The country’s sound economy is an example for sub-Saharan Africa

Classified by the World Bank as an upper-middle income country, Gabon enjoys an average per capita income – estimated at €8950 in 2013 – that is far higher than the sub-Saharan Africa developing country average of €1212. Oil revenues have sustained the economy, accounting for 56% of total revenues and 80% of total exports by value, according to US Energy Information Administration (EIA) statistics for 2011. The predominance of oil has limited the development of other sectors of the economy and – as is often the case in rentier states – facilitated relatively non-inclusive growth, as evidenced by a poverty rate of 30%.

After oil, mining and timber activities are the major contributors to revenues, primarily due to the export of raw product – something which the government is now actively looking to change. The push to move up the value chain and stimulate activity in new sectors is in part a reaction to a change in the oil production level, which after reaching a peak of 370,000 barrels per day (bpd) in 1997, now stands at approximately 240,000 bpd. While the new offshore blocks are being auctioned off, Gabon’s existing oil fields are reaching maturity. To minimise the impact of declining oil revenues on the economy, Gabon has embarked on a programme of economic diversification and industrialisation that should also lead to a more inclusive, job-creating pattern of growth.

Growth

Driven by the non-oil sectors – including construction, which benefitted from a public spending boom in the lead-up to the 2012 Africa Cup of Nations and a broader push to improve internal links – Gabon’s economy has shown healthy growth in recent years at rates that have, since 2010, remained at least a percentage point higher than the sub-Saharan Africa developing countries average. Growth in 2013 reached 5.5%, reflecting a mild deceleration compared to 5.7% in 2012, but still robust. Standard Chartered Bank forecasts growth of 6.5% in 2014, driven in large part by public investment. Oil still dominates national income, though to a lesser extent than in previous years. According to the African Development Bank (AfDB), oil accounted for 49% of GDP in 2008, but by 2013 that share had fallen to 43.7%, indicating that economic diversification is gradually being achieved. The mining and timber sectors are the primary drivers of non-oil growth, though public investment spending has contributed significantly in recent years as well. Other contributors are the finance, real estate and business services sectors, which together accounted for 13.2% of GDP in 2013.

Strong Fundamentals

Gabon boasts strong macroeconomic indicators, including stable trade patterns and a healthy current account surplus. Estimates differ for the 2013 current account balance: AfDB put it at 7.2% of GDP, while the IMF estimated 10.4% and Standard Chartered Bank said 13% of GDP. Public expenditures totalled about 29% of GDP in 2013, while public revenues for the year reached an estimated 27.4% of GDP. A net exporter, Gabon’s trade balance was 37.9% of GDP in 2013. The country had a current account surplus of 13% of GDP in 2013 and projects a drop to 10% for 2014. Key trade partners include the EU and China, with France alone accounting for more than a quarter of imports in 2012. Over 90% of Gabon’s exports are of raw materials, more than 80% of which is oil.

Gabon’s monetary policy is set by the regional Economic and Monetary Community of Central Africa (Communauté Économique et Monétaire de l’Afrique Centrale, CEMAC), whose prudent monetary policies have successfully kept inflation in check within the region. The inflation rate is estimated at about 0.5% for 2013, but is expected return to the 2-3% range in 2014 and 2015. Gabon also enjoys sizeable foreign exchange reserves and a manageable debt burden. The country had a debt-to-GDP ratio of 24% in 2013. Reinforced by a December 2013 Eurobond issue, Gabon had €2.5bn in FX reserves at the end of the year, the equivalent of approximately 4.7 months of imports, according to Standard Chartered Bank.

FDI

Foreign direct investment (FDI) in Gabon stood at €524m in 2012, representing 3.9% of GDP, according to World Bank records. As a percentage of GDP, FDI inflows have risen modestly year-on-year (y-o-y) since 2010, when FDI stood at 3.4% of GDP. The country’s main sources of income – the petroleum and mining sectors – have attracted the lion’s share of FDI. KPMG forecasts that FDI inflows will reach 4.1% of GDP in 2014, continuing the y-o-y progress sustained since 2010, with France remaining the biggest contributor.

