Strengthening fiscal policy: New reforms aim to improve the management of funds

Expansionary and targeted fiscal policy will be key to realising Gabon’s economic diversification plan. As the state’s balance sheet expands, the administration aims to control already large recurrent spending as it sustains high public investments in infrastructure and development. In 2013 Gabon’s budget expanded spending 28% on the year before, at CFA3.14trn (€4.71bn), with a 7.6% budget deficit, or 2.3% of GDP. Supported by multilateral organisations like the World Bank, the EU and the IMF, work has started towards rationalising Gabon’s public finances management, taking account of the rapid multiplication of agencies and the tax code. Cognisant of its dominant role in the economy, the government is also working to upgrade the institutional capacities of its civil service. The ultimate effect of these reforms will be to clarify the institutional structure of the state for investors and to improve the bureaucracy’s budget absorption and implementation capacity.

REVENUE: Buoyed by healthy growth and high prices for its key commodity exports, Gabon recorded higher-than-expected tax revenues in 2012. Corporate tax income came in 22% higher than the budgeted CFA450bn (€675m), at CFA549bn (€823.5m) in 2012, accounting for 17% of the 2012 budget, according to figures from the Economic Service of the French embassy. Personal income tax remains marginal at 3% of the budget; although personal tax grew 12% to CFA88.6bn (€132.9m) in 2012, it fell short of the expected CFA104bn (€156m). Value-added tax income, which accounts for 8.5% of the budget, grew by 50% in 2012, much higher than the expected 30%. Meanwhile, Customs and import duties remained stable at CFA390bn (€585m) in 2012 and are expected to remain so in 2013 as the government seeks to streamline import procedures and sustain import-duty waivers for 166 staple products enacted in March 2013. The 2013 budget banks on similar revenue levels with an expected CFA525bn (€787.5m) in 2013, of which half, CFA252bn (€378m), is forecast to come from non-oil and non-mining firms. Gabon’s reliance on market funding, with bond issues of CFA248bn (€372m) in 2012, higher than the CFA100bn (€15m) budgeted, is only set to grow, with a total of CFA240bn (€360m) in Treasury bills and CFA240bn (€360m) in bond issues planned for 2013 (see analysis).

While the government cut corporate income tax from 35% to 30% for all sectors aside from oil and mining in January 2013, and extended a package of tax incentives for investors in the Nkok special economic zone (SEZ), such as a decade-long corporate tax holiday, followed by five years at a 10% tax rate, it is also moving to rationalise its system of tax exemptions. Currently, a plethora of agencies and ministries can grant exemptions and reductions.

The World Bank conducted a diagnostic of Gabon’s tax system in 2013 and found that the state had foregone 46.4% of all Customs revenue and roughly a quarter of all internally generated revenue like corporate tax and value-added tax. The World Bank found the effective tax rate on investment in industry to be 13.4%, for instance – lower than in other countries.

“The challenge for authorities is not the levels of tax rates, nor the principle of tax exemptions, but rather the level and management of these exemptions,” Rick Tsouck Ibounde, the World Bank’s resident economist for Gabon, told OBG. “Exemptions are discretionary and can be extended by a variety of ministries. The government plans to unify all exemptions under one law in time for the 2014 budget.”

In addition, the project aims to streamline and simplify the tax- and duty-filing process. One such effort towards this has been creating a one-stop investment centre at the Nkok SEZ, centralising 13 public administrations, including Customs.

CURBING THE RECURRENT: The administration is also seeking to strengthen and rationalise its recurrent spending. The recurrent budget grew from roughly 40% of total spending in 2010 to 46.4% in the revised 2012 budget, though the 2013 budget aims to cut it back to 40.6% (a revised budget usually presented in August and passed by October typically raises it). A major component of recurrent spending is fuel subsidies that keep domestic fuel prices some 30% below world averages, according to the IMF. The fund estimates that some 75% of subsidies go to businesses. While the government is weighing options for reform, it is also seeking ways to switch to targeted support for different types of consumers. There is also room to trim the bureaucracy somewhat. An unpublished audit of the civil service completed in 2011 is alleged to have found up to 7000 “ghost workers”, or fictitious employees on the payroll, with some civil servants collecting multiple paycheques. In 2013 the Office of the President launched a voluntary departure scheme for staff nearing retirement age, although it has not set specific targets for numbers. An earlier attempt, which reduced the retirement age to 60, was reversed under the previous administration.

The Ministry of the Budget, Public Accounts and Public Administration is spearheading a public-private training programme to improve its cadres’ capacities. Since April 2011 France’s HEC Paris, a business school founded by the Paris Chamber of Commerce and Industry, has been contracted to run intensive training courses for the government, starting with top civil servants in 2011 and 2012 before expanding to lower-level administrators in 2013. The first batch of 160 public managers (out of 400) received their degrees from the “Emergence Programme” in February 2013. Gabon’s national administration school, L’É- cole Nationale d'Administration, has also signed a partnership with HEC Paris. Wide-ranging in scope and urging inter-ministerial contact and cooperation, these courses aim to significantly improve the administration’s efficiency. “The segregation of the Budget, Public Accounts and Public Administration Ministry from the Economy, Employment and Sustainable Development Ministry in Gabon means inter-ministerial coordination is even more crucial for budget implementation,” Pascal Yembiline, principal country economist at the African Development Bank, told OBG.

The administration is approaching institutional reform from two angles: curbing its total staffing numbers and investing in training for its cadres. The EU is funding a CFA618m (€927m) partnership to improve Gabon’s public finances management. Under the Sectoral Governance Support Project (Projet d'Appui à la Gouvernance Sectorielle, PAGOS), the EU and IMF are working as technical partners to support reviews of public finances, and the management of mining resources, biodiversity and road infrastructure. The shift to programme-based budgeting by 2015 under PAGOS should allow better roll-over of unspent funds.

STRENGTHENING DISBURSEMENT: The challenge of improving disbursement levels for public investment projects persists, as in many peer economies. “There is fiscal expansion on paper, but with low disbursement on capital expenditure there is ample fiscal space,” Alain Fazili Bula, vice-president of Citibank Gabon, told OBG. The World Bank estimates budget disbursement reached only 66% in 2010, the last year for which figures are available.

“Disbursement of the government’s capital expenditure is usually this low due to low absorption capacity,” Tsouck Ibounde also told OBG. “The year 2012 was special in that all infrastructure had to be delivered in time for the Africa Cup of Nations.”

The state set up a roll-over fund for unspent budgeted funds, with 2012 as its first year of operation. The roll-over of unspent funds to the next year’s budget has suffered some delays, however, with technical arrears to contractors for work completed in 2012 causing a build-up of internal debt in the first half of 2013, although Gabon still sits comfortably within the regional convergence criteria. However, by 2015 the roll-over of unspent funds is likely to improve with the planned shift to programme-based accounts.

MEASURES AHEAD: In the mean time, the Office of the President introduced a new control measure, the visa d’opportunité, an additional seal that was made mandatory for all new contracts from 2012. By centralising the final decision-making, the Office of the President has tightened its powers of control.

“The new presidential control of contracts may lengthen approval of projects but this is a price worth paying if it limits the level of government arrears,” Bula, of Citibank Gabon, told OBG. This extra degree of control is expected to be particularly important given the rapid growth in number of executive agencies.