala Basin (Yoyo-Yolanda, Carmen-Diega, 2024 (with growth of –4.3 percent)8 on the back of declining Etinde), the negotiation of the final agreements for the Mega hydrocarbon production and domestic demand. Declining Gas Hub (phase II-Alba and phase III-Aseng) and the Nigeria hydrocarbon production and lower commodity prices are Gas Pipeline project. The exploitation agreement for the expected to result in negative annual growth of 3.5 percent Yoyo-Yolanda project was signed by the Heads of State of in 2025-2026. Over the same period, the hydrocarbon sector Cameroon and Equatorial Guinea and was recently approved is projected to contract by 15.5 percent, on average, while by the Equatoguinean Parliament. However, the projections the non-hydrocarbon sector is projected to grow by only 1 of hydrocarbon production still indicate a secular decline, percent, given the tight link between the two sectors. especially that Exxon Mobil is exiting the country with its contract expiring in 2025 and given the expected limited The projected decrease in hydrocarbon production is production from planned projects. Given the significant expected to continue to weigh on the country’s fiscal and structural challenges facing the country, significant efforts external positions over the medium term. Decreasing are needed to boost resilient and diversified growth. exports would lead to current account deficits over the medium term. Albeit at a slower pace, imports are also Policy Watch, Structural Challenges, and Reform projected to decrease, on account of declining public Priorities spending due to limited fiscal space. The government is expected to continue its fiscal consolidation efforts, with The Government has adopted several reforms in recent reduction of all but social expenditures in the FY24 budget. years to improve governance, public financial management, The fiscal balance is projected to turn to deficits (3.1 percent and the business environment. The Government has made of GDP, on average) in 2025-2026, with public expenditure efforts to improve governance with the passage of an Anti- cuts unable to compensate for the larger decline in Corruption law by Parliament in 2021; the drafting of a hydrocarbon revenues. Against this backdrop, the authorities procurement law limiting the recourse to non-competitive are implementing reforms to boost domestic revenue tenders; the completion of the audits of the largest state- mobilization (see section 2.4). owned oil and gas companies; the publication of the final audits of COVID-related expenses; an increase in the number Risks to the outlook are titled to the downside of qualified judges and lawyers; and the establishment of a with the main risk being a faster-than-expected system of commercial arbitration. The authorities are also decline in the hydrocarbon sector taking measures to improve public financial management, including through (i) the approval of a decree establishing There are significant risks to the medium-term growth a treasury single account by the Senate in November 2023; outlook. Given the heavy reliance of the Equatoguinean (ii) the approval by the Chamber of Deputies9 of a revised economy on the hydrocarbon sector, a stronger decline in tax law (updating the 2004 law) which would help broaden hydrocarbon production or prices would reduce the fiscal the tax base, including for instance through amendments to space and risks external stability. A further tightening taxes on business and employment income and to Valued of global financial conditions and lower demand from Added Tax (VAT)10, and the introduction of a special regime Equatorial Guinea’s main export partners including India and for SMEs; and (iii) the passage of a presidential decree China, could also undermine growth. Global trade disruptions (no. 009/2024) in February 2024 providing provisions for affecting food prices amid a protracted war on Ukraine would improving domestic revenue mobilization and to implement increase food insecurity especially for the most vulnerable, other structural reforms (see Box 1). The 2024 Budget Law as the country relies heavily on food import. Delays in aims at reducing the non-hydrocarbon fiscal deficit. The addressing structural issues, including banking sector ongoing deployment of the ASYCUDA system to the Bata vulnerabilities and governance issues, could hamper private port and the single window for vehicle clearance in Bata as investment and undermine medium-term growth. On the well as the accession to the World Customs Organization in 8  While remaining negative, this GDP growth rate is above that projected (-6.0 percent) in June 2023 Economic Update (see Table 1). 9  The revised Tax Law is still in the process of being adopted and approved by the Parliament. 10 New measures include, for instance, a reduction of the Corporate Income Tax (CIT) rate from 35 to 25 percent and refunds of input VAT tax credits, reduced VAT rates for essential goods, and the expansion of the VAT base to include electronic commerce services. See IMF Equatorial Guinea Article IV 2023. Equatorial Guinea Economic Update 2024 2nd Edition 23 2021 also strengthen revenue collection. On the expenditure to create a business; the creation of a page for investors side, the authorities are continuing their fiscal consolidation on its website where all relevant information for investing efforts with the reduction of all except social expenditures in Equatorial Guinea is publicly available (e.g., procedures, in the 2024 Budget Law and their objective to remove costs, requirements, legislation); and more recently the most of the regressive fuel subsidies. The authorities are launch a new e-visa which eases the visa process for also implementing an integrated expenditure management investors and tourists. The Equatoguinean Government has system. Recent reforms towards creating a more conducive created a business climate committee which is presided business environment include the establishment of a One by the Prime Minister, and of which the the Equatoguinean Stop Shop to facilitate business registration, with World business association is a member. Bank support; the reduction of the minimum capital required Box 1. The authorities highlighted their commitments to improve the sustainability of the Equatoguinean economy and public finances in the February 2024 Presidential decree On February 7, 2024, a presidential decree (no. 009/2024) that introduces economic and financial measures in support of the sustainability of the economy and public finances in Equatorial Guinea for the period 2024- 2028 was published. The decree highlights two complementary and reinforcing policy measures, namely (a) fiscal consolidation to eliminate the structural public deficit and reduce the non-oil primary balance, and (b) implementation of structural reforms to promote the “reactivation” of the economy. The decree provides several provisions including: 1. Development of a legal framework for Public-Private Partnerships (PPP); 2. Improvement in management of government income and revenue collection through the preparation and publication of a tax audit plan on an annual basis, the creation of a special body of tax inspectors, the computerization of tax services to simplify procedures; the mandatory use of ASYCUDA when declaring goods for import, the control and rationalization of exemptions and customs duties, and the approval of a new tax law to broaden the tax base and attract more private investment; 3. Improvement in expenditure management by transposing and implementing all CEMAC directives for the harmonization of Public Financial Management (PFM), steadfast implementation of the medium- term budget framework, extension of the Integrated Expenditure Management System (CONTFIN) to all ministerial departments and state institutions, control and rationalizing of public expenses including telephone expenses, fuel costs, fuel subsidies; 4. Improvement in public investment management with guidelines on submission of public investment expenses through a national payment commission, chaired by the Ministry of Finance and Budgets; 5. Promotion of financial sustainability with provisions on settlement of public debt arrears, usage of budget surplus; 6. Implementation of economic reactivation measures to boost inclusive growth and social development which include the drafting of sectoral plans by ministerial departments for the diversification of the economy and social development, review and update of the Investment Law to include incentives capable of attracting both national and foreign private investment, creation of a Sovereign Wealth Fund with the objective to facilitate economic diversification, full implementation of the roadmap to improve the business climate and the competitiveness of the economy; 7. Improvement in governance and anti-corruption framework by introducing an application to access the Initiative for Transparency in the Extractive Industry (EITI), concluding the process of the accession of ANIF (Agencia Nacional de Investigación Financiera de Guinea Ecuatorial) to the EGMONT Group to improve the international exchange of information on tax crimes, steadfast the operationalization of the national commission for the prevention and fight against corruption; and 8. Compliance by the hydrocarbon companies with the agreement regarding the domiciliation of 35 percent of their invoicing in national banks. Source: Equatoguinean authorities, Guinea Ecuatorial press Equatorial Guinea Economic Update 2024 24 2nd Edition Despite recent reform progress in some areas, more needs accessing the labor market, with the youth and female to be done as the structural challenges of the country labor force participation rates at only 28 percent percent require bold policy measures to change the current oil- and 53 percent in 2022, respectively. The country’s share of driven model. The capital-intensive hydrocarbon sector vulnerable employment11 in total employment at 78 percent remains the country’s largest economic sector but has is also higher in Equatorial Guinea compared to the average provided few opportunities for job creation. The industry for SSA and upper-middle income countries (UMICs). The sector accounted only for 13 percent of jobs in 2022 while gender gap is noticeable in terms of vulnerable employment agriculture remained the largest employment source of with 86 percent of women vs. 72 percent of men engaged the country (Table 2). While the labor force participation in vulnerable jobs in 2022 (Figure 17). The small size of the rate in Equatorial Guinea has increased in recent years, it formal private sector (accounting for only 12.6 percent)12 remains below pre-pandemic levels and access to the labor and limited skill level of the current workforce partly explain market is limited compared to income peers (Figure 16). low labor market opportunities. The young generation and women have more difficulties Figure 16 Figure 17 Figure 16. Equatorial Guinea and peers - Labor force Figure 17. Equatorial Guinea and peers - Vulnerable participation rate, total (% of population ages 15-64), 2000- employment by gender, (% of female or male employment), 2022 2010-2022 80 180 150 86 80 70 120 71 72 90 60 60 37 39 83 84 30 63 71 41 44 50 0 Male Female Male Female Male Female 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Equatorial Guinea SSA UMICs Equatorial Guinea SSA CEMAC UMICs 2010 2022 Source: World Development Indicators (WDI), World Bank. Equatorial Guinea’s asset portfolio - including natural for UMICs (Figure 18). Indicators of telecommunications capital, physical capital, human capital, and institutions - development also point to lower internet penetration in is not diversified. The country is endowed with significant Equatorial Guinea compared to its income peers which can natural resources with nonrenewable resources (oil, gas, be explained by limited affordability of connectivity, digital coal, and minerals) representing the bulk (83.6 percent) skills and infrastructure, and lack of enabling regulations of total natural capital in 2018. Forests (timber and forest and competition policies (see Box 2). The country’s score ecosystem services) constitute the country’s largest on the World Bank’s Logistics Performance Index (LPI), renewable natural resources but its contribution to GDP which measures performance along the logistics supply has been negligible in recent years. While Equatorial Guinea chain within a country, is low by international standards has invested in hard infrastructure like roads, airports and and remains below that of the average for SSA and UMICs ports, infrastructure gaps persist in the country. Electricity (Figure 19). This highlights the need to improve customs access in Equatorial Guinea improved slightly in the last regulations and reinforce logistics infrastructure to efficiently two decades and is higher than the average for CEMAC and move goods, and connect manufacturers, businesses, and SSA. However, it remains significantly below the average consumers with international markets. 11  The status in employment distinguishes between two categories of the total employed: (a) wage and salaried workers (also known as employees); and (b) self-employed workers, with the subcategories: (i) self-employed workers with employees (employers), (ii) self-employed workers without employees (own-account workers), and (iii) members of producers’ cooperatives and contributing family workers (also known as unpaid family workers). Vulnerable employment refers to the sum of (ii) own-account workers and (iii) contributing family workers. 12  The informal sector comprises firms that do not meet at least one of the following criteria: a) have a tax identification number; b) have a commercial register number; c) be registered with the Social Security Institute (INSESO); d) pay corporate income tax; e) pay personal income tax; f) pay the social protection fund for workers; and g) pay value-added tax. Source: INEGE. 2023. Equatorial Guinea Business Census report. Equatorial Guinea Economic Update 2024 2nd Edition 25 Figure 18 Figure 19 Figure 18. Equatorial Guinea and peers - Electricity access, Figure 19. Equatorial Guinea and peers - Logistics percentage of the population, 2000-2021 Performance Index, 2018 120 3 2000 2010 2021 100 2.5 80 2 60 1.5 40 1 20 0.5 0 0 SSA CEMAC Equatorial UMICs Equatorial CEMAC SSA UMICs Guinea Guinea Source: WDI, World Bank and Logistics Performance Index (LPI), World Bank. Box 2. The digital economy offers a transformative opportunity for growth but is constrained by significant bottlenecks in Equatorial Guinea Digital technologies and digitalization are found to have significant impacts on productivity, economic growth and income gains at several levels. The digital economy can address certain concerns with asymmetric information, or allow products and services to be customized and targeted. Developing the digital economy could help countries transform their economy. For example, research relying on data for SSA shows that access to internet and mobile technologies have posivitive impacts on growth, jobs, innovation, firm and agricultural productivity, and household consumption levels (Katz and Callorda, 2019; Hjort and Poulsen, 2019; George et al., 2021; Ordu et al., 2021; and Bahia, et al., 2020). Digital technologies have also contributed to increased financial inclusion in Western and Central Africa. The development of digital financial services allowed access to transaction accounts in the region to increase from 33 percent in 2014 to 48 percent in 2021. However, Equatorial Guinea’s digital economy is nascent and constrained by important bottlenecks. Digital Infrastructure challenges remain a major constraint for the development of the sector. Access to electricity in Equatorial Guinea– which can affect the availability, uptake, and usage of mobile connectivity and digital inclusion – has seen a slow improvement since 2000 (64.8 percent in 2000 versus 66.8 percent in 2021) with large disparities in access between urban and rural areas. Equatorial Guinea lacks the appropriate infrastructure and ecosystem, which results in low levels of internet access and high connectivity prices in the country. In 2022, 54 percent of the population had access to the internet in 2022 which is higher than the SSA average of 35 percent but much lower than the upper-middle income average of 74 percent. Equatorial Guinea was ranked 183rd out of 193 counties on the E-Government Development Index, which incorporates access characteristics, such as infrastructure and educational levels. The country scored only 43 points (out of 100) on the 2020 International Telecommunication Union ICT regulatory tracker which indicates limited reforms and low levels of liberalization and privatization in Equatorial Guinea’s ICT sector. The digital business ecosystem in Equatorial Guinea is still in emergence and constrainted by limited access to internet and finance, and relatively low digital skills. The authorities are making progress to reduce connectivity prices which would help expand internet access. Following a series of international submarine fiber link launches, Equatorial Guinea began to implement measures to reduce prohibitively high end-user retail prices for fixed broadband access. Following negotiations with the Government, on 20 April 2022 an agreement was signed by Equatorial Guinea’s mobile operators, ORTEL (the regulator) and GITGE, to reduce telecoms service rates ‘by 50 percent’. The subsequent Ministerial Order No. 2/2022 (27 April 2022) established a maximum retail mobile data price per 1MB of XAF 15 effective 1 May 2022. Further policy guidance prompted Ministerial Order No. 3/2022 (10 August 2022), obliging operators to reduce internet/data prices on 1 September 2022, including an obligation to set a maximum retail mobile data charge of XAF 1 (including VAT) per 1MB. Source: World Bank (forthcoming) Equatorial Guinea Country Economic Memorandum and World Bank (2023). Equatorial Guinea Digital Economy for Africa (DE4A) Equatorial Guinea Economic Update 2024 26 2nd Edition Equatorial Guinea falls behind in efficiently converting critical as weak governance could undermine the effective natural resources into productive capital including human implementation of the reforms identified in the Government’s capital and institutions. The country ranks 133rd (out of 193 National Strategy for Sustainable Development (AGENDA countries) on the Human Development Index, with an index 2035), the recent economic diversification initiave 2024- of 0.650, below that of its structural peers like Azerbaijan and 2028, as well as in the February 2024 presidential decree. Gabon. The country’s human capital outcomes are also not in line with its upper-middle-income status. Available data Weak governance and institutions also result in a on Equatorial Guinea show limited access to education and challenging business environment as private sector learning, low education outcomes and a mismatch between development is constrained by a range of factors, including supply and demand of skills.13 Spending on education in lack of competition and legal uncertainty. The Equatoguinean Equatorial Guinea at 0.9 percent of GDP is lower than in private sector is nascent and characterized by large private SSA (4.1 percent of GDP).14 For countries with low levels firms in extractive industries and a large informal sector. of produced and human capital, the quality of institutions Equatorial Guinea ranks in low percentiles and lags CEMAC determines how well public services are delivered, how level and SSA on the WGI rule of law – which captures perceptions the playing field is for companies, and whether opportunities of the extent to which agents have confidence in and abide can be provided for both individuals and firms.15 However, the by the rules of society, including the quality of contract Government’s efforts have not yet translated into significant enforcement and property rights (Figure 20). The country improvements in the quality of governance. Equatorial Guinea also scores below CEMAC and SSA averages for regulatory still ranks in lower tercile of its income group in all Worldwide quality which measures the perceptions of the ability of the Governance Indictors (WGI) but absence of violence government to formulate and implement sound policies and and political stability (Table 2). Improving governance is regulations that allow promote private sector development.16 Figure 20 Figure 20. Equatorial Guinea and CEMAC – Worldwide Governance Indicators (percentile), 2022 50 45 40 35 30 25 20 15 10 5 0 Control of Voice and Regulatory Quality Rule of Law Government Political Stability Corruption Accountability Effectiveness and Absence of Violence/Terrorism Equatorial Guinea Average CEMAC Average SSA Source: Worldwide Governance Indicators, World Bank. Note: Higher values (up to a maximum of 100) indicate better governance ratings. Limited access to credit constitutes another challenge Equatorial Guinea has low levels of financial inclusion with an for the development of Equatorial Guinea’s private sector, account ownership rate of 31 percent of the population aged especially given the low financial inclusion and the 15 and more, well below that SSA regional (42.6 percent), banking sector vulnerabilities. With domestic credit to the and income (72.4 percent) peers. While the Government private sector representing only 10.5 percent of GDP, the has made progress towards clearing domestic debt arrears, financial sector provides limited support for private sector NPLs remain high in Equatorial Guinea, adversely impacting development in Equatorial Guinea compared to UMICs (135.4 the banking system stability and domestic credit to private percent) and SSA (35.6 percent) (Figure 21). Moreover, sector.16 13  Equatorial Guinea Country Economic Memorandum (forftcoming). 14  See (Izvorski et al., 2018) https://openknowledge.worldbank.org/server/api/core/bitstreams/5daf6ef7-6eaf-5b85-9bca-4aab617da647/content 15  Social spending in Equatorial Guinea was estimated at 1.6 percent of GDP in 2022, three times lower than the West and Central Africa average. 16  Climate change is another development challenge for Equatorial Guinea. The country ranks 86th (out of 185) on the 2021 Notre Dame Country (ND-GAIN) Index indicating a country’s vulnerability to climate change and is among the least prepared to improve resilience (181st our of 192). Equatorial Guinea Economic Update 2024 2nd Edition 27 photo: © alarico73 / Adobe Stock Figure 21 Figure 21. Domestic credit to private sector (in percent of GDP) and GDP per capita, 2021 160 Domestic credit to private sector (% of GDP) 140 UMICs 120 100 80 60 40 SSA 20 Equatorial Guinea 0 0 2500 5000 7500 10000 12500 15000 GDP per capita (constant 2015 US$) Source: WDI, World Bank Note: The scatterplot shows data for upper-middle income countries (UMICs) and the averages for UMICs and SSA. Policy priorities going forward include building the economic participation and boosting job creation would foundations to promote economic and asset diversification require investing in formal entrepreneurship and labor skills and reinvigorating growth. The decline in hydrocarbon to reduce skills mismatch in the labor market. Ultimately, reserves indicates the need for Equatorial Guinea to move to implementing the country’s economic diversification vision a new growth model by creating the conditions for successful will require significant efforts to (i) advance the governance private sector activities in non-oil sectors to reinvigorate agenda, (ii) improve the business environment and financial growth and achieve structural transformation with productive inclusion, (iii) attract investment, (iv) strengthen human and job intensive sectors. Renewable resources like capital and the social protection system, (v) enhance public agricultural land, fisheries, and forests need to be develop financial management, (vi) improve infrastructure and and better utilized in a sustainable manner. This will require logistics performance, (vii) facilitate trade, and (viii) connect leveraging public financing, and attracting additional private further the country through enhanced digitalization and investments. Designing efficient fiscal instruments for tourism. Table 3 shows selected short term policy reforms sustainable forestry – discussed in Chapter 2 – can be highly to help achieve the country’s development and economic beneficial for the Equatoguinean economy, optimizing fiscal diversification goals.17 revenues while preserving forests resources. Promoting 17 The forthcoming Equatorial Guinea Country Economic Memorandum provides detailed policy recommendations (by timeframe: from short to long term) to promote faster, diversified, and more inclusive growth. Equatorial Guinea Economic Update 2024 28 2nd Edition Table 2. Structural Indicators, Equatorial Guinea Value Position relative to the Upper middle-income Indicators Trend 2020 2021 2022 group (upper tercile – middle – lower tercile) Private Sector Foreign direct investment, net inflows 3.97 4.14 3.79 Down Middle-tercile (% of GDP) Domestic credit to private sector (% of GDP) 12.87 10.55 Lower tercile Industry (including construction), value added 45.40 50.85 51.83 Up Upper (% of GDP) Services, value added (% of GDP) 51.29 46.45 45.11 Down Lower tercile Agriculture, forestry, and fishing, value added 3.15 2.90 2.70 Down Lower tercile (% of GDP) Infrastructure Gross fixed capital formation (% of GDP) 11.39 Lower tercile Access to electricity (% of population) 66.57 66.67 66.78 Stable Lower tercile Access to electricity, urban 90.5 90.3 Lower tercile (% of urban population) Access to electricity, rural 1.84 1.35 Lower tercile (% of rural population)c WB logistics Performance index (LPI)d Score: 1.88 Score: 2.3 Score: Rank: Out of about 160 countries Rank: 156 Rank: 136 Rank: No data Lower tercile Score: 0 to 5 In 2016 In 2018 In 2023 Human Capital Government expenditure on education, total 0.6 0.6 0.88 Up Lower tercile (% of GDP) Output per hour worked (GDP constant 2017 24.49 22.97 22.04 Down Middle tercile international $ at PPP) Human Development Index (HDI) 0.65 0.64 0.65 Stable Lower tercile Digitalization Individuals using the Internet (% of population) 49.13 53.83 53.92 Up Lower tercile Climate Change ND-gain index on climate vulnerability 41.69 41.69 41.62 Down Lower tercile and readiness (higher is better) Employment Employment in agriculture 55.57 56.01 55.98 Stable Upper tercile (% of total employment) Employment in industry 13.04 13.11 13.14 Up Lower tercile (% of total employment) Employment in services 30.88 30.90 31.32 Up Lower tercile (% of total employment) Labor force participation rate, total (% of total population ages 15-64) 54.385 54.98 56.966 Up Lower tercile (modeled ILO estimate) Labor force participation rate, male (% of male population ages 15-64) 57.694 58.02 60.439 Up Lower tercile (modeled ILO estimate) Equatorial Guinea Economic Update 2024 2nd Edition 29 Table 2. Structural Indicators, Equatorial Guinea (cont.) Value Position relative to the Upper middle-income Indicators Trend 2020 2021 2022 group (upper tercile – middle – lower tercile) Employment Labor force participation rate, female (% of female population ages 15-64) 50.348 51.288 52.767 Up Lower tercile (modeled ILO estimate) Vulnerable employment, total (% of total employment) 78.18 78.11 77.97 Stable Upper tercile (modeled ILO estimate)e Vulnerable employment, male (% of male employment) 72.2 72.1 72.2 Stable Upper tercile (modeled ILO estimate) Vulnerable employment, female (% of female employment) 86.62 86.54 86.10 Stable Upper tercile (modeled ILO estimate) Governance Percentile rank among all countries (ranges from 0 (lowest) to 100 (highest) rank) Voice and Accountability, 2.89 2.89 4.34 Up Lower tercile Political Stability and Absence of Violence/ 39.62 40.56 43.39 Up Middle tercile Terrorism Government Effectiveness 10.47 11.42 9.91 Down Lower tercile Regulatory Quality 4.28 3.81 5.18 Up Lower tercile Rule of Law 11.9 10.95 7.07 Down Lower tercile Control of Corruption 4.28 3.33 2.83 Down Lower tercile Legend (1) Indicator trend from 2020-2022a: Up Down Stable (2) Position in the income group : b Upper tercile Lower tercile Middle tercile Note: Blank cells in the table mean there was not enough data available to assess the trend or to identify the tercile position of the country. a) The table shows how the indicator value evolved over a three-year period from 2020 to 2022, except for the ND-gain index and Logistics Performance Index, access to electricity, for which data is shown in different years. The value can either increase, decrease, or remain stable. b) Additionally, for each structural indicator, the country’s position in its income group based on its 2022 indicator value is identified. The country can be in the upper tercile (countries with higher scores in the income group), middle tercile (countries with average scores in the income group), or lower tercile (countries with lower scores in the income group). c) Access to electricity and the ND-gain index are reported for 2021, 2020, and 2019. The 2021 value is used to allocate each country into its tercile within its income group. d) The World Bank’s Logistics Performance Index is reported for 2023, 2018, and 2016. The 2023 value is used to allocate each country into its tercile within its income group. e) Vulnerable employment has a different color code rule. When vulnerability goes down it shows improvement (green color), and when it goes up, it shows deterioration (red color). Being in upper tercile means belonging to countries with higher vulnerability in the country income group. Equatorial Guinea Economic Update 2024 30 2nd Edition Table 3. Selected short term policy recommendations Areas Reforms Governance and PFM Improve governance and fiscal and data transparency Fully operationalize the anti-corruption law Align PFM regulations with the CEMAC PFM directives Fully implement the Integrated Expenditure Management System (CONTFIN) in all ministries Implement the CEMAC regional fiscal rule Develop a functional classification of expenditure Business environment Reduce the minimum capital required for limited liability companies from XAF100,000 to XAF5,000 in line with OHADA legislation Amend the judiciary organic law to introduce clear criteria and processes to select, appoint, and promote judges Revise the public procurement legislation to enable private sector participation on a level playing field Develop a national financial inclusion strategy to establish a roadmap for progress toward this goal Human capital Increase the share of social sectors spending in the national budget while addressing inefficiencies within those sectors and controlling other current expenditures Prioritize primary education on improving access, teacher training, and a structured pedagogy program to ensure learning Obtain approval of the new Social Protection Law and broadening use of the social registry to cover all social programs Trade and Digitalization Accelerate the digitization of customs processes and the full implementation of ASYCUDA at the airports and ports of Bata, Luba, and Malabo Declare the international capacity and national backbone fiber wholesale markets as relevant markets and applying cost-oriented regulation following a proper market study Develop a national ICT education strategy and conduct a digital skills gap assessment (Eco)tourism Remove restrictions on visitors' movement and replacing the tourist permits system with a Sustainable Tourism Pass that covers entrance to key sites Establish a para-public tourism marketing board Create a national tourism brand and marketing strategy, and develop a national ecotourism strategy Develop incentives and/or concessions for the private sector to invest in quality ecolodges around protected areas Source: Equatorial Guinea Country Economic Memorandum (forthcoming). Equatorial Guinea Economic Update 2024 2nd Edition 31 photo: © themorningglory / Adobe Stock Equatorial Guinea Economic Update 2024 32 2nd Edition CHAPTER 2 Designing Fiscal Instruments for Sustainable Forestry 2.1 Introduction The six nations encompassing the Congo Basin — Cameroon, Central African Republic, Equatorial Guinea, Gabon, Democratic Republic of the Congo (DRC), and Republic of the Congo — are custodians of the world’s second-largest tropical forest and its largest remaining unbroken forest landscape. This basin serves as a vital carbon sink, crucial for both regional and global ecological balance and climate stabilization. It is a rich reservoir of biodiversity and a cherished home for 60 million inhabitants, for whom these forests are not only indispensable natural resources but also an integral part of their cultural legacy.18 Sustainable forest management and well-regulated wood production are important sources of economic activity and revenue in the Congo Basin. Historically, the Congo Basin has experienced relatively low deforestation rates compared to other tropical forest regions. However, 2021 marked an alarming increase in forest loss, outpacing previous years. Deforestation in the Congo Basin increased in 2021 compared to the baseline period 2018-20 by nearly 30,000 hectares (or 4.9 percent), reaching a total of 636,000 hectares lost in 2021.19 To achieve the global goal of halting deforestation by 2030, a reduction in forest cover loss of 10 percent per year from the 2018-20 baseline will be needed. According to a recent regional assessment, only two Congo Basin countries – the Republic of the Congo and Gabon – are currently on track to meet this goal. Each year that passes without sufficient progress makes it increasingly difficult to meet global forest protection goals – and increases the annual reductions that will be required in future years.20 Beyond mere deforestation, the risks of forest degradation and fragmentation loom large, threatening the integrity of the world’s most extensive intact forest landscape. The value of carbon sequestration services provided by the Congo Basin forest is estimated at least US$55 billion annually, corresponding to 36 percent of the GDP of the region covered by the forest in 2021.21,22 In addition, the Congo Basin forests also mitigate global warming through their cooling effects through transpiration. Other important ecosystem services provided by the forests, some of which also have global public good characteristics, include biodiversity, controlling floods and erosion, and filtering water supplies. 18 Forest Declaration Assessment. 2022. Regional Assessment 2022. 19 Forest activities were impacted by the COVID-19 pandemic. 20 Forest Declaration Assessment. 2022. Regional Assessment 2022. 21 Mitchell I. and S. Pleek. 2022. How Much Should the World Pay for the Congo Forest’s Carbon Removal? CGD Note. November 2022 22 This is a lower bound estimate, using the the value of US$50 per ton used by the US government. However, other estimates suggest that the value could be as high as US$150 per ton (Mitchell and Pleek, 2022). Equatorial Guinea Economic Update 2024 2nd Edition 33 The Congo Basin countries face difficult tradeoffs financial compensation for the provision of the global public between forest preservation and economic opportunities good of carbon sequestrations amount to less than one that involve deforestation. The primary threats to these percent of the estimated value of these services. At the same core intact forests arise from industrial mining, logging, time, forest projects are among the lowest cost interventions and commercial agriculture, which pave the way for further per ton of CO2 averted (Mitchell and Pleek, 2022). development and deforestation in pristine forest territories. Although subsistence agriculture remains the most common In 2021, during the UN COP26 climate conference, over direct cause of deforestation in the region, it typically occurs 140 countries, covering more than 90 percent of global in already fragmented areas. Challenges such as insecure forest cover, pledged to cease deforestation and land land tenure for local communities, governance issues, weak degradation worldwide by 2030, as part of the Glasgow institutional frameworks, and insufficient law enforcement Leaders’ Declaration on Forests and Land Use. All six intensify the encroachment and direct pressures on countries of the Congo Basin have endorsed this declaration, these forests. Given the Congo Basin countries’ need for acknowledging the critical need to safeguard forests both accelerated economic growth and job creation, finding an globally and within their region. adequate balance between forest preservation objectives and the use of forest resources and land for economic International benefactors have recognized the paramount development is essential. International climate finance can importance of the Congo Basin forests, committing US$ 1.5 play an important role by providing resources that at the billion between 2021 and 2025 to aid in their protection and minimum provides adequate compensation for foregoing sustainable stewardship. Yet, these commitments, though alternative economic uses of forest resources and land and laudable, have not fully materialized into concrete actions. help to finance alternative investments that would generate The 2022 global Forest Declaration Assessment revealed economic growth and employment that does not rely on that a year following COP26, the world witnessed the loss deforestation. of 6.8 million hectares of forest, resulting in the emission of 3.9 billion metric tons of greenhouse gases. A mere six Governments in the Congo Basin region of Central Africa years remain to fulfill the ambitious objective of stopping and are engaged in concerted efforts to mitigate deforestation, reversing deforestation by 2030. Under the Forest Carbon though their prioritization of economic growth and Partnership Facility, the World Bank is working with eleven poverty alleviation may inadvertently conflict with forest countries, including Cameroon, the Central African Republic, conservation goals if not strategically aligned. Integrating the Republic of Congo, and Gabon, to enhance readiness for a forest-centric approach into broader macro-economic the issuance of high integrity carbon credits which would development plans and fiscal policy regimes can assist facilitate the transfer of resources to communities from these nations in achieving sustainable development and companies and governments. enhancing rural livelihoods, while concurrently preserving their forest ecosystems. The realization of these objectives Fiscal policy is an often underused policy instrument to in the Congo Basin demands the supportive engagement of foster the sustainable use of forest resources and economic industrialized nations, the private sector, and philanthropic growth, but can play an important complementary role entities, investing in the sustainable use and management of to other instruments such as regulation, information and these indispensable forest resources. voluntary instruments. In particular, fiscal policy tends to be effective where economic agents respond to price signals Carbon-finance, Official Development Assistance (ODA), and where limited governance capacities constrain the and private sector mobilization for forest protection can effective enforcement of regulations.23 Expenditure policies play an important role in making forest preservation a can also support sustainable forest management, but limited sustainable component of the Congo Basin countries’ fiscal space tends to severely constrain their use. While development strategies by at least compensating countries scaled up climate finance for the Congo Basin countries is for the economic opportunities foregone by preserving essential to help moderate trade-offs between sustainable their forests. The Congo Basin nations need the backing of forest management and economic development objectives, industrialized countries, the private sector, and philanthropic environmental fiscal policies can help widen fiscal space organizations to invest in the sustainable utilization and and create important pre-conditions for leveraging greater management of these vital forests. However, at present international and private financing of domestic climate action. 23 World Bank. 2021a. Designing Fiscal Instruments for Sustainable Forests. Washington D.C.: The World Bank. Equatorial Guinea Economic Update 2024 34 2nd Edition Effective use of fiscal instruments can help (a) capture The implementation of the Government’s AGENDA 2035 a fair share of resource rents for the public sector and AGENDA 2035 which sets out goals to protect and restore thus contribute to overall fiscal space; (b) promote terrestrial ecosystems, sustainable forest management, industrial policy objectives for the forest sector, such as combat desertification, conserve marine resources, and increased domestic value addition and employment; and enhance climate resilience as important goals,25 and (c) foster environmental management and sustainable Economic Diversification Initiative, which includes the use of forests. Key instruments include the taxation of green economy (including forestry) as one of the five natural resource rents, results-based expenditure policies priority sectors26, will require significant financing. Amid a (payments for ecosystem services, REDD+24), subsidies, decreasing fiscal space, the Government has committed, environmental taxation (taxes, charges and fees), tradable in the February 2024 presidential decree (no. 009/2024), to permits, biodiversity offsets/biobanking, liability instruments continue pursuing fiscal consolidation and implement public (noncompliance fines) or performance bonds. The various financial management reforms, including domestic revenue fiscal instruments will interact in the achievement of the mobilization.27 Coupled with structural reforms to attract afore mentioned objectives. In addition, economic policies investment, fiscal reforms in sectors such as forestry can that do not directly address forest issues, such as agricultural contribute not only to the country’s economic diversification policies or mining policies, may also affect the use of forest efforts but also to mobilizing more revenues to meet resources. It is thus important that they are embedded in a spending needs and alter the deterioration in fiscal positions. comprehensive and consistent approach for the sustainable management of forest resources. The special topic (i) examines the current socio-economic context of forest policy in Equatorial Guinea, (ii) discusses Fiscal policies for sustainable forests are closely the role and current use of forest-related fiscal instruments, intertwined with potential international compensation for and (iii) proposes options and trade-offs in the design of climate services provided by the Congo Basin countries. forest related fiscal policy reforms to adequately capture First, environmental fiscal policies can help to achieve resource rents, promote forest based value-addition and sustainable management of forests as the basis for employment, mitigate deforestation and forest degradation, leveraging carbon finance. At the same time, given the Congo and promote sustainable growth, while creating important Basin countries’ very limited fiscal space, international and preconditions for leveraging greater international and private financing are also essential to implement programs private financing of domestic climate action. There remains for forest conservation and to establish adequate monitoring, a notable lack of comprehensive knowledge in this area, reporting, and validation systems. particularly in terms of how fiscal policy instruments are currently employed at the country level, the effects these Efficiently adopting forest-related fiscal measures, policies have on various incentives, and how particular fiscal combined with the right policy mix to attract international policy reforms may contribute to the goal of leveraging and private financing, can help finance the sustainable greater climate finance from international donors and the management of forests in Equatorial Guinea amid a private sector. They can provide an initial step towards shrinking fiscal space. Equatorial Guinea’s government providing policymakers a spectrum of strategies to craft a revenue primarily originates from the hydrocarbon sector fiscal system tailored to forest conservation and sustainable which is in a secular decline. Hydrocarbon production growth management. decreased significantly from 321 thousand barrels per day in 2004 to about 54.8 thousand barrels per day in 2023. The special topic contains seven sections that provide a This translated into a significant decline in government brief overview of the forestry sector in Equatorial Guinea. revenue and fiscal space. Still, the hydrocarbon sector Section 2.1 examines the state and trends of forests in dominates the Equatoguinean economy with 86 percent of Equatorial Guinea, offering insights into current conditions government revenue emanating from the sector in 2023. and historical changes. Section 2.2 explores the contribution 24 Reducing Emissions from Deforestation and Forest Degradation and the Role of Conservation, Sustainable Management of Forests, and Enhancement of Forest Carbon Stocks in Developing Countries. See Box 3 for more details on REDD+ 25 The National Sustainable Development Strategy also sets out goals to ensure affordable, and sustainable energy access, minimize environmental impacts, promote sustainable consumption and production, and integrate climate change considerations into planning and development. 26 The Economic Diversification Initiative focuses on five priority sectors namely, the blue economy (marine resources), the green economy (environment, agriculture, and forestry), the yellow economy (energy), the digital economy, and the tourism sector, alongside enabling policies focused on attracting investment, building human capital, and improving governance. 27 Box 1 in Chapter 1 provides detailed information on the presidential decree. Equatorial Guinea Economic Update 2024 2nd Edition 35 of forests to the Equatorial Guinean economy, highlighting prepared for most CEMAC member countries. In several their economic importance. Section 2.3 places Equatorial countries, including Cameroon, the Central African Republic, Guinea in a regional and international context, discussing and Gabon, the World Bank has specific project activities climate finance challenges and how the European Union to support the sustainable utilization and management of forest-free regulation policy may influence local forestry forests. The World Bank is currently also preparing natural practices. Section 2.4 addresses the role of environmental capital accounts for several Congo Basin countries, which fiscal policy, focusing on the trade-offs involved in the will provide an in-depth valuations of the services provided forestry sector. Section 2.5 reviews the use of forest-related by the Congo Basin Forest. Another important aspect of the fiscal policy instruments in Equatorial Guinea, providing a World Bank’s work is to look at options for monetizing the comparative analysis. Section 2.6 identifies opportunities for carbon and ecosystem services provided by the Congo Basin climate-smart forest fiscal policy reform in Equatorial Guinea, Forest, looking at options such as nature linked bonds, debt suggesting ways to integrate fiscal policies with climate for nature swaps, or helping countries meet the prerequisites objectives, and then looks ahead, summarizing the lessons required for accessing carbon finance. Recognizing the learned from other sections and offering recommendations importance of helping countries achieve greater benefits and for policy actions. value added from their forests, a project that would, inter alia, support value chains in the forest sector in the CEMAC The analysis and discussion focus narrowly on fiscal region is currently being prepared. The World Bank has also revenue instruments directly targeting forest production recently established the Global Challenge Program: Forests and preservation to highlight first order opportunities for for Development, Climate, and Biodiversity (GCP-F). The the use of fiscal instruments. However, it is important to note program recognizes that conservation will remain a vital part that concrete policy design and implementation will need to of sustainable forest management, but it will broaden the consider a whole range of complementary issues. First and approach to put people at the center by generating meaningful foremost, forest-related fiscal instruments are a subset of economic opportunities and mobilizing significant private economic instruments for sustainable forest management sector resources to develop cross-sectoral forest-based and complement regulatory approaches and information economies. Specific activities for the roll-out of the program and voluntary instruments. Second, deforestation and use to the Congo Basin countries are currently being designed. of forest resources also depends on non-forest policies. An important example of such non-forest policies are agricultural policies such as agricultural subsidies that may lead to increased demand for land and lead to deforestation. 2.2 The Importance of Forests: Water sector policies are another important example, given State of Forests and Economic the central role of healthy river systems for sustainable forests. Policies that lead to unsustainable water extraction contribution or river pollution would result in negative impacts on river and the forest ecosystem. Another example would be State and Trends of Forests in Equatorial Guinea policies that affect the livelihood to people and their demand for forest products. For example, with wood being used by Forests in Equatorial Guinea play a vital role as essential many households, provision of alternative energy sources ecosystems, however the rates of deforestation would reduce the demand for wood. Finally, it is also and forest degradation in the country are showing important to mention the importance of land use planning- concerning upward trends. frameworks and their interaction with fiscal policies. For example, ecological reserves would need to be managed Equatorial Guinea is largely covered by forests which differently from community managed forests and taxation/ account for 87 percent of its land, ranking the country fines allocated according to the land use planning. with 7th highest forest cover in the world and 2nd highest in Africa, behind Gabon. Equatorial Guinea covers an area The present analysis draws on and contributes to the of 28,051 km² and is divided into two main regions: the World Bank’s broader engagement on the Congo Basin mainland (26,000 km²) and the islands (2,017 km²). Several forests. This includes work on Country Climate and bays and capes distinguish its geography, such as the Development Reports, Public Finance Reviews, and Country Luba Bay, Cape San Juan, and Annobón (in the southern Economic Memoranda which have been or are being hemisphere), and the islets of Corisco, Elobey Grande, Elobey Equatorial Guinea Economic Update 2024 36 2nd Edition Chico, and Mbañé in the northern hemisphere.28 Forests are deforestation rate is considered moderate compared to other dispersed across nearly all regions of the country and hold high-forested countries such as the Democratic Republic immense value for various stakeholders. At least 500,000 of Congo or Brazil.31 Forest disturbance is also showing a rural Equatoguineans (30 percent of the total population) concerning upward trend.32 It is estimated that 30,579 (± reside in and rely on these forests for their livelihoods.29 8,530) hectares of forests, or 1.2 percent of forests, were Forests are indispensable ecosystems that fulfill a myriad degraded each year from 2014 to 2018, a sharp increase of crucial roles in the environment, society, and economy. from 2004 to 2014 (Figure 23).33 Since 2000, about half of They serve as sanctuaries for an immense array of plant Equatorial Guinea’s “intact forests” have been lost, and the and animal species, fostering biodiversity and ensuring country has the lowest forest landscape integrity index of the ecosystem stability. Forests are crucial for climate regulation six Congo Basin countries.34 Forest loss has been particularly by absorbing carbon dioxide and producing oxygen through pronounced on the islands of Bioko and Annobón, which photosynthesis, mitigating climate change impacts. They are home to highly threatened biodiversity.35 In general, regulate the water cycle, reduce soil erosion, and purify air deforestation and forest degradation increase the risk and and water by filtering pollutants. Forests provide habitats exposure to emerging zoonotic diseases.36 As humans for wildlife and resources like timber, food, and medicinal encroach on natural forests, the chances for outbreaks and plants. Additionally, they offer recreational opportunities and transmission of such diseases from animals to humans can boost local economies through activities such as hiking, increase. For these reasons, alongside climate stability and camping, and eco-tourism. broader sustainable development, a comprehensive green growth should not leave forests behind. Although Equatorial Equatorial Guinea has the highest deforestation rate in Guinea signed the Glasgow Declaration in 2018, which aims CEMAC, with the rate increasing to approximately 0.35 to end deforestation and land degradation by 2030, these percent between 2010 and 2020 (Figure 22).30 However, the goals appear far from being achieved. Figure22 Figure 22. Equatorial Guinea and CEMAC countries 23. Equatorial Guinea - deforestation trend and Figure 23 Figure - deforestation trend, percentage of total forest area, categories, 2000-2022 2010-2020 0 0.025 0.020 -0.1 Disturbance area (Mha) 0.015 -0.2 0.010 -0.3 0.005 -0.4 0 Gabon Congo Central Cameroon Equatorial 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 African Guinea Republic Total forest disturbances (degradation or deforestation) Total deforestation (direct or after degradation) 2000-2010 2010-2020 Forest regrowth Source: Food and Agriculture Organization, FAO (2024). Source: Vancutsem et al. (2021). 28 Equatorial Guinea National Determined Contribution report (NDC, 2021). 29 Equatorial Guinea CEM, forthcoming. 30 FAO, 2024. 31 The deforestation rate between 2010 and 2020 was 0.8 percent in the Democratic Republic of Congo. 32 Forest disturbance is the damage caused by any factor (biotic or abiotic) that adversely affects the vigour and productivity of the forest and which is not a direct result of human activities. It includes disturbance by insect pests, diseases, severe weather events and fires (FAO, 2020). 33 Central Africa Forest Initiative, 2024. 34 Forest Declaration Assessment. 2022. Regional Assessment 2022. The Forest Landscape Integrity Index (FLII) provides an indication of how much a forest area has been impacted or fragmented by human influences such as roads, agriculture, urbanization, and logging. It helps evaluate the overall health and connectivity of forest landscapes. 35 National REDD+ Investment Plan 2020. 36 See https://www.rainforest-alliance.org/insights/deforestation-and-pandemics/#:~:text=Multiple%20scientific%20studies%20show%20a,the%20risk%20 of%20disease%20transmission. Equatorial Guinea Economic Update 2024 2nd Edition 37 Forest degradation has been mainly driven by the growth – is one of the five priority sectors in the Government’s recent of subsistence agriculture (41 percent), followed by Economic Diversification Initiative. However, achieving infrastructure development (36 percent) and forest this goal will require substantial policy reforms, improved harvesting (23 percent).37 When accounting for its indirect efficiency of forestry administration, increased timber value impacts, infrastructure emerges as the foremost driver Figure 24 and decisive measures against corruption. addition, of deforestation. The extension of the electricity grid and Figure 24. Forestry contribution to GDP in Equatorial Guinea transportation networks, including forest trails and logging routes, facilitates urban expansion and the expansion of 0.6 1800 other public services. However, as outlined in the national 0.5 1600 REDD+ strategy, much of the planned infrastructure has 0.5 0.4 1400 already been constructed. Therefore, efforts to combat Industrial roundwood Percentage of GDP 0.4 1200 deforestation should now primarily target agricultural 1000 management (both small-scale and intensive), regulation 0.3 800 of the forest industry, and the enforcement of laws against 0.2 0.2 600 corruption and illegal logging.38 400 0.1 200 The Role of Forests in Equatorial Guinea’s 0.0 0 Economy and Climate Actions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 The share of the forestry sector in GDP was high before Forestry contribution to GDP (lhs) the discovery of hydrocarbons, but since the mid- Industrial Roundwood, production quantity (1000 m3) (rhs) 1990s, with the exploitation of hydrocarbons, it has Source: Equatoguinean authorities and The International Tropical Timber decreased considerably. Organization, ITTO (2022). Equatorial Guinea’s economy, once dependent on Commercial logging occupies 20 percent of forest area but agriculture and timber, is now heavily reliant on the does not fully realize its economic potential in terms of job hydrocarbon sector. Before the discovery of oil, the country’s creation.41 Currently, 16 forest concessions have been granted forests played an important role in the national economy, for a duration of 15 years, covering a total area of 549,476 contributing substantially to tax revenues and foreign hectares.42 Recognizing that the export of unprocessed exchange reserves through commercial timber harvesting. In logs reduces job opportunities and economic benefits for 1995, the forestry sector represented 20 percent of GDP and Equatorial Guinea, the government banned the practice in 55 percent of export revenues.39 However, its contribution 2007 (as per Decree No. 61/2007). However, the ban adversely to GDP decreased to 0.5 percent in 2007 and further to 0.2 impacted revenue generation and the labor supply in the percent in 2023 (Figure 24).40 The economy remains heavily forestry sector over the following two years. As a result, the dependent on oil, lacking diversification and, therefore, government adopted flexibility measures in subsequent years, vulnerable to external fluctuations. The hydrocarbon sector leading to increased revenues and job creation.43 In 2018, the accounted for 39 percent of the country’s GDP in 2023. government reinstated the ban after a resurgence of prohibited Falling oil prices and production plunged the country into species exploitation. However, during the COVID-19 pandemic an economic recession from 2014 to 2020, exacerbated by in 2020, the ban on log exports was lifted, and this remains in the COVID-19 pandemic, which worsened an already fragile effect to date. Despite the government’s long-term aspirations, situation. The Government’s development and economic log exports have accounted for 90 percent of forest exports diversification plans recognize the importance of forests. since 2015. It is estimated that there are 5,000 formal jobs For instance, AGENDA 2035 commits to promote sustainable in the forestry sector (excluding informal employment), with forest management and combat diversification. The ‘green most of these jobs related to tree harvesting rather than wood economy’ – including forestry, environment, and agriculture processing. In December 2023, the government announced 37 National REDD+ Investment Plan 2020, using data from 2004-2014. 38 Ibid. 39 Observatory of Economic Complexity (OEC, 2024). 40 National REDD+ plan (2020), Equatorial Guinea National accounts (INEGE, 2023). 41 According to the Ministry of Forest and Environment, the area for forest production is 820,527 hectares, which corresponds to 30 percent of the national territory. 42 Source: Equatorial Guinea’s Ministry of Forests and Environment. 43 According to the authorities, forest revenues increased to about 11 billion CFAF between 2017 and 2018. Equatorial Guinea Economic Update 2024 38 2nd Edition its intention to implement a new ban on log exports by June percent of forest products exported by Equatorial Guinea 2024, following the recommendations of the recent CEMAC are made of industrial roundwood, not having undergone Council of Ministers, which requires member countries to major processing. This has less added value compared to adopt accompanying measures for a gradual ban on log processed timber products such as sawnwood, plywood, and exports until 2027. veneer (Figure 26). In contrast, the largest part of Gabon’s forest products undergo extensive processing before being Wood industrial processing in Equatorial Guinea is exported (Figure 25). Due to legal concerns, Equatorial relatively less developed compared to other countries Guinea’s forest products have been restricted from accessing in the sub-region. Value can be added to wood and wood the European markets. As a result, more than 90 percent of products at various levels of processing. However, nearly 90 wood exports are directed towards China. Figure 25 Figure 26 Figure 25. Equatorial Guinea and selected countries - Wood Figure 26. Equatorial Guinea - Wood products export value product export value (US$ million), 2022 (US$ million), 2000-2022 900 400 800 700 300 600 500 200 400 300 200 100 100 0 0 Cote Cameroon Gabon Congo Ghana Equatorial Guinea d'ivoire CAR 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Roundwood Sawnwood, Veneer & Plywood Ind. Roundwood Plywood Sawnwood Veneer Fourniture, Moulding & Other Source: ITTO (2024). Because of its large forest area, Equatorial Guinea currently per capita.44 In 2020, the top 3 biggest contributors to GHG absorbs more carbon dioxide than it releases, underlining emissions included activities linked to energy production (37 the critical importance of its forests in the fight against percent of total emissions), land use change and forestry (28 climate change. The country’s total greenhouse gas (GHG) percent), and activities related to industry, electricity, waste, emissions have fallen in recent years, from 18 million tons manufacturing, and construction (15 percent) (Figure 27). in 2014 to 13 million tons in 2020. However, in terms of Despite these emissions, Equatorial Guinea remains a net per capita emissions, Equatorial Guinea ranks first among carbon sink. Figure 27 all CEMAC countries emitting 11 tons of GHG emissions Figure 27. Equatorial Guinea - GHG emissions by sector (million tons), 2020 Gases from energy production 5.08 Land use change and forestry 3.83 Manufact & constr 2.05 Electricity and heat 1.23 Transport 0.44 Industry 0.38 Waste 0.24 Buildings 0.1 Bunker fuels 0.08 Agriculture 0.02 0 1 2 3 4 5 6 Source: Climate Watch (2024). 44 Climate Watch (2024). Equatorial Guinea Economic Update 2024 2nd Edition 39 Equatorial Guinea has shown commitment to Guinea through REDD+, with an approach based on sustainable development, but strong reforms are competitiveness, sustainability, integrated land management, needed to promote sustainable forestry management food security, and social and gender equity”.46 In particular, and build forestry value-chains, increasing forest the REDD+ plan aims to reduce the country’s emissions from revenue, creating more jobs, and fostering inclusive the AFOLU (agriculture, forestry and land used) sector by 40 economic participation. million tons of carbon dioxide equivalent (tCO2 eq) by 2040, which covers the periods of implementation (2020-2030) and In 2020, Equatorial Guinea launched its REDD+ national capitalization (2030-2040). A total budget of US$ 185 million investment plan, aiming to better combine environmental is needed to achieve this goal. The plan includes investments preservation and socio-economic development.45 The in national programs related to agriculture, land use planning, plan, which has received technical support from the FAO forestry, mining, construction, energy, and good governance. and financial support from Central Africa Forest Initiative The plan also includes local investment programs in the (CAFI), is in line with the National Strategy for Sustainable province of Litoral, the municipality of Niefang, the province Development 2035, which aims to “contribute to the global of KieNtem, and the islands of Bioko and Annobón. However, fight against climate change and to the development of the it is difficult to assess the status of this ambitious program, country to achieve the well-being of the people of Equatorial as little public information is available on its progress.47 Box 3. What is REDD+? REDD+ stands for: Reducing Emissions from Deforestation and forest Degradation plus conservation, sustainable management of forests, and enhancement of forest carbon stocks. Forests serve as significant carbon sinks, absorbing substantial quantities of carbon dioxide. But Forests can become sources of greenhouse gas emissions if they are destroyed or degraded. Countries have implemented the ‘REDD+’ initiative within the framework of the Paris Agreement to safeguard forests and mitigate climate change. Under the framework with these REDD+ activities, developing countries can receive results-based payments for emission reductions when they reduce deforestation. This serves as a major incentive for their efforts. The key distinction between REDD+ finance and previous international flows of funding to address deforestation is the explicit intention to progress toward results-based finance. In other word, developing countries can receive ex-post payments for verified emissions reductions, which can be financed either from public fund or carbon markets (Seymour & Busch, 2016). Parties agreed that REDD+ should be implemented in 3 phases, which can overlap: 1. Development of national strategies or action plans, policies and measures, and capacity-building for reducing forest based-emissions. 2. Followed by implementation of national policies and measures and national strategies or action plans that could involve further capacity-building, technology development and transfer and results-based demonstration activities, 3. Results-based actions that should be fully measured, reported and verified, allowing countries to seek and obtain results-based payments. As of the end of 2022, REDD+ activities implemented by developing countries cover a forest area of approximately 1.35 billion hectares (about 62 percent of forest area in developing countries). Over the past decade, the UN Climate Change secretariat has conducted REDD+ technical assessments. Among the 60 countries reporting REDD+ activities to the UNFCCC secretariat, 16 developing nations have collectively reduced 11 billion tons of carbon dioxide emissions. These countries are now eligible to seek result-based finance. Source: (UNFCCC, 2024). 45 Box 3 provides detailed information on REDD+. 46 National REDD+, 2020 47 Equatorial Guinea CEM, forthcoming Equatorial Guinea Economic Update 2024 40 2nd Edition Equatorial Guinea ratified the Paris Agreement on climate country’s forest preservation goals to minimize deforestation and, in its revised Nationally Determined Contribution and forest degradation. Balancing large infrastructure or (NDC), aims to reduce emissions by 35 percent by 2030, energy projects with forest conservation requires meticulous with the goal of reaching 50 percent by 2050. With this planning and comprehensive environmental impact ambition, the total emission reduction target corresponds to assessments (EIAs) to evaluate potential consequences 379,291.54 Gg CO2eq by 2030, lower than the 446,215.38 on forest ecosystems. These assessments should involve Gg CO2eq recorded in 2010.48 The increase in climate input from various stakeholders, including environmental ambitions from a reduction of emissions by 20 percent in experts, local communities, and indigenous groups. Based the previous NDC to 35 percent in the current one follows on the findings, project designs can be adjusted to minimize recommendations from COP25, held in Madrid, urging Parties forest encroachment, incorporate offsetting measures like to urgently increase their climate ambitions. To reduce the reforestation, and implement stringent mitigation strategies country’s emissions, the government has selected a set to safeguard biodiversity and ecological corridors. Better of actions including adaptation and mitigation measures governance in the forestry sector requires fighting corruption spanning various sectors, aligned with the Sustainable and aligning objectives and decisions across sectors, such as Development Goals (SDGs) as well as the country’s National those between the ministries governing forestry, agriculture, and Territorial Development Priorities. But the measures mining, and infrastructure development. It also requires taken are struggling to produce tangible results. better coordination among all institutions responsible for forest management, both at the national and local levels. The total estimated cost of NDC implementation by 2030 Increasing timber processing necessitates investment in is estimated at US$ 844.48 million, including US$ 576.61 infrastructure and skills. Improving monitoring, reporting, million for mitigation measures and US$ 114.87 million and verification of logging activities through digitalization for adaptation. Among the flagship measures this amount will also help fight deforestation and will be foundational will help finance, by 2030, the country aims to establish and/ for both better governance and the emergence of a robust or strengthen laws and regulations pertaining to forestry, timber processing industry. protected areas, and land management. It will also implement a strategy to reduce emissions from deforestation and forest Securing land tenure for forest communities and enforcing degradation, with the goal of reducing current deforestation the benefit-sharing of forest revenue is central to and degradation rates by 80 percent by 205049. Additionally, combating deforestation, improving local communities’ investments will be made in smart agriculture to increase social conditions, and strengthening social cohesion. agricultural productivity and reduce the need for extensive Research shows that when effectively implemented, granting land use for agricultural purposes. The plan includes planting participation rights to local actors in forest governance can more than 15,600 trees in 20 cities across the country and enhance forest management (Klooster and Masera, 2000; expanding new areas of protected land by 101,276 hectares. Smith and Scheer, 2003; Veit, 2019). When communities Agroforestry practices, particularly in cocoa and coffee have a direct stake and decision-making power in managing plantations, will be encouraged. Furthermore, the country their local forests, they are more likely to adopt sustainable aims to strengthen its forest degradation monitoring system practices that align with their long-term interests. By and establish sectoral focal points and corresponding receiving a portion of the revenues from activities such as databases to collect information on agriculture, forestry, and sustainable timber harvesting, non-timber forest product other land uses. collection, or ecotourism initiatives, communities become invested stakeholders in the responsible management of Improving forest governance, developing a robust timber these natural assets. Additionally, the income generated processing industry, and enhancing monitoring, reporting, through revenue sharing can be reinvested in community and verification of logging activities are critical to achieving development projects, education, healthcare, or alternative both forest preservation and economic goals. Equatorial livelihood opportunities, further strengthening the Guinea’s AGENDA 2035 commits to improve access to connection between forest conservation and local well- infrastructure to support businesses, including road, port, being. Community-based Forest management and forest airport, railway, energy and water, and telecommunications revenue benefit sharing foster a sense of ownership and infrastructure. These projects must be aligned with the responsibility among community members, encouraging 48 Equatorial Guinea, NDC (2021). 49 Ibid Equatorial Guinea Economic Update 2024 2nd Edition 41 them to protect the forests from overexploitation and International financial pledges, while substantial, often illegal activities. For full effectiveness, community forestry lack the accompanying quantifiable, transparent targets, programs need clear tenure rights, capacity building, and leaving a gap between promise and practice. This support from higher levels of governance. discrepancy is thrown into sharper relief when considering the Congo Basin’s relative underfunding for climate action 2.3 Regional and International and environmental protection, when compared to other tropical forest regions. The situation is further complicated Context when considering the distribution of these funds. Funding allocated to local communities, communal forests, and Financing for Sustainable Forest Management indigenous populations remain palpably inadequate. This shortfall extends to other vulnerable groups, such as rural International climate funding for Equatorial Guinea women and smallholder farmers. and the broader Congo Basin has been inconsistent and often insufficient, hindering effective forest Overall, at the national level, a patchwork of intent and management and conservation efforts. action is observed: governments do earmark budget lines for forest conservation and protected area funding, but Recent years have seen a notable uptick in international governmental action is marred by a lack of coherence. funding for sustainable forest management within the The financial objectives and actions of different ministries CEMAC region, a trend exemplified by the Central African often appear to be reading from different scripts, diluting Forest Initiative (CAFI)50 and the rejuvenated pledges the potential impact of these funds. For example, one at COP26. This financial support has been crystallized in ministry might prioritize conservation and allocate funds the Joint Declaration for the Congo Basin, which earmarks for protected areas, while another focuses on economic an ambitious US$ 1.5 billion for distribution across the development projects that may inadvertently encourage six countries from 2021 to 2025. Letters of intent signed deforestation. Additionally, there can be discrepancies in between CAFI and national authorities have further solidified policy implementation, with some departments failing to commitments, totaling US$ 465 million. However, when enforce conservation laws effectively or lacking the capacity viewed against the vast need for forest protection in the to monitor and manage protected areas adequately. Congo Basin, this amount appears insufficient, highlighting a mismatch of scale and ambition. At the end of 2022, the CAFI While many international observers posit that REDD+ budget transferred to Congo Basin countries totaled US$ approaches and similar mechanisms around voluntary 372 million, with only US$ 1.1 million allocated to Equatorial carbon markets can serve as potential financial lifelines Guinea (Figure 28). for the Congo Basin forests, the reality is more tempered. Figure 28 Figure 28. CAFI Budget transferred to countries million US$, 31 December 2022 300 246.9 250 200 150 100 58.9 45.7 50 17.8 1.7 1.1 0 DR Congo Inter regional Gabon Congo CAR Equatorial Guinea Source: CAFI, 2022. 50 Central Africa Forest Initiative (CAFI) was created in 2015 by eight developed countries (Norway, Germany, France, United Kingdom, Netherlands, South Korea, Sweden, and Belgium) with the aim to slow down the loss and degradation of forests in the six countries of the Congo Basin Forest (DR Congo, CAR, Congo, Gabon, Cameroon, Equatorial Guinea). Equatorial Guinea Economic Update 2024 42 2nd Edition Consider Gabon, which in 2021 distinguished itself as the achieving sustainable forest management and conservation first African nation to receive performance-based payments goals. through REDD+, securing US$ 17 million of the anticipated US$ 150 million through CAFI. While this development is Implementation of the CEMAC Log export ban: a laudable, it underscores the broader issue: the funding flow potential solution for increasing value added in through REDD+ is a trickle rather than the needed torrent. the wood industry Moreover, the integrity of the voluntary carbon market itself invites skepticism, with its potential financial injection falling Implementing a logging ban can significantly increase short of the region’s pressing demands. the value added to the wood industry, but it requires strategic planning and investment in infrastructure Refining fiscal processes at the national level and and skills development. increasing forest activities value added can lead to more effective channeling of existing funds towards forest CEMAC countries have moved towards implementing protection. Enhanced budget allocation, efficient resource a ban on the export of round logs as part of an effort to use, increased credibility, strategic alignment with national promote local timber processing within these countries plans, robust monitoring, and community engagement and aligning themselves with a global movement towards are all critical elements that contribute to the success of sustainable forest management. This significant policy forest protection initiatives. By addressing these areas, shift, initially slated for commencement in January 2023, governments can ensure that funds are used effectively to has been postponed to 2028, allowing countries involved conserve and sustainably manage forest resources. ample time to adapt to this transformative agenda. The initiative is a facet of a broader regional strategy, the Forest-related fiscal policy instruments and results-based Sustainable Industrialization Strategy of the Timber Sector in financing (RBF) are interconnected through their shared the Congo Basin, designed to reconcile and weave together goal of promoting sustainable forest management and environmental stewardship and industrial development. The conservation. Fiscal policy instruments, such as Pigouvian strategy envisions the establishment of special economic taxes and subsidies, are designed to influence the behavior zones focused on wood processing, a regional committee of forest stakeholders by making sustainable practices more to oversee industrialization efforts, and the development financially attractive. For instance, in Nepal, fiscal policy of plantations in accordance with sustainable practices. instruments have been used to address issues related to Furthermore, it advocates for the creation of educational revenue sharing and benefit distribution among community institutions to nurture a new generation of professionals in forest user groups, although inconsistencies in these the timber sector, supported by a harmonized forest code policies have hindered their effectiveness. Similarly, in India, and a unified forest taxation policy. The African Development intergovernmental fiscal transfers have been employed to Bank is expected to play a pivotal role in financing this support forest conservation, but the design of these transfers transformative project. is crucial for achieving desired conservation outcomes. On the other hand, RBF links financial rewards to the The regional initiative to ban round log exports across the achievement of specific, pre-defined results, such as reduced entire Congo Basin represents a veritable turning point deforestation or improved forest governance. This approach in the history of regional cooperation, moving beyond is central to initiatives like REDD+ (Reducing Emissions from previous unilateral efforts. Cameroon and Gabon, each Deforestation and Forest Degradation), which mobilizes in their own time and manner, have previously grappled financial resources based on verified emissions reductions. with the formidable challenge of halting log exports, albeit The integration of fiscal policy instruments with RBF can with modest outcomes. Cameroon, following the edicts enhance the effectiveness of both approaches by providing of its 1994 forestry law, began to prohibit log exports in continuous financial incentives for sustainable practices 1999, allowing a generous interval for adaptation. Yet the while ensuring accountability and measurable outcomes. persistence of log exports, facilitated by a convoluted system For example, Gabon’s use of a ‘bonus-malus’ (feebate) fiscal of quotas and exceptions, bore witness to the complexity of instrument mechanism in forest policy demonstrates how the issue at hand. Gabon, taking a step further, enacted a aligning fiscal measures with sustainability certification total ban on log exports in 2010, having initially targeted standards can improve fiscal resource distribution and policy four pivotal species. This move, however, inadvertently performance. Overall, the synergy between fiscal policy catalyzed a shift in forest exploitation activities to other instruments and RBF can create a robust framework for nations within the Congo Basin, underscoring the inherent Equatorial Guinea Economic Update 2024 2nd Edition 43 limitations of unilateral measures. Against this backdrop, fiscal impacts expected from such a ban. Specifically, the the collective ban by the CEMAC countries is not just a postponement aims to prevent substantial revenue losses policy shift but a philosophical realignment, recognizing that would occur immediately if the ban were implemented the intertwined fates of nations in the region in their as initially planned. Recently, the Council of Ministers of the attempts to limit deforestation and promote sustainable CEMAC concluded that the member countries, including forest management. It represents a recognition that the in Equatorial Guinea, were not ready to enforce the ban by preservation of the Congo Basin necessitates a shared the initially set date of January 2023. They cited concerns vision and collective action. over the huge fiscal costs and the need for accompanying measures to mitigate these impacts. For instance, it was The decision to postpone the ban on the export of round noted that when Gabon implemented this ban, it resulted in logs in Equatorial Guinea and other CEMAC countries significant fiscal losses initially, indicating similar potential was primarily driven by economic concerns. The delay economic impacts for other member countries including allows these countries more time to adjust to the significant Equatorial Guinea​ . Box 4. An indicative trajectory of structural reform to transition from log exports to higher value-added processing Transitioning from log exports in Equatorial Guinea and other CEMAC countries involves several key steps aimed at fostering sustainable forest management, economic diversification, and enhancing domestic capabilities. Firstly, implementing reforms such as the Log Export Ban (LEB) can significantly reduce deforestation, as evidenced by Gabon’s avoided deforestation of nearly 2,100 km² from 2010 to 2018. Strengthening the regulatory and institutional framework for export promotion is crucial, alongside improving human capital quality and creating a fair business environment. Developing a national land use plan that includes sustainable concessions and mandatory forestry certification can help balance economic goals with environmental protection. Additionally, adopting a national carbon threshold for land conversion and requiring concession-level set-aside ratios can mitigate carbon emissions from activities like timber and palm oil plantation expansion. Addressing the informality and illegal practices in the domestic lumber market through better governance and clear legislation is also essential. Encouraging forward linkages in the timber industry by setting domestic processing targets, despite challenges like high production costs and inadequate infrastructure, can enhance value addition within the country. Ensuring supply chain transparency and traceability of wood products through stable isotope analysis and other tracking technologies can support due diligence and compliance with international regulations. Diversifying the economy away from oil dependency by exploring other sectors and improving infrastructure services is also recommended to stabilize economic growth. Finally, the success of these initiatives depends on the government’s capacity to enforce sustainable forest management and the willingness of concession holders to invest in long-term forest management plans. These steps collectively aim to transition from log exports to a more diversified and sustainable economic model in Gabon and other CEMAC countries. This strategic postponement reflects a careful consideration no restrictions on the export of roundwood and sawnwood. of economic stability and the readiness of the domestic However, the country has committed to stopping the export industries to handle the shift towards increased local of roundwood by mid-2024. processing of timber. The policy aims to eventually foster a more sustainable industrialization of the timber sector, The impact of this policy shift, once implemented, is capitalizing on local value chains and generating employment, expected to be significant. For instance, in Cameroon, the but requires a gradual transition to mitigate immediate Minister of Forests and Fauna anticipates a substantial economic shocks​ . Currently, in Equatorial Guinea, there are increase in timber collected from forest concessions by 2030, Equatorial Guinea Economic Update 2024 44 2nd Edition with an expected rise to 15 million cubic meters per year, depend on various factors, including the exposure of up from the current 7 million cubic meters.51 This increase CEMAC forest-related commodity exporters to the EU is forecasted by the ministry to double the timber sector’s market, the political will of the governments in the region, contribution to GDP and create around 100,000 jobs, up the capacity of local industries to comply with these from the current 40,000. The focus will be on enhancing the standards, and the support from international bodies and rate of log processing and improving secondary and tertiary NGOs in facilitating compliance. CEMAC countries have processing activities. However, there is an acknowledgment been increasingly exporting wood to Asian markets in that in the initial years of the ban’s implementation, the recent years. This is increasingly limiting the impact of CEMAC region countries might face negative impacts in EU deforestation-free regulations, especially in Equatorial the short run, including a significant drop in government Guinea, where 90 percent of wood export goes to the China revenues from the sector​ . This anticipation has reinforced market. Nevertheless, it is anticipated that over time, the the delays in the log export ban’s full implementation. EU’s approach could serve as a model for other regions and countries, demonstrating how stringent environmental The EU Law on Deforestation-Free Products: standards can be integrated into trade policies to promote A regulation that promotes sustainable forest global forest conservation efforts. management in the region? Equatorial Guinea is participating in the Forest Law Adding to the complexity of CEMAC regional initiatives Enforcement, Governance and Trade (FLEGT) Voluntary in the forestry sector, the European Union has taken Partnership Agreement (VPA) initiative with the European significant steps to restrict the import of commodities Union. Although the country is in the process of engaging linked to deforestation as part of a broader effort to with this initiative, it has not yet reached the stage of mitigate climate change and biodiversity loss. The new fully implementing a timber legality assurance system or European Union (EU) Regulation on Deforestation-Free issuing FLEGT licenses. The country has been actively Products aims to ensure that a range of products sold within involved in FLEGT-VPA-related seminars and workshops to the EU do not originate from deforested land anywhere in the enhance understanding and cooperation among regional world. This includes commodities such as wood products, stakeholders. For instance, in 2016, a workshop was held meat products, cocoa, coffee, palm oil, soy, rubber, charcoal, in Bata, focusing on the mechanisms of FLEGT and VPA, and printed paper products. as well as private certification of logging legality. This workshop facilitated discussions among technical, national, The imposition of the EU deforestation regulation on Congo and sub-regional experts from Central Africa, focusing on Basin countries could incentivize greater momentum both the administrative and technical aspects necessary for towards enforcement of certification regimes coupled with promoting legal and sustainable forest management​ . environmental fiscal policy reforms promoting sustainable forest management. By requiring stringent due diligence In their regional response to EU regulations banning and traceability of products, the EU regulation sets a higher deforestation-linked commodity imports, Equatorial standard for environmental monitoring, reporting, and Guinea and other Congo Basin countries are likely to verification (MRV) systems in the forestry sector, which could face complex governance challenges that necessitate encourage producing countries to adopt more sustainable increased bureaucratic and strategic state capacities. On practices. This, in turn, could lead to the development of the one hand, to varying degrees, they will need to adapt to policies and practices that prioritize forest conservation and EU’s stringent requirements, which necessitate proof that sustainable land use, aligning with the EU’s environmental their exports, such as timber, agricultural, paper, and mineral standards to maintain access to its market. products, are not linked to deforestation. On the other hand, they will need to align with regional policies like the CEMAC However, the real-world effect of the EU deforestation log export ban, in pursuit of their efforts to boost local regulation may be minimal in some countries and will processing and sustainable forestry practices. 51 Interview of the Minister of Forestry and Fauna, Jules Doret Ndongo in the “Business in Cameroon” Magazine, 2022. Equatorial Guinea Economic Update 2024 2nd Edition 45 Box 5. Cross-cutting issues in sustainable forest management Promoting sustainable forest management (SFM) in CEMAC countries faces several cross-cutting issues, including weak governance structures and political economy constraints. Effective governance is crucial for SFM, yet many regions, including CEMAC, suffer from inadequate governance capacity, which hampers the adoption of forest certification and other sustainable practices. Institutional and structural obstacles, such as insufficient funding and lack of technical forestry operations training, further impede the effective involvement of local communities in forest management, leading to overexploitation and degradation. Additionally, the presence of multiple, overlapping, and independent actors along the value chain can create trust and credibility issues, complicating the implementation of policies like the Voluntary Partnership Agreement (VPA). Political economy constraints, such as the influence of forest-adverse economic sectors like agriculture, bioenergy, and mining, also pose significant challenges, necessitating coherent international policy cooperation and integrative actions to align these sectors with SFM goals. Moreover, the high transaction costs associated with implementing and enforcing rules to reduce overharvesting can deter effective forest governance, especially under conditions of environmental and institutional uncertainty. The uneven progress in SFM, particularly in tropical low-income countries, highlights the need for long-term forest management plans and clear ownership of forests to prevent deforestation and degradation. Despite the global expansion of SFM, the gap between developed and developing countries remains wide, necessitating multi-dimensional solutions involving coordination among various stakeholders. Finally, the socio-economic benefits of forests are often undermined by poor governance, which calls for systematic analysis and targeted efforts to improve administrative systems and promote positive changes. Addressing these cross-cutting issues is essential for achieving sustainable development and ensuring the resilience of forest ecosystems in CEMAC countries. To manage these dual pressures effectively, greater sustainable use of forest resources, contributing to global coordination across national policies and ministries will objectives of biodiversity conservation and climate change be crucial. Countries will need to harmonize their efforts to mitigation. develop sustainable forestry practices that meet international standards while also building local processing capabilities to add value to their exports. Such coordination could involve 2.4 The role of Environmental sharing best practices, developing regional frameworks for sustainable forestry, and seeking technical and financial Fiscal Policy: Trade-offs in the support from international partners to build the necessary Forestry sector infrastructure and capabilities. While these policy directions present distinct challenges, they also offer opportunities Environmental fiscal policies can play a crucial role in for these countries to enhance their forest management protecting forests by providing economic incentives practices, diversify their economies, and improve their and disincentives that encourage sustainable forest standing in the global market by aligning with international management practices. environmental standards.52 Numerous strategies exist for the conservation of forests, Taken together, these regional and international forest- yet their efficacy varies significantly, particularly in the related regulations and governance arrangements context of nations with limited economic resources. operating in the CEMAC countries demonstrate a Regulatory mechanisms, such as mandated standards and multi-faceted approach to combating deforestation prohibitions, have shown promise in meeting conservation and promoting sustainable forest management. By goals (Table 4). Nevertheless, they demand substantial incorporating both legislative measures and collaborative administrative and enforcement infrastructure and initiatives, these efforts aim to ensure the conservation and may not be as cost-effective as alternative economic 52 Achieving these goals would also require an increased technology transfer to these countries and the incorporation of industrialization in their national development strategy. Equatorial Guinea Economic Update 2024 46 2nd Edition measures. Economic tools, such as policies based on to the establishment of new institutions and administrative results-driven spending, necessitate advanced governance frameworks. Some of these policies, like REDD+, hinge on structures and are typically more expensive to deploy due financial support from international benefactors. Table 4. Selected Approaches and Policy Instruments for Sustainable Forest Management Regulatory Approaches Information & Voluntary Instruments Economic Instruments • Restrictions or prohibitions on use (e. g. • Ecolabeling and certification (e.g., • Results-based expenditure policy restrictions on trade in illegal timber) sustainability certification) (payments for ecosystem services, • Restrictions or prohibitions on access • Green public procurement REDD+) and use (e.g., designation of protected • Voluntary approaches (e.g., negotiated • Subsidies area agreements between firms and • Environmental taxation (taxes, charges • Permits and quotas governments) and fees, e.g., royalties) • Quality, quantity, and design standards • Corporate environmental accounting • Tradable permits (e.g., minimum harvesting diameters) • Conditional credit • Biodiversity offsets/biobanking • Spatial planning (e.g., ecological • Liability instruments (noncompliance corridors) fines) • Planning tools and requirements (e.g., • Performance bonds environmental impact assessments, strategic environmental assessments) Source: World Bank (2021a), adapted from OECD (2013). Conversely, climate-smart fiscal policy instruments Although environmental taxation should be leveraged more applied to the forestry sector are, in principle, a cost- extensively to foster forest conservation and sustainable efficient strategy that can be independently implemented practices, it is not the sole solution. A holistic approach, by countries. When thoughtfully crafted, forest-related incorporating regulations, informational measures, and fiscal instruments have the potential to be impactful even in various economic strategies, including policies based on environments marked by limited governance or administrative results-driven spending, is crucial for a comprehensive and capacity. Forest-fiscal policy instruments complement other effective conservation framework. forest conservation and management strategies for forests. photo: © Milan / Adobe Stock Equatorial Guinea Economic Update 2024 2nd Edition 47 Box 6. The impact of forest-related fiscal instruments on fiscal space Forest-related fiscal instruments significantly impact fiscal space by influencing government revenues and expenditures through various mechanisms. Instruments such as Pigouvian taxation and subsidies, and market-based systems like feebates and certification schemes can either enhance or constrain fiscal space depending on their design and implementation. For instance, the introduction of feebates, which are budget- neutral mechanisms, can promote sustainable forestry without reducing government revenues, as seen in the promotion of certified timber and agricultural commodities in Central Africa. However, the effectiveness of these instruments can be limited by high administration and compliance costs, as well as the niche market shares, they often occupy, which has been observed in the case of voluntary certificates supported by developed countries. Several cross-country examples illustrate the varied impacts that forest-related fiscal instruments can have on public finances. In Brazil, the REDD+ strategy, which includes both results-based funding and market instruments, demonstrates how financial resources can be mobilized for emissions reductions, thereby impacting fiscal space through the redistribution of funds across various governance levels. In Nepal, inconsistencies in fiscal policy instruments, such as multiple taxation and unclear revenue-sharing mechanisms, have hindered the sustainable management of forest resources and affected the financial situation of community forest user groups, thereby impacting local fiscal space. In Poland, the forest fund model redistributes resources from high- income to deficit-reporting forest districts, although it faces challenges in ensuring fair and rational distribution. Additionally, the implementation of financial accounting standards like AASB 1037 in Australia, which mandates the reporting of forest assets’ net market value, can influence fiscal space by recognizing changes in asset values as revenues or expenses. The impact of forest-related fiscal instruments on fiscal space is multifaceted, requiring a balanced approach that considers both economic and regulatory measures to achieve sustainable forest management and fiscal stability. Forest taxes are used by governments in addition to are often traded in small quantities on few markets, making corporate taxation to capture a greater share of revenues, the information on sales prices difficult to know. Relative but often in the context of imperfect, asymmetrical prices are constantly evolving, not only among species but information. Theoretically, the aim of forest taxes is to also between logs and processed products. In addition, capture the “stumpage value” of a production forest, which companies can reduce their tax base, often through transfer can be assimilated to an economic rent (Gillis, 1992). The pricing, but not only, and understaffed tax authorities stumpage value corresponds to the market price of the frequently lag behind. Therefore, forest taxes play a critical wood production (that is, a mix of logs, sawn wood, by- role by collecting minimum revenues for the state, whether products, and finished products) minus the cost associated they capture some share of the economic rent. with logging, forest management, transport, processing, marketing, and a “normal” profit. Corporate taxation The strategic application of forestry taxation requires should also be deducted to get the stumpage value of a an astute understanding of its potential impacts (Table forest management unit. Forest taxation, therefore, can be 5). A tax targeting timber production, for instance, might viewed as a way of capturing the forest economic rent not inadvertently encourage practices detrimental to forest collected by corporate taxation, in a context of asymmetrical health, depending on the nuances of the production process. information between companies and governments about the The goal, then, is to refine tax policies to incentivize methods prices and costs of timber operations. that align with sustainable forest management principles, ensuring that taxation not only serves fiscal objectives but Such information asymmetry is often specifically also contributes to the broader goal of forest conservation. associated with tropical timber and fragile states. Species Equatorial Guinea Economic Update 2024 48 2nd Edition Table 5. A selection of fiscal mechanism and their relative impact on incentives for sustainable forest management (SFM) Fiscal Mechanism Description Effect on SFM Incentives Other Features Excise tax Tax on timber and other Mixed impact – Without Revenue-increasing forest-derived products additional measures can High administrative Can be unit-, profit-, or increase incentives for illegal or costs (information, resource rent–based informal logging, selective enforcement) harvesting, and land use change Area fee Fee based on harvested area Mixed impact – Without Low administrative costs additional measures can encourage more intensive harvesting Export tariff Tax on exported timber Mixed impact – Without Revenue-increasing and other forest products, additional measures can Low administrative costs levied by customs authority generate distortions in consumption and marketing of forest products or encourage inefficiency and waste in domestic industry Input tax Charges on capital Mixed impact – Can be Revenue-increasing equipment, labor, or other mechanism to help control inputs illegal logging Subsidy or tax Fiscal incentives and tax Strong impact on incentives for SFM Revenue-decreasing expenditure discounts and land use change, if well targeted High administrative cost Combination of Taxation and rebate Strong impact on incentives for SFM, Potentially revenue taxation combination based on if well targeted Neutral Medium administrative and subsidy/rebate firm adoption of SFM or cost, if used in (feebate) another environmental combination with indicator information instruments Ecological fiscal Portion of central Strong impact on public Revenue neutral transfer government fiscal transfers incentives for SFM and forest Low administrative cost allocated based on environmental conservation indicators Source: World Bank (2022), adapted and expanded from Gray (2002). Note: This is a noncomprehensive list of forestry fiscal mechanisms. The country-level context will determine which instruments are most appropriate in each circumstance. The revenue-generating potential of well-designed forest taxes, for example, may incentivize public authorities 2.5 Survey of Forest-Fiscal Policy to keep forested land under its current use rather than Instruments in Equatorial Guinea encourage land conversion to agriculture. However, traditional forest taxes do not act as environmentally This subsection surveys a select set of forest-fiscal targeted (Pigouvian) taxes, since tax rates in practice do instruments, examining their economic and environmental not vary based on the size of negative externalities (e.g., rationale and their utilization in Equatorial Guinea. The emissions) but on the area exploited or volume of timber. section begins with the basic and traditional fiscal While it is theoretically possible to foresee taxes levied based instruments, and gradually progress to those that balance on associated environmental damages, this could entail high multiple considerations: environmental targeting (Pigouvian administrative costs. Forest services in fragile states lack principle), revenue generation, administrative capacity, and independent financial means to monitor forestry operations strategic state capacity in managing diverse vested interests and estimate the level of damages on a consistent, objective in forest-related commodities sectors. basis. Equatorial Guinea Economic Update 2024 2nd Edition 49 Recurrent Annual Charges Logging Licensing and the Auctioning of Forest Concessions Recurrent annual charges come in several forms, including property taxes (charging a percentage of the value of the Logging licenses allocated through competitive auctions is property, either including or excluding the value of the a market-based approach that aims to promote sustainable trees), and area fees (a fixed charge per area of land).53 forest management and responsible resource utilization. Area fees are generally simpler to implement since property Under this approach, the government or relevant authority taxation necessitates regular land revaluation assessments. sets limits on the total area or volume of timber that can be However, area fees also entail some administrative harvested within a specific time frame and region. Interested sophistication as they are typically determined by some parties, such as logging companies or businesses, participate valuation of the forestry concession, which may need to in a competitive bidding process, where they submit offers be adjusted over time. This is sometimes achieved through to secure the rights to log in designated areas or obtain a competitive auction. specific volume of timber. The auction process allows the market to determine the true value of the logging rights Area fees reveal the complex, often unpredictable, through competitive bidding, ensuring that the highest bidder effects of forest taxes on logging behavior. The response secures the license or contract. This approach generates of loggers to these fiscal pressures reveals that increased revenue for the government, which can be reinvested in fees sometimes beckon towards more intensive logging. sustainable forest management, conservation efforts, or The empirical literature, enriched by insights from Vincent, other environmental initiatives. Additionally, companies Gibson, and Boscolo (2003), hints at a potentially myopic that win the logging licenses have an incentive to operate rush towards exploitation induced by higher fees, urging efficiently and sustainably, as they have invested substantial loggers towards premature extraction. This is because area resources to secure the rights. fees impose a fixed cost that forestry operators must pay regardless of the volume of timber extracted. Unlike Cameroon, which operates an auction system to determine the annual area fees through a competitive Equatorial Guinea does not impose property taxes on bidding procedure, Equatorial Guinea authorities allow forested lands but does levy area fees. The Ministry of candidates to simply apply for a logging license. The Forest and Environment charges holders of logging licenses process of granting a logging permit in Equatorial Guinea a fee per hectare. The fees depend on forest zones defined begins with the application for a logging lease contract, with proximity to the port of Bata. There are three forest zones, through which the interested company is granted a including Zone A (closest to the port of Bata), Zone B (slightly concession by a presidential decree, after fulfilling all the father from the port), and Zone C (farthest from the port).54 The requirements. After the release of a presidential decree, the area fees are paid annually by all forest operators under forest ministry grants a logging authorization upon payment of 50 harvesting leases. Logging companies also pay occupation percent of the occupation fee for the first year and 100 percent fees, which vary by zone. If a company has arrears in paying in the following years until the expiration of the validity of the these fees, it is not eligible to renew its Forest Use Lease CAAF. Integrating forest concession auctioning in Equatorial Contract (Contrato de Arrendamiento por Aprovechamiento Guinea can improve forest management by promoting Forestal, CAAF). Although there is no public data available transparency, accountability, and competition, leading to on area tax revenues, it is theoretically possible to calculate more efficient and sustainable practices. Auctioning process this by considering the total usable area according to official can also reduce the likelihood of corruption and favoritism documents and forest management plans. However, these that often accompany traditional allocation methods. official documents are rarely accessible. Unlike Gabon, which imposes a higher area tax on concessions without sustainable Output taxes: royalties from harvested timber management certification, the area tax rate in Equatorial and stumpage yield taxes Guinea does not vary according to how sustainably the forest concession is managed. Thus, whether the concession is Output taxes in the forestry sector commonly take one of managed sustainably according to a forest management two forms: royalties from the market value of harvested plan or, better still, accords with private legal or sustainable timber, or a stumpage yield tax. Royalties based on the value management certification, there is no difference in the tax rate. of harvested timber are typically calculated as a percentage 53 World Bank (2021a), Fiscal instrument for sustainable forest management. 54 Zone A, Zone B, and Zone C are charged 2,500 FCFA per hectare per year, 2,000 FCFA per hectare per year, and 1,500 FCFA per hectare per year, respectively. Equatorial Guinea Economic Update 2024 50 2nd Edition of the market value of the timber at the time of harvest. This The behavioral effects of the two output taxes – royalties means the amount paid varies with the market price of the on harvested timber and stumpage yield taxes – have timber, which can fluctuate based on demand, supply, and mixed, ambiguous impacts on harvesting decisions. other economic conditions. A stumpage yield tax, in contrast, With value-based royalties, there might be an incentive to is a fixed charge levied on the volume of wood extracted, harvest more when prices are high, potentially leading to regardless of its market value. It is typically set per unit of unsustainable practices if not well-regulated. In contrast, a volume (e.g., per cubic meter or per ton), and the rate usually fixed stumpage yield tax might encourage more consistent remains constant unless changed by policy. harvesting practices, but it could also discourage harvesting if the fixed tax becomes economically burdensome during The design of the output tax has economic implications periods of low timber prices. Each system has its advantages – for both revenue variability and risk-sharing. Royalties and challenges, and the choice between them often depends that depend on the market value of timber are more variable on the economic objectives, administrative capacity, since they are directly tied to timber prices. This can mean and forestry management goals of the region or country higher revenues for landowners or governments when implementing these policies. prices are high, but lower revenues when prices are down. In contrast, a stumpage yield tax provides a more predictable Equatorial Guinea levies a number of export taxes on wood and stable revenue stream, as it is not dependent on market products, including export license fee, official chamber prices. The implications for the sharing of risks are also of commerce fee, logging fee, reforestation fee, and road significant. Royalties on the value of harvested timber share construction fee. These export fees are variable, depending the price risk between the timber owner and the harvester (or on the species and quality of the wood product. The export the government in some cases). When prices are high, both taxes, along with many other wood product taxes, are benefits, and when they are low, both earn less. On the other managed by the Ministry of Forest and Environment, the hand, a stumpage yield tax places more risk on the timber Ministry of Finance and Budget. Forest fiscal revenues make harvester, as they have to pay a fixed rate regardless of the a modest contribution to total fiscal revenues in Equatorial timber’s selling price. Guinea (Figure 29). In 2021, only 1.4 percent of total tax revenues came from forest rents and taxes on wood exports. Stumpage yield taxes have lower administrative This share dropped to 0.3 percent in 2023. The highest complexity, with implications for compliance. Calculating contribution of forestry revenues to total tax revenues in the royalties based on timber value can be more complex, last ten years was recorded in 2017, where they represented requiring accurate assessment of timber prices and possibly 2.8 percent. Based on available data, most forestry revenues, leading to disputes over valuations. This system might also particularly between 2019 and 2022, came from taxes on need more rigorous enforcement and auditing to prevent forest product exports, reflecting the industry’s strong export underreporting of values. The stumpage yield tax, being a orientation. More than 80 percent of exports consist of fixed rate based on volume, is generally simpler to administer unprocessed rough wood. This generates lower revenues and easier for compliance. Figure 30 because raw logs are sold at lower prices compared to Figure 29. Equatorial Guinea, forest tax revenue, as a percentage of total tax revenue 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Timber export revenue Internal Forest tax revenue (OCIPEF) Source: Equatoguinean authorities, Budget execution data. Note: OCIPEF is Oficina de Control, Información y Promoción de Especies Forestales. Equatorial Guinea Economic Update 2024 2nd Edition 51 finished or semi-finished products. Levying an export tax on timber can present several Tax Expenditures for Agriculture and VAT challenges. High export taxes can reduce the competitiveness Exemptions for Farm Inputs of timber products internationally, decrease demand, and reduce revenue for the timber sector. They can also distort In the broader context of fiscal policies impacting forestry domestic market dynamics, lead to resource misallocation, and deforestation, tax expenditures for agriculture and and incentivize illegal activities such as smuggling. VAT exemptions for farm inputs are crucial. These financial Additionally, high export taxes can deter investment and tools can influence land use decisions and potentially lead to potential overexploitation of forest resources if accelerate deforestation if not aligned with environmental domestic processing is inefficient. Robust enforcement objectives. Tax breaks and incentives for agricultural activities mechanisms are required to prevent tax evasion, which can often promote agricultural expansion, which can lead to be administratively demanding and costly in countries with the conversion of forested lands into agricultural fields, limited governance capacities. Addressing these challenges especially in areas where agriculture is a primary driver of often requires a balanced approach that considers both the deforestation. By reducing the cost of agricultural inputs, economic benefits of taxation and the potential for negative VAT exemptions can make it cheaper and more economically outcomes. Solutions might include more moderate tax viable for farmers to cultivate larger areas, including rates, improved enforcement mechanisms, and policies that potentially encroaching on forested lands. While potentially encourage sustainable practices in both the domestic and beneficial for food production, these exemptions can lead to export markets. more intensive farming practices that might degrade soil, reduce biodiversity, and increase runoff and pollution if not Business Income Taxes managed sustainably. Forestry businesses, apart from facing sector-specific In Equatorial Guinea, farmers benefit from VAT exemptions taxes like export taxes or stumpage yield taxes, are also on agricultural inputs. According to article 283 of the subject to general business income taxes. These taxes current (2004) tax law, raw products obtained from farmers, have unique considerations in the forestry sector due to their stockbreeders, fishermen, and hunters are exempt from distinctive characteristics, particularly the long investment VAT and special duty provided that such products are sold cycle. In forestry, the period from planting trees to harvesting directly to the final consumer by the same owner. can extend over many decades, which influences how income taxes are designed and implemented. In many jurisdictions, It is essential to align VAT exemptions and overall income from timber is not taxed on an accrual basis, where agriculture fiscal policies with environmental goals to income is recognized as it is earned. Instead, it is taxed on balance agricultural development and sustainable land a realization basis, meaning the income is recognized at the use practices that protect forests. Fiscal tools could be point of harvest. This method recognizes the proceeds from redesigned to support sustainable agricultural practices. timber, minus the associated costs, only when the timber is It is possible, for example, to align tax expenditures and actually harvested and sold. The taxation of these proceeds VAT exemptions with environmental benchmarks. Fiscal can vary: they may be treated as ordinary income or as capital authorities could provide these benefits only for agricultural gains. Typically, long-term capital gains taxes are lower than practices that maintain or improve forest cover, use ordinary income tax rates. When timber proceeds are taxed environmentally friendly technologies and practices that as capital gains, this usually provides a significant tax benefit contribute to soil conservation and biodiversity, or employ because of the lower rates applied. advanced agroforestry techniques. To mitigate the negative environmental impacts while leveraging the economic In Equatorial Guinea, the corporate income tax must be benefits of agricultural development, it is crucial to integrate paid by any resident company. The corporate income tax fiscal policies strategically. By carefully designing and rate is 35 percent to be paid on taxable profits. However, as implementing these fiscal instruments, governments can help per article 147 of the current tax law, certain cooperatives ensure that agricultural growth contributes positively to both producing, transforming and selling agricultural products; economic development and environmental sustainability, agricultural unions and syndicates and supply and purchasing avoiding the pitfalls of unchecked expansion that leads to cooperatives operating in accordance with the provisions significant deforestation. governing them; and mutual agricultural credit funds are exempt from corporate income tax. Equatorial Guinea Economic Update 2024 52 2nd Edition 2.6 Opportunities for Climate- that encourages producers to adopt more environmentally friendly practices. This approach not only addresses the Smart Forest Fiscal Policy Reform informational gap but also promotes market formalization in Equatorial Guinea by incentivizing legality and sustainability in production processes. Aligning the tax rates with the sustainability of timber production methods The collaboration between fiscal authorities and certification agencies exemplifies a synergistic approach The fiscal and ecological benefits of forestry taxes hinge to environmental policy, wherein the strengths of each on the precise targeting of the tax base. Taxes on timber entity are harnessed to achieve a common goal. This products essentially penalize production output, yet the partnership has the potential to enhance market dynamics by environmental impact varies greatly depending on the creating a dual incentive structure, where certified producers production methods utilized. Ideally, environmental forestry benefit from both tax advantages and consumer preferences taxes should target these methods directly to incentivize for sustainable products. Moreover, this approach fosters sustainable forest management investments. In particular, international cooperation by aligning domestic fiscal the ideal of dynamically varying tax rates in accordance policies with global sustainability goals, offering a model for with the sustainability of production practices emerges as international collaboration in forest conservation. an optimal environmental forest tax principle, echoing a departure from the uniform taxation models of the past. Ultimately, the integration of sustainability certification This innovative approach, reminiscent of the transition from into forest-related commodity tax rates (including for indiscriminate electricity taxes to carbon taxes, emphasizes timber, paper, and potentially agricultural and mineral the importance of differentiating tax burdens based on products) represents a forward-thinking approach to environmental impact. Such differentiation aims to encourage environmental fiscal policy, one that acknowledges the sustainable production in the forestry sector by adjusting tax complexities of sustainable production and seeks to leverage rates to reflect the ecological footprint of different production fiscal instruments in service of environmental conservation. methods. This shift represents a nuanced understanding By adopting this strategy, governments can create a more of fiscal incentives, acknowledging that the sustainability effective, information-driven framework for encouraging of timber production varies significantly across different sustainable practices in the forestry sector and beyond, harvesting techniques. paving the way for a more sustainable and environmentally responsible global economy. Despite the potential of commodity tax systems to drive sustainable practices, the practical challenge of varying A ‘bonus-malus’ system in forestry: using taxes tax rates based on production methods lies in the fiscal on non-sustainable production to finance tax authorities’ limited insight into the specifics of these benefits for sustainable practices methods. This informational gap hinders the ability to align tax rates precisely with the sustainability of production A ‘bonus-malus’ system in forestry consists of applying practices, thus diluting the environmental efficacy of higher taxes on non-sustainable production to fund tax such taxes. Overcoming this obstacle requires innovative reductions for sustainable practices. This system is strategies that enable fiscal authorities to access detailed intended to be budget-neutral, where the revenue from higher information about production techniques, thereby facilitating taxes (maluses) directly funds the reductions (bonuses). more nuanced and effective taxation policies. This model is particularly relevant in budget-constrained environments in Congo Basin countries. This mechanism The integration of sustainability certification into tax requires careful calibration to ensure it does not lead to policy offers a promising solution to this challenge. revenue losses for the state. For instance, when applied By leveraging the detailed assessments conducted by to taxation based on concessions’ certification levels, the certification agencies, fiscal authorities can align tax rates mechanism’s success depends on accurate forecasting of more closely with the environmental impact of production the transition from non-certified to certified units, which in methods. Offering tax discounts or waivers for products turn affects the financial sustainability of the tax system.55 certified as sustainable introduces an incentive structure 55 Karsenty (2024). Equatorial Guinea Economic Update 2024 2nd Edition 53 In Gabon, a differentiated forestry taxation system was Addressing these multiple challenges will require substantial introduced, which resembles a bonus-malus mechanism: investments.56 Protecting tropical forests is among the fastest certified forestry concessions (FSC or PAFC) received a tax and most affordable ways to decrease emissions, while also reduction, concessions with legality certification faced a advancing development. Better forest land management will moderate tax increase, and uncertified concessions saw a contribute to the achievement of Sustainable Development significant tax increase. This system, which can be replicated Goals related to food, water, health, energy, human safety, in other countries, aimed not just at budget neutrality but also and biological diversity. at increasing overall tax revenues, by incentivizing sustainable practices through fiscal measures. Potential challenges Through its REDD+ national investment plan, Equatorial of the Bonus-Malus mechanism concern the accessibility Guinea has engaged on an ambitious program to reduce of certification systems for national operators and small GHG emissions linked to forest loss and improve the producers, often due to high audit costs. A potential solution management of its land and forests. Implementing an to this would be allocating a portion of sectoral taxation to effective tax policy can help achieve this objective. A a special fund dedicated to subsidizing these costs, thus tax policy that reduces private and public incentives for reducing financial barriers and mitigating potential conflicts deforestation, forest degradation, and land use change of interest between auditors and their clients. and instead encourages forest conservation, sustainable management, and green value chains is critical in Equatorial Implementing a bonus-malus system in forestry taxation Guinea. can encourage sustainable forestry practices. However, it requires robust management and forecasting capabilities As discussed above, fiscal policies such as subsidies to ensure that changes in production patterns do not lead for sustainable practices, adjusting forest taxes with to fiscal imbalances. Furthermore, supporting smaller the ecological footprint of the wood production method, producers through financial subsidies for certification can tax rebate for forestry certification and agroforestry, enhance the inclusivity and effectiveness of such policies. reinvestment of natural resource revenues, fiscal By linking tax incentives directly to sustainable practices, transfers, and grants can play a crucial role in protecting governments can drive significant environmental benefits, Equatorial Guinea forestland. But taxation on forests needs aligning economic activities with broader ecological to be applied with careful consideration of economic, social, objectives. and environmental factors. Ensuring that taxes are equitable, transparent, and effectively used to promote sustainable Looking ahead: How to better leverage fiscal forest management and conservation. Balancing the need to policy to achieve both forest preservation goals discourage harmful practices with the need to support and and increase the forestry sector participation in incentivize sustainable livelihoods will help achieve long- the economy? term forest conservation goals. A. Combining fiscal instruments with better forest Such fiscal strategies, however, are not standalone governance through improved enforcement, solutions but components of a comprehensive policy monitoring, and transparency will help Equatorial mix that addresses the multifaceted challenges of forest Guinea safeguard its forests while enhancing the conservation. From regulatory measures to economic forestry sector’s role in the economy instruments and informational campaigns, the success of forest conservation and sustainable development strategies Deforestation and forest degradation in Equatorial Guinea and efforts hinges on the ability to implement a coherent, increase climate risks by impairing the ability of forests integrated strategy that leverages the strengths of each to act as carbon sinks and reduce the resiliency of local approach. The role of governance, in this context, cannot be communities to climate damages. They also increase the overstated. A robust governance framework is essential not likelihood of exposure to emerging zoonotic diseases. As only for the effective implementation of tax policies but also human activities encroach upon natural forest habitats, the for fostering the collaboration and transparency necessary potential for outbreaks and transmission of such diseases for sustainable forest management. Box 4 provides lessons from animals to humans increases (World Bank, 2021a). learned from previous fiscal reforms for forestry in Central 56 For example, in Equatorial Guinea, the total estimated cost of NDC implementation by 2030 is estimated at US$ 844.48 million, including US$ 576.61 million for mitigation measures and US$ 114.87 million for adaptations. Equatorial Guinea Economic Update 2024 54 2nd Edition Africa which indicates the importance of political economy change commitments, the country needs to build a robust, aspects and how sector interests could hamper reform inclusive commercial forestry sector with substantial efforts (Box 4). domestic value-added processing and integrate responsible and sustainable forest management into economic and The Equatoguinean authorities’ AGENDA 2035 and recent environmental policies. Different fiscal policy options could Economic Diversification Initiative offer an opportunity to be considered in a strategy to create more fiscal space for develop and maximize the forestry sector. To meet both the country’s development goals while creating jobs and Equatorial Guinea’s economic diversification and climate preserving natural resources for future generations.BOX 7 57 Box 7. Lessons learned from fiscal reforms for forestry in Central Africa Since the early 1990s, the World Bank has worked to reform forest concession regimes in Central Africa with two main goals: enhancing the economic value of forest resources and dismantling the patronage system in forest permit allocation.49 These reforms aimed to improve governance and transparency but faced resistance from vested interests, resulting in only partial implementation. Key aspects included adjusting the fiscal framework to increase public revenue and reduce resource waste. Over time, the focus of forestry reforms shifted towards REDD+ initiatives, which emphasize reducing emissions from deforestation and forest degradation. This shift reflected a broader change in international environmental policy priorities. However, the actual impact of these initiatives on forest management practices and deforestation rates has been mixed. In the interest of learning from history, the practical difficulties in implementing these reforms, including the need for robust and transparent systems to manage and monitor forestry activities, should be acknowledged. Past reform efforts in the forestry sector across Congo Basin countries were critiqued for not sufficiently involving local communities in decision-making processes and for underestimating the non-timber values of forests, which are crucial for the livelihoods of forest-dependent people. Ongoing work by World Bank teams is now focused on the development of robust natural capital accounting, including the value of forest ecosystem services and other non-timber benefits, in the Congo Basin forests. Past experience highlights the importance of aligning fiscal instruments with sustainable forestry management goals. It also points to the need for inclusive policy-making processes that involve all stakeholders, including local communities and forest-dependent populations, to ensure that forestry reforms support both environmental sustainability and economic development. While fiscal instruments such as adjusted taxation and competitive bidding for concessions have been central to the World Bank’s reform efforts, their effectiveness has been tempered by the complex interplay of local governance, economic interests, and institutional capacities. The ongoing challenge is to design and implement fiscal policies that effectively balance economic incentives with conservation goals, ensuring that forestry practices contribute to sustainable development and environmental protection. 57 Karsenty (2016). Equatorial Guinea Economic Update 2024 2nd Edition 55 photo: © jurra8 / Adobe Stock Going forward, addressing the multifaceted challenges • Promote user-friendly digital services for the forestry facing Equatorial Guinea’s forestry sector, a coherent set sector, including processes for permit applications, tax of solutions is proposed, focusing on both fiscal reforms and fees payments, and real-time tracking of forestry and measures for long-term sustainability of forest activities, ensuring these platforms are available in management and conservation. These include: remote areas to increase efficiency and transparency. As part of capacity building, the government could provide • Adjust forest tax rates to reflect the ecological footprint training for forestry officials and concessionaires on the of timber production methods. By leveraging the use of digital tools to improve efficiency, transparency, detailed assessments conducted by forest certification and traceability. agencies, fiscal authorities can align tax rates more • Engage local communities in expanding and closely with the environmental impact of production strengthening the implementation of REDD+ projects methods. across Equatorial Guinea’s forests to ensure they benefit • Encourage forest certification and, like Gabon, directly from carbon sequestration efforts. This could experiment with the implementation of a “bonus-malus” include financial incentives or alternative livelihood system where non-certified concessions are taxed programs. Secure performance-based funding from more than certified ones. There are currently no third- international donors by demonstrating measurable party certified concessions (e.g., Forest Stewardship progress in carbon sequestration and community Council) in Equatorial Guinea, and concessionaires’ benefits. compliance with social commitments is considered • Implement comprehensive legal reforms to strengthen low. Public authorities could also consider establishing forest governance and law enforcement. Currently an independent body to monitor compliance with social the foundational legal document (Forest Use and commitments and environmental standards. Management Law, 1997) governing the forestry sector • Rationalize tax expenditures for agriculture to improve is pending an update to address some shortcomings their targeting and align them with environmental and inconsistences with other laws. Despite the goals. Public authorities could consider implementing a legal requirements, no forestry inventories have been monitoring system to ensure funds are used effectively completed since 1992 and no Forestry Management and aligned with environmental goals. Plans have been formulated or implemented. As part of Equatorial Guinea Economic Update 2024 56 2nd Edition the legal update, conduct nationwide forestry inventories sustainable management practices. Although Congo Basin and develop comprehensive Forest Management Plans countries have legal frameworks that aim at regulating forest with stakeholder input. management and protection, the lack of regional guidelines, • Foster international partnerships and secure increased and enforcement often hinders the implementation of these funding for forest conservation and climate resilience laws. Strengthening the Central African Forestry Commission projects. Equatorial Guinea should actively seek (COMIFAC), particularly through its Central African Forest international cooperation to attract climate finance, Observatory (OFAC), is essential for harmonizing national technical assistance, and capacity-building support. institutional frameworks and data collection. Harmonizing By engaging with global environmental initiatives, fiscal policies, particularly to encourage forest management international donors, and climate funds, the country plans and certifications, and aligning agricultural and mining can secure resources needed for forest conservation, policies with forest protection efforts can significantly community adaptation strategies, and sustainable contribute to forest preservation. livelihood programs. • Promote agroforestry and sustainable land management Regional political efforts within CEMAC to harmonize practices as key strategies for reducing pressure on forest-related fiscal policies are crucial for fostering forests. Investments in agroforestry projects that environmental conservation, business environment, and integrate tree cultivation with agricultural crops, coupled regional integration. While aligning countries to commit with training and technical support for farmers, can to a ban on the export of logs to promote the domestic facilitate the transition to more sustainable agricultural timber sector is a significant step, it is not sufficient. More practices, such as crop rotation, organic farming, impactful policies include enhancing the coverage, quality, and soil conservation techniques, thereby reducing and monitoring, verification, and enforcement (MRV) of deforestation and forest degradation. sustainability certifications for forest-linked commodities. • Enhance community engagement and participatory These certifications ensure products meet environmental forest management to ensure the sustainability of and social standards, improving market access and prices. conservation efforts. Empowering local communities Adopting recurrent annual charges on commercial land and indigenous peoples through participatory forest use, such as land area taxes, can discourage deforestation management models is crucial for the sustainable use and promote sustainable land management. Implementing of forest resources. Implementing community-based feebates, with taxes varying based on production forest management programs that include clear benefit- sustainability, incentivizes eco-friendly practices, while sharing mechanisms can incentivize conservation and eliminating uneconomic and environmentally harmful tax sustainable livelihoods. expenditures, like subsidies for agricultural inputs, further • Increase efforts to develop a robust local wood supports sustainable forest management. processing industry, which can add value to forest products, create more jobs, and generate more revenue Aligning CEMAC member countries with this best-practice compared to exporting raw timber. This could be frontier of forest-fiscal policies can mitigate competitive facilitated by offering incentives such as tax breaks, disparities among member countries, creating a stable grants, and technical support. Focus on producing high- and predictable investment environment that attracts value products for domestic and international markets. sustainable investments. Regional policy alignment Invest in vocational training programs to build a skilled initiatives are essential to avoid beggar-thy-neighbor workforce capable of supporting a thriving wood policies, which can undermine collective progress by processing sector. shifting unsustainable logging practices to less regulated countries. Through environmentally targeted (Pigouvian) B. Strengthening regional cooperation through standardization of forest taxation and regulations, harmonized regulations, better law enforcement, and governments can reduce tax evasion, capture greater land- improved forest fiscal policy alignment will better use sector rents, promote fairer revenue distribution, and equip Congo Basin countries to face cross-border lessen administrative burdens for firms engaged in cross- challenges, enhance institutional capacities, and border operations. Regional alignment encourages greater attract more international funding foreign business investment in sectors such as timber, agriculture, and eco-tourism, benefiting local populations Better coordination of forest preservation policies in Congo through job creation, technology transfer, and infrastructure Basin countries will help ensure consistent enforcement development. Coherent policies also bolster regional across borders, reduce illegal activities, and improve integration by facilitating trade and cooperation, enhancing Equatorial Guinea Economic Update 2024 2nd Edition 57 overall cohesion, and making the region more attractive to Degradation) initiative can provide additional vital support. international donors and organizations focused on climate Engaging more with these foreign direct investors and change and sustainable development (OECD 2019). climate-related aid organizations can be achieved through regional cooperation platforms, joint project proposals, and Regionally integrated forestry initiatives are essential to demonstrating a strong commitment to policy coherence and avoid beggar-thy-neighbor policies, which can undermine sustainable development. This collaborative approach not collective progress by shifting unsustainable logging only secures financial resources but also brings in expertise practices to less regulated countries. Harmonized and technology essential for long-term environmental and regulations promote sustainable forest management economic sustainability (UNFCCC 2018). by ensuring the uniform application of environmental standards, thereby protecting forests and biodiversity across C. The Congo Basin countries’ efforts to preserve their borders. Evidence from regions such as the European Union, forests provide an essential global public good in the Amazon Cooperation Treaty Organization, and East African form of climate regulation and biodiversity services Community demonstrates that policy alignment effectively and require significantly scaled-up international combats environmental degradation and fosters sustainable support and compensation practices (European Commission 2020; ACTO 2021; EAC 2018). By embracing coordinated fiscal policies, CEMAC The international community must urgently provide countries can safeguard their forests, bolster economic substantial financial support and fair compensation for the growth, and enhance regional resilience against worsening Congo Basin forests’ carbon sequestration and ecosystem climate impacts. services. Despite their pivotal role in global climate regulation and biodiversity preservation, these forests Regional forest-fiscal alignment can also significantly receive inadequate financial recognition for their critical enhance CEMAC countries’ attractiveness to international environmental contributions. Acting as a significant carbon donors, organizations, and conservation funds. Lending sink and providing vital ecosystem services that benefit the groups such as the World Bank, Global Environment entire world, the Congo Basin forests are underfunded. The Facility (GEF), and Green Climate Fund (GCF) are more Congo Basin countries face a substantial financing gap for likely to bolster investment in regions where policies are their climate commitments, receiving only a small fraction harmonized, as this reduces the risk and complexity of of the required funds. This stark disparity highlights the project implementation. Potential funding and technical urgent need for increased and equitable investment in the assistance can be unlocked for development projects such as conservation and sustainable management of these forests. reforestation, biodiversity conservation, and sustainable land Adequate financial backing is crucial to sustain conservation management (World Bank 2021; GEF 2022), strengthening efforts, combat deforestation, and promote sustainable activities including those under the Central African Forest development in the region. Fair compensation for these Initiative (CAFI). The World Bank, under the aegis of its ecosystem services would not only help preserve these vital Global Challenge Program on Forests for Development, forests but also bolster the economic stability and growth of Climate, and Biodiversity, is initiating a regional Congo Congo Basin countries, paving the way for a more equitable Basin Sustainable Forest Economies program to increase and sustainable future for all. To this end, countries also need regional coherence on governance and fiscal policies, to enhance their readiness to effectively mobilize available strengthen regional institutions such as CEMAC, COMIFAC, climate finance options. The World Bank, through its regional and OFAC to access the benefits of recent advances in ASA initiative58, is supporting these nations in building the digital technologies particularly Earth Observation (EO) necessary capacity for results-based climate financing. and Artificial Intelligence (AI) for forest and biodiversity This approach considers the comprehensive value of forest monitoring and MRV systems (measurement, reporting, and ecosystems and environmental services, including carbon verification) and invest in sustainable forest and protected sequestration, biodiversity conservation, soil conservation, areas management. Financial instruments and mechanisms and water retention. like the Forest Carbon Partnership Facility (FCPF) and the REDD+ (Reducing Emissions from Deforestation and Forest 58 The World Bank, through its Congo Basin Forests Advisory Services and Analytics (ASA), is assisting CEMAC countries and the DRC in developing natural capital accounts to capture the comprehensive value of forest assets and ecosystem services, thereby enhancing national planning and decision-making for sustainable forest management. Additionally, the initiative supports these countries in building the necessary capacities and readiness to leverage both existing and innovative options for results-based climate finance. Equatorial Guinea Economic Update 2024 58 2nd Edition References ACTO. (2021). Annual Report Amazon Regional Observatory Colfer, C., Sheil, D., & Kishi, M. (2006). Forests and Human (ARO). Brazilia: ACTO/ARO. Retrieved from https://ora. Health. CIFOR. 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