Human Development

Oil wealth, combined with a small population of about 1.6m, affords Gabon some advantages over its peers in terms of socio-economic development, notably in the provision of health and education services. Gabon has one of the highest primary education enrolment rates in Africa, at 94.6% in 2012; however, the completion rate is much lower at only 37.2%. Nonetheless, Gabon’s literacy rate of 89% is considerably higher than the sub-Saharan Africa average of 60%, although below the 94% average for upper-middle-income countries (see Education chapter). Gabon created a National Fund for Health Insurance and Social Security (Caisse Nationale d’Assurance Maladie et de Garantie Sociale, CNAMGS) in 2008, and it is estimated that 90% of the population has access to government-provided health care services (see Health chapter). Increases in access to basic services account for Gabon’s modest but steady progress in the UN’s Human Development Index (HDI) over the past several decades. In the 2014 HDI rankings, Gabon placed at 112 out of 187 countries, scoring above the sub-Saharan Africa average with indicators similar to Namibia and Botswana.

Beyond access to basic services, however, social development has been slow to manifest for much of the population and wealth distribution remains unequal. The AfDB estimates that around one-third of the population lives below the national poverty line, with little improvement in poverty reduction during the past decade. Recent years have seen the country strengthen social development, rolling out a “social pact” in 2014 to help improve headline indicators, although the principal challenge for Gabon is to improve job creation and access to credit to help foster a more inclusive pattern of economic growth.

Strategy And Goals

The 2011-16 Emerging Gabon plan (Plan Stratégique Gabon Émergent, PSGE) outlines the government’s roadmap for Gabon to become an emerging economy by 2025, primarily through diversification away from raw commodity exports and oil production. In recent years, the government has sought to spur this through extensive public investment in transport and energy infrastructure, while offering substantial tax and other incentives to potential investors, including through special economic zones (SEZs). In the medium to long term, the focus will be on building up local industries for the domestic processing of natural resources and thereby adding value to the country’s exports, creating jobs and wealth, and extending the benefits of economic growth to a greater portion of the population. Gabon’s natural wealth in tropical timber and mineral resources, including manganese, gold and iron ore, affords great potential to diversify the economy. The government’s diversification strategy hinges upon the development of local processing industries in these key sectors, as evidenced by a 2010 blanket ban on raw timber exports which forced producers to expand domestic downstream capacity.

Some of these initiatives have begun to bear fruit; oil as a share of GDP was down to 43.7% in 2013 from 49% in 2008. Meanwhile, IMF figures reveal that nonoil economic growth accelerated from 2.1% to 8.3% in the five years to 2013 and is expected to achieve 9.8% in 2014. A key component of the PSGE is a bigger role for the private sector – a shift away from Gabon’s traditional approach to economic management, which involved a more robust state role.

“There is political will to put the private sector at the centre of economic activity,” Alain Rempanot Mepiat, general manager of the Chamber of Commerce, Agriculture, Mining, Industry and Crafts of Gabon, told OBG. “An example of this is the reorganisation, in 2010, of the Chamber of Commerce. Until a few years ago, the chamber was directed by individuals nominated by the government, and now it’s headed by an elected directorate of businessmen, and is much more responsive to businesses’ needs.”

The government is working with the World Bank to develop a public-private partnership (PPP) framework. PPPs are currently overseen by sector-specific regulations and the National Agency of Public Works (Agence Nationale des Grands Travaux, ANGT) is providing oversight. As of mid-2014, this approach had succeeded in several industries, including fisheries and infrastructure (see analysis).

Infrastructure Upgrades

To support long-term private sector growth and stimulate activity outside of Libreville, where the bulk of the population resides, the government has launched an extensive programme of public infrastructure development entitled the National Infrastructures Master Plan (Plan Directeur National des Infrastructures, PDNI).

The PDNI includes structural upgrades for the roads network, the airports and maritime ports of Owendo-Libreville and Port-Gentil, the Lalala-Port-Mô leLibreville highway axis, and bridges and intersections in Libreville (see Transport chapter). Also included is refurbishment of public buildings such as hospitals, and prisons as well as expansion of public education infrastructure. The PDNI is overseen by ANGT, created for that purpose in 2010, with management and technical support from the US engineering firm Bechtel. Financing for the PDNI is to come in part from funds raised via the issue of a €1.1bn Eurobond in December 2013, and the government had planned a significant outlay of capital expenditure in the draft 2014 budget. During the mid-year budget review in July, however, a draft Amended Finance Act was adopted, reducing capital expenditures by 52.6%, from CFA1.3trn (€2bn) to CFA627.1bn (€940m).

As Rempanot Mepiat told OBG, “A number of projects have been halted as a result of payment problems, and this may have an impact on growth in 2014.” One notable project that was completed in June is a 520-metre-long bridge over the Banio lagoon connecting the city of Mayumba to the mainland. Mayumba is in Nyanga Province, 711 km from Libreville, near the border with the Republic of Congo, and the long-awaited bridge is expected to reduce travel times and boost economic activity in the area.

Significant progress has also been made in expanding the country’s energy infrastructure, specifically, with the completion in 2013 of three new power plants in Alénakiri, Port-Gentil and the Grand Poubara dam complex (see Energy chapter). While completion of the full slate of PDNI projects is likely to be delayed as a result of the recent budget revision, its eventual implementation is critical for the development of domestic industries, including tourism. Gabon is also working on upgrades to digital infrastructure, most notably the installation of the Africa Coast to Europe (ACE) underwater fibre-optic cable, which will greatly expand coverage of the broadband network and lower the cost of information and communications technology (ICT) services (see Telecoms & IT chapter). The infrastructure for the submarine fibre optic cable is already in place and will enter into service in 2014. The project was partially financed by a €43.3m loan from the World Bank, which is part of a larger €82m World Bank-assisted effort to extend ICT access throughout the country. Plans are under way to connect Gabon’s provincial capitals to the broadband network during the next five years.

Public Finances

Although revenues have tightened in recent years, resulting in payment delays and a closer look at current spending, Gabon’s fiscus has traditionally been comparatively strong (see analysis). Public expenditure in 2013 remained steady at about 29% of GDP, but is expected to rise 1% y-o-y in 2014 and 2015 as the government presses ahead with its programme of large-scale infrastructure investment. Meanwhile, public revenues declined in 2013, from 28.1% of GDP in 2012 to an estimated 27.4% in 2013, resulting in an increase in the budget deficit to 2.3% of GDP. This appears to be due to declining oil revenues (rather than tax revenues) with some impact also from falling import and export duties. Oil revenues declined by 3.5% between 2012 and 2013, from CFA1.5trn (€2.25bn) to CFA 1.4trn (€2.1bn), according to an IMF estimate. Meanwhile, both exports and imports fell as a percentage of GDP in 2013, with imports declining from 17.1% to 16.2%, respectively, while exports dropped from 56% to 54.2%.

The government is counting on strong growth in mining and increased oil production, as well as foreign investment, to grow its revenues and offset capital expenditures. It has plans to reduce spending on public sector wages, which currently absorb 20% of total spending, and recently issued a €1.1bn Eurobond to improve liquidity in the short term.

While €455m of the sovereign debt funds will be used to replace existing debt, the remainder has been allocated for public infrastructure projects. The growing roster of PPPs is also part of the strategy to expand the role of the private sector in financing core development projects and relieve some of the fiscal pressure on the public purse. Moving from a resource budget to a results-based budget may also improve fiscal management, as it promotes a better alignment of resources with programmatic objectives. The restructuring was begun in 2013 and 2014 is intended to be a test year for the new model.

Rick Emery Tsouck Ibounde, principal economist at the World Bank, told OBG, “The new results-based budgeting will require the government to enhance clarity within its institutions by more clearly defining sectoral policy and specifying targets. The government is partnering with the World Bank to develop coherent plans for procurement, expenditure commitments and payments, as well as a performance-based auditing infrastructure, all of which are necessary components of programme-based budgeting.”

Business Climate

Gabon advanced six places in the World Bank’s 2014 “Doing Business” ranking, moving up to 163 from 169 in 2013. The upgrade is owed to reforms in the tax regime which reduced the corporate tax rate from 35% to 30% for all but the oil and mining sectors, and a lessening of the administrative burden and time required to start a business. Yet Gabon places relatively low compared to the rest of sub-Saharan Africa, at 28 out of 47 ranked countries, meaning there is still much room for improvement, particularly in terms of regulatory transparency and further streamlining of the tax structure. Tsouck Ibounde said, “Foreign investors still perceive the business environment as relatively difficult, which is why they generally seek to negotiate a favourable tax arrangement to counter the costs involved in doing business in the country.” Continued challenges facing both local and international entrepreneurs include the high cost of labour, misalignments of the workforce with the needs of the market and relatively rigid labour regulations that do not take into account the different staffing requirements of different sectors. Interest rates on business loans are high, sometimes up to 25%, and access to credit generally remains limited, especially for local actors.

New extractive codes for the hydrocarbons and mining sectors are planned, which combined contribute more than half of total government revenues. The establishment of SEZs, which provide both fiscal incentives and turnkey infrastructure for tenants in Nkok, just outside Libreville, and in Mandji Island near the oil and gas hub of Port-Gentil have boosted investment interest in domestic processing industries, in particular for timber and petroleum products. The government is offering SEZ investors a slate of incentives.

“Regulating extractive sectors involves harmonising rules with international norms, but by doing so – as with the hydrocarbons code – the country improves its investment attractiveness,” Dadja Tabo, country director for KPMG, told OBG.

New Agencies

To facilitate inbound investment, particularly in greenfield projects, the government has created two new entities: the Agency for the Promotion of Investment and Exports (Agence de Promotion des Investissements et des Exportations, APIEX), established in 2010, and the High Council for Investment (Haut Conseil pour l’Investissement, HCI), formed in February 2014 and headed by President Ali Bongo Ondimba with the specific mission of supporting private sector growth and ensuring collaboration and dialogue between the public and private sectors.

Rempanot Mepiat told OBG the objective of the new bodies is to ensure that “investors will not just be signing a contract, but rather will be more fully integrated into the Gabonese economy”.

While tax breaks are a big draw for investors, transparency and predictability in the system are also critical to enabling investor engagement. The current system of tax incentives is a discretionary patchwork of agreements, conventions and special exonerations, which many different authorities have the power to grant, resulting in a degree of incoherence that can complicate business in the country. In recognition of the need for more transparency, the government is working with the World Bank on a project to simplify the system of incentives. As Rempanot Mepiat told OBG, “The reforms the government has put in place are beginning to bear fruit, even if all the objectives are not yet achieved. However, the important thing is the trajectory, which is heading in the right direction. Now it remains to focus on putting into place the tools necessary to achieve the objectives.”

In light of the dramatic increase in government spending since 2009, authorities in Gabon have also moved to create a Public Procurement Regulatory Agency (Agence de Régulation des Marchés Publics, ARMP) that will be tasked with overseeing and streamlining procurement. In a region where bidding for public contracts can be a protracted affair, the ARMP is expected to assist the government in setting policy and regulations on public procurement, develop sector training mechanisms, implement independent technical audit procedures, penalise firms that fail to comply with regulation and ensure out-of-court settlement of any disputes arising from public contracts. The agency should have full financial and administrative authority from the state, with its own regulatory board and permanent secretariat.

Eyes On Construction

The establishment of the ARMP is part of a broader effort to bring clarity and rigour to the construction sector, particularly when it comes to investments in national infrastructure. In 2010 the government established the ANGT, which helped the state to create an overarching infrastructure development plan and oversees major building projects. The ARMP is expected to streamline the procurement process and alleviate some of the difficulties private sector players have experienced with the allocation of public contracts and payment timelines. The volume of contracts for public works highlights the need for more efficient management of the process. Housing construction, for example, while a national priority, has experienced substantial delays in recent years due to bottlenecks. In 2009, the government set a goal of constructing 5000 new units per year for a total of 35,000 homes by 2017, but little progress was seen until 2012.

Developers and construction firms have faced a number of obstacles in this area, particularly with accessing and registering land. In May 2012, the National Agency for Urban Planning, Topographical Works and Land Registry simplified administration for land purchases to facilitate new building projects, once the system is fully implemented.

Workforce

Labour shortages remain an impediment to private sector growth in Gabon. Even though youth unemployment is high, with a rate of 30%, in part as a result of the low labour intensity in the hydrocarbons sector, companies still face difficulty finding staff due to a lack of technical competency. The mismatch between the skills of the workforce and the needs of the economy affects all sectors, but particularly those targeted for industrialisation, such as manufacturing, forestry, and mining. The forestry sector currently absorbs a majority of the workforce, but most forestry workers are trained in harvesting, rather than processing, activities.

Immigrant workers are also numerous, particularly in the informal sector, with most hailing from other Central and West African countries. While free movement of people across national borders within the CEMAC regional community exists in principle, implementation of the policy has yet to be fully realised. Gabonese labour laws dictate a local hiring quota of nine Gabonese for each expatriate employee, though flexibility regarding local content laws is a common incentive offered by the government to attract foreign companies to the more lucrative sectors such as oil and gas. However, the principal weakness of the local workforce quota is that it does not discriminate between sectors, and therefore does not allow flexibility for industries where it is warranted, such as in newer domestic processing and those where local technical expertise will take some time to develop.

Public and private initiatives have been launched to improve vocational training, including the Oil and Gas Institute, and the Mining School of Moanda, which is expected to open in 2015.

Outlook

Gabon’s medium-term prospects for growth and economic diversification are strong, though the government will need to resolve its cash flow issues to sustain the current development trajectory. Expansion of the forestry sector, with an emphasis on domestic processing, has potential to catalyse a more inclusive growth pattern, while the mining sector shows promise for boosting revenues through raw exports. Overcoming the skills deficit of the workforce, with the establishment of vocational schools, and regional integration will diversify the labour pool and boost growth of domestic industries.