EQUATORIAL GUINEA COUNTRY ECONOMIC MEMORANDUM DECEMBER 2024 EQUATORIAL GUINEA Building the Foundations for Renewed, More Diversified and Inclusive Growth EQUATORIAL GUINEA COUNTRY ECONOMIC MEMORANDUM DECEMBER 2024 EQUATORIAL GUINEA Building the Foundations for Renewed, More Diversified and Inclusive Growth © 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. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution: Please cite the work as follows: World Bank. 2024. Equatorial Guinea Country Economic Memorandum: Building the Foundations for Renewed, More Diversified and Inclusive Growth, Washington, DC: The 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 Acknowledgements The Equatorial Guinea Country Economic Memorandum (CEM) was prepared by a team led by Djeneba Doumbia (Economist) under the overall guidance of Cheick Fantamady Kante (Country Director), Abebe Adugna (Regional Director), Abdoulaye Seck (Country Director), Aissatou Diallo (Resident Representative), Sandeep Mahajan (Practice Manager), Robert Utz (Lead Economist), Clelia Rontoyanni (Program Leader), and Raju Singh (Lead Economist). Other members of the team include Alessandra Heinemann (Senior Social Protection Specialist), Alex Ciborowska (Consultant), Alex Pio (Consultant), Anthony Patrick Mavrogiannis (Temporary), Camila Mejia Giraldo (Senior Digital Development Specialist), Chris Belmert Milindi Katindi (Extended Term Consultant), Christian De la Medina Soto (Private Sector Development Specialist), Dukken Gaphi Ossouna (Consultant), Fabienne Mroczka (Senior Public Sector Specialist), Federico Ivan Fiuratti (Temporary), George Henry Stirrett (Environmental Specialist), Ivan Gonzalez Berenguer Pena (Consultant), Joana Monteiro Da Mota (Former Extended Term Consultant), Jules Dumas Nguebou (Consultant), Karlygash Dairabayeva (Consultant), Luis Camilo Osorio Florez (Health Specialist), Martin Elias De Simone (Education Specialist), Olga Guerrero Horas (Health Specialist), Priyanka Pandey (Consultant), Silvia Muzi (Senior Economist), Sonia Barbara Ondo Ndong (Economist), and Tania Begazo Gomez (Senior Economist). The extended team comprises Santiago Ntutumu Eko Angono (Consultant) and Natalia Leonor Campora (Consultant). Maria Claudia Pachon, Paula Maria Cerutti (Senior Economist) and Chimene Fouthe (Consultant) provided inputs at early stages of the report preparation. The team also benefited from feedback from Jose Signoret, Utz Johann Pape, and Chadi Bou Habib at different stages of the report preparation. The team thanks Pinar Baydar (Operation Analyst), Irene Sitienei (Program Assistant), Ifeoma Clementina Ikenye (Program Assistant), and Suhair Murad Al-Zubairi (Program Assistant) for their support. The team would like to thank Philip English (Consultant) for his editorial support. The team is thankful to the peer reviewers Arvind Nair, Jose Luis Diaz Sanchez, Steve Loris Gui- Diby and Erik von Uexkull for their contributions. The team would like to thank the Equatoguinean authorities for their collaboration in the preparation of this report. Consultations on specific chapters were held during the preparation of the CEM. Initial CEM discussions with the authorities were held in Malabo (Equatorial Guinea) in February 2023, followed by several virtual discussions on specific areas of the report. Preliminary results were discussed with the authorities, including the Minister delegate of State Treasury and Patrimony (World Bank Governor), the former Minister of Planning and Economic Diversification (former World Bank Governor), other government counterparts, private sector actors, and donors and presented at workshops in Malabo and Bata (Equatorial Guinea) between February 28 and March 4, 2024, and virtually on March 20, 2024. The team also gratefully acknowledges the authorities’ feedback on the draft report received in September and October 2024. Report design, layout & graphics: Kane Chong Cover image source: © istockphoto.com/alarico Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 3 Table of Contents Table of Contents Acknowledgments 3 List of Figures 7 List of Tables 10 List of Boxes 11 Abbreviations and Acronyms 12 Executive Summary 15 Overview 15 Key Findings and Conclusions 22 Summary of Recommendations 28 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth 31 1.1 Understanding Equatorial Guinea’s drivers of past growth 32 1.2 Diversifying the asset portfolio to promote greener and sustained economic growth 44 1.2.1 Natural resources 46 1.2.2 Physical and human capital 54 1.2.3 Institutions 57 1.3 Boosting long-term growth 60 1.3.1 Baseline projections of GDP growth 60 1.3.2 Reform scenarios: non-oil TFP growth, human capital, investment, and female labor participation 61 1.3.3 Reform packages, climate scenario, and oil and gas discoveries scenario 63 1.3.4 How can Equatorial Guinea reinvigorate and sustain more diversified growth over the long-run? 66 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 69 2.1 Enhancing fiscal sustainability in the presence of commodity price volatility to support economic growth 70 2.1.1 Fiscal policy as a tool for supporting economic growth and macroeconomic stability 70 2.1.2 Understanding fiscal challenges associated with resource volatility 71 2.1.3 Fiscal rules and sovereign wealth funds can mitigate commodity price volatility 75 2.1.4 Policy options to build fiscal buffers and manage oil price volatility risks 78 2.2 Strengthening domestic revenue mobilization 79 2.2.1 Analyzing Equatorial Guinea’s revenue performance 79 2.2.2 Challenges in improving domestic revenue mobilization in Equatorial Guinea 83 2.2.3 Policy recommendations 88 4 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Table of Contents 2.3 Improving public expenditure efficiency and investment management 90 2.3.1 Enhanced public expenditure efficiency matters for economic growth 90 2.3.2 Public expenditure dynamics and spending efficiency 90 2.3.3 Enhancing public investment management 93 2.3.4 Improving fiscal transparency 97 2.3.5 Policy recommendations 99 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 103 3.1 Human capital development is key for long-term economic growth 104 3.2 More and better education to boost human capital 108 3.2.1 Context and overview of the education system in Equatorial Guinea 108 3.2.2 Education outcomes 110 3.2.3 Policy recommendations 116 3.3 Protecting human capital by investing in health 119 3.3.1 Overview of the health system and sector 119 3.3.2 Equatorial Guinea’s Health Outcomes 122 3.3.3 Policy recommendations 124 3.4 Social protection as a key element for human capital accumulation 126 3.4.1 Social protection in Equatorial Guinea 128 3.4.2 Policy recommendations 134 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth 137 4.1 Why an enabling business environment and competition matter for economic growth, diversification, and private investment 138 4.2 The current business environment in Equatorial Guinea 142 4.3 Enabling factors to foster private sector growth 145 4.3.1 Legal uncertainty is a significant constraint to economic development and business growth 145 4.3.2 Land titling and limited access to credit represent an important challenge to private sector development 147 4.3.3 Low levels of digitalization of public services hampers private sector development 148 4.3.4 Addressing gender gaps in regulations can foster private-sector led and inclusive growth 150 4.4 Removing barriers to entry and attracting investment 152 4.4.1 Barriers to business entry hinders the establishment and growth of new businesses 152 4.4.2 An Investment Promotion Agency can be a catalyst for a country’s investor appeal 153 4.5 Shaping government interventions to promote well-functioning markets 155 4.5.1 The Equatoguinean government must set the rules by which private firms operate to ensure well-functioning markets 155 4.5.2 As an important market participant, Government interventions can strengthen or undermine private sector activities 158 4.6 Policy recommendations to boost private sector development and investment 167 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 5 Table of Contents CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy 173 5.1 Enhancing digitalization to promote productivity growth and economic transformation 174 5.1.1 Why digitalization matters for Equatorial Guinea’s productivity and economic transformation 174 5.1.2 Equatorial Guinea’s digital economy ecosystem 176 5.1.3 Policy recommendations 187 5.2 Promoting trade integration and facilitation 191 5.2.1 Why trade matters for economic growth and diversification 191 5.2.2 Trade dynamics and outcomes 192 5.2.3 Enhancing trade policy and integration 198 5.2.4 Improving trade facilitation and connectivity 201 5.2.5 Policy recommendations 206 5.3 Removing barriers to ecotourism growth in Equatorial Guinea for a more diversified growth 208 5.3.1 Ecotourism impact and government objectives 208 5.3.2 Key constraints to demand 212 5.3.3 Key constraints to supply 213 5.3.4 Strategic considerations and recommendations 214 Annex 216 Annex 1 217 Annex 2 218 Annex 3 222 Annex 4 223 Annex 5 224 References 226 6 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Table of Contents List of Figures Figure ES1 Equatorial Guinea’s income per capita 16 Figure ES2 Equatorial Guinea – Sectoral share of GDP and employment share by sector 16 Figure ES3 Equatorial Guinea’s wealth – natural, physical, and human capital, and institutions 18 Figure ES4 Transitioning towards an economy that is less reliant on the hydrocarbon sector 19 Figure ES5 Analytical outline and structure of the CEM 21 Figure 1 Equatorial Guinea’s income per capita has been on a declining trend over the recent 32 years Figure 2 Increases in per capita income during the last commodity boom have been eroded 34 Figure 3 Equatorial Guinea’s post-oil boom economic growth has been well below that of regional 35 peers Figure 4 The decline of the largest driver of economic growth the hydrocarbon sector explains 37 Equatorial Guinea’s long cycle of recessions Figure 5 While labor productivity decreased, industry remains the most productive sector; 38 however it provides limited employment opportunities Figure 6 Declining TFP growth has dragged down economic growth 39 Figure 7 Lower exports and investments, which are highly concentrated in the hydrocarbon 39 industry, have been the main contributors to Equatorial Guinea’s negative growth in the recent years Figure 8 Real and nominal effective exchange rates in Equatorial Guinea, 2000-2023 41 Figure 9 Structure of wealth accounts 45 Figure 10 Equatorial Guinea is the richest country in natural capital per capita in SSA 46 Figure 11 Non-renewable resources constitute the largest share of the country’s natural resources 47 Figure 12 Equatorial Guinea is the fifth largest producer of oil in SSA 47 Figure 13 FDI in Equatorial Guinea, highly concentrated in the oil sector during the early 2000s, 48 has dropped significantly since the end of the oil boom Figure 14 The country’s fiscal and external earnings are heavily dependent on the oil sector 49 Figure 15 Physical capital accumulation, in per capita terms, in Equatorial Guinea dropped after 55 the end of the oil boom and remains among the lowest when compared to peers Figure 16 The decline of public capital spending since the end of the oil boom has hampered 56 improvements in infrastructure quality in the country Figure 17 Equatorial Guinea lags peers in terms of enabling institutions 57 Figure 18 Equatorial Guinea’s government effectiveness deteriorated in recent years and 59 perception of corruption remains higher compared to peers Figure 19 Baseline GDP and GDP per capita, annual growth rate, percentage 61 Figure 20 Reforms to growth drivers (LTGM-NR simulation) 62 Figure 21 Real GDP growth and decomposition of incremental GDP growth under different reform 64 scenarios Figure 22 Discoveries and climate scenarios (LTGM-NR simulation) 65 Figure 23 Fiscal policy and economic growth: Main transmission channels 71 Figure 24 The end of the oil boom led to a sharp decline in capital spending 72 Figure 25 Government spending in Equatorial Guinea has been highly pro-cyclical 73 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 7 Table of Contents Figure 26 While still sustainable, the country’s public debt increased considerably following the 74 end of the oil boom Figure 27 Equatorial Guinea’s government revenue depends considerably on the oil sector, which 80 makes the country vulnerable to oil price swings Figure 28 Tax to GDP ratio in Equatorial Guinea is below the SSA and CEMAC averages 81 Figure 29 Taxes collected from companies and individuals operating in the oil sector remain the 82 main sources of tax revenue in Equatorial Guinea Figure 30 While there is no major change in tax structure, the government’s efforts to diversify 82 revenue sources and increase domestic revenue mobilization started to show some results Figure 31 Equatorial Guinea has potential to improve further its domestic revenue mobilization but 83 room for improvement is more limited for VAT Figure 32 Equatorial Guinea performs relatively well on CIT and PIT collection compared to other 84 CEMAC countries Figure 33 The significant size of the informal sector is preventing Equatorial Guinea from potential 86 additional revenues Figure 34 Capital expenditures in Equatorial Guinea decreased significantly after the oil boom 91 period while current expenditures increased; the share of public expenditure in GDP is below that of most peers Figure 35 The budget that was spent, including capital expenditures, deviated significantly from 92 the approved budget in 2021 and 2022 Figure 36 Public spending efficiency has improved in 2018 but remains below that of CEMAC 93 countries, on average Figure 37 With sustained investments during the first phase of the NDP2020, Equatorial Guinea’s 95 public capital stock as a share of GDP is higher compared to peers; however, efficiency remains low Figure 38 Budget transparency in Equatorial Guinea, peers, and world, 2021 98 Figure 39 Human capital and human development outcomes are positively correlated with income 104 per capita Figure 40 Higher quantity and quality of schooling are associated with improved per capita 105 income Figure 41 Cross-country correlation between schooling and health outcomes, 2020 106 Figure 42 Comparable education data in Equatorial Guinea is scarce 109 Figure 43 Equatorial Guinea’s population is mostly young 110 Figure 44 Despite recent progress, Equatorial Guinea’s educational attainment remains low 111 Figure 45 The percentage of students passing high examinations at the end of secondary slowly 112 increased to 25.8 percent in 2021 Figure 46 The percentage of qualified teachers is relatively low, especially for early years of 114 education Figure 47 Government spending in education in Equatorial Guinea remains very low by regional 115 standards Figure 48 Health sector outcomes and spending on health are lower in Equatorial Guinea 123 compared to peers Figure 49 Social protection is critical for achieving human capital accumulation, ensuring its 126 productive use, and its effective protection Figure 50 Spending on social assistance spending as a share of GDP is very low in Equatorial 129 Guinea 8 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Table of Contents Figure 51 Social security coverage in Equatorial Guinea has increased in recent year but remains 131 low with men and workers in the private sector being the most covered Figure 52 Equatorial Guinea’s new social protection law provides an opportunity to establish a 133 flagship cash transfer program as the core building block of the future Social Protection system Figure 53 Channels of impact between competition and economic diversification 139 Figure 54 BTI aggregated market organization indices for Equatorial Guinea, other CEMAC 143 countries and structural and aspirational comparators (2022) Figure 55 EIU indicators of operational risks for Equatorial Guinea, other CEMAC countries and 144 structural and aspirational comparators (2022) Figure 56 Equatorial Guinea and Sub-Saharan Africa’s Performance in Women, Business, and the 151 Law report 2024 Figure 57 How governments shape markets: An analytical framework 155 Figure 58 EIU regulatory quality indicators for Equatorial Guinea, other CEMAC countries and 156 aspirational peers Figure 59 African SEZ policies heavily rely on fiscal incentives (left), but their impacts on 164 employment are limited (right) Figure 60 Digital economy foundations and pillars 176 Figure 61 Equatorial Guinea ranked below peers on the 2022 E-Government Development Index 177 Figure 62 How networks are built 178 Figure 63 Guinea Ecuatorial de Telecomunicaciones SA remains the leading mobile operator in 180 Equatorial Guinea Figure 64 Actors of Equatorial Guinea Digital Businesses ecosystem 185 Figure 65 Trade openness is associated with higher income per capita 191 Figure 66 Despite recording a decrease since the 2000s, Equatorial Guinea’s trade to GDP remains 192 above that of most of CEMAC countries Figure 67 Equatorial Guinea trade dynamics, especially those of exports, are linked to oil 193 production and prices Figure 68 Over the past two decades, the share of hydrocarbons in Equatorial Guinea’s goods 194 exports has decreased Figure 69 Equatorial Guinea has a comparative advantage in exports of minerals and wood and 195 wood articles Figure 70 The European Union and the UK, China, and India constituted Equatorial Guinea’s top 3 196 export destinations in 2021 Figure 71 Growth rates for top exports, Equatorial Guinea and worldwide exporters, 2011-2021 196 Figure 72 Product concentration, goods exports, Equatorial Guinea and peers, 2009-2011 vs. 2019- 197 2021 Figure 73 Equatorial Guinea’s exports, imports, and share of regional trade 199 Figure 74 The CEMAC’s average tariff rate at 18.3 percent is high with 37.1 percent of the tariff lines 200 subject to the 30 percent rate and 45.5 percent subject to the 10 percent rate Figure 75 The trade complementarity between CEMAC countries is limited 201 Figure 76 Equatorial Guinea ranks the lowest among peers in logistics performance 202 Figure 77 Trade costs between Equatorial Guinea and neighboring country Cameroon is higher 203 than with China and the US Figure 78 LSCI is lower in Equatorial Guinea than in neighboring Gabon and Cameroon 203 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 9 Table of Contents Figure 79 Map of key tourism and natural sites of Equatorial Guinea 209 Figure 80 Evolution of the tourism sector in National Accounts (2007-2017) 210 Figure 81 Tourism balance of payments and international tourism arrivals (2013-2022) 210 Figure 82 International arrivals to Equatorial Guinea by purpose of trip (2009-2022) 211 Figure 83 Estimated international passenger and tourism arrivals to Equatorial Guinea (2013-2022) 211 Figure 84 International tourism arrivals to Equatorial Guinea and regional peers (2013-2022) 211 Figure 85 Estimated international air passenger arrivals to Equatorial Guinea and regional peers 211 (2013-2022) List of Tables Table ES1 Summary of Recommendations 28 Table 1 Quantity of infrastructure, Equatorial Guinea and peers, latest data available 55 Table 2 Policy recommendations for oil volatility management and to build fiscal buffers 78 Table 3 Tax and customs exemptions granted by category, Billion CFAF 85 Table 4 Policy recommendations to improve domestic revenue mobilization 88 Table 5 Policy recommendations to enhance spending efficiency and public investment 100 management Table 6 Policy recommendations: More and better education to boost human capital 118 Table 7 Strategic priorities and programs under the PNDS 2021-2025 120 Table 8 Policy recommendations: Protecting human capital by investing in the health sector 125 Table 9 Policy recommendations: Improving social protection 135 Table 10 Distortions of different state support instruments 162 Table 11 The four Dos and four Don’ts of SEZ 164 Table 12 Recommendations to promote competition, private entry, and investment 170 Table 13 Policy recommendations: Digital infrastructure 187 Table 14 Policy recommendations: Digital skills 188 Table 15 Policy recommendations: Digital businesses 189 Table 16 Policy recommendations: Promoting trade integration and facilitation 206 Table 17 Estimated occupied scheduled aviation seats, international versus domestic (percent) 213 Table 18 Sequencing of key initiatives for ecotourism development 215 10 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Table of Contents List of Boxes Box 1 Better statistics and data provision will improve economic monitoring and evidence-based 33 policy design Box 2 The COVID-19 pandemic, the Bata explosions and, more recently, Russia’s invasion of 36 Ukraine were consecutive setbacks to Equatorial Guinea’s economic growth Box 3 Does Equatorial Guinea suffer from the natural resource curse and Dutch disease? 40 Box 4 Government’s national strategy for sustainable development 43 Box 5 Wealth measurement and diversified development framework 45 Box 6 Examples of Sovereign Wealth Funds for resource-exporting countries 77 Box 7 Integrating climate change into public financial management in Equatorial Guinea 96 Box 8 COVID-19 and education in Equatorial Guinea 113 Box 9 What is social protection? 127 Box 10 An enabling business environment with well-functioning markets is critical for the 141 development of the priority sectors identified in the Equatorial Guinea Economic Diversification Initiative Box 11 Financial inclusion assessment in Equatorial Guinea 149 Box 12 The Costa Rican Investment Promotion Agency, known as CINDE (Coalición Costarricense 154 de Iniciativas de Desarrollo), has played a crucial role in attracting investment to the country Box 13 Good practices in the preparation of PPP 161 Box 14 Design of business support measures 162 Box 15 Implementation of EIPs in Morocco and Ethiopia 165 Box 16 Singapore has boosted its private sector through the creation of a strong institutional 168 mechanism that supports business environment reforms; sustains reform implementation and shapes public official’s incentives Box 17 TEG Campus Malabo 2022 – TEG Planet Edition 183 Box 18 Digital trade in Africa 205 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 11 Table of Contents Abbreviations and Acronyms ADIA Abu Dhabi Investment Authority GCF Green Climate Fund AfCFTA African Continental Free Trade Area GDP Gross Domestic Product AfDB African Development Bank Group GHG Greenhouse Gas Emissions AGENDA Equatorial Guinea’s National Sustainable GITGE Telecommunications Infrastructure Manager 2035 Development Strategy for 2021-2035 of Equatorial Guinea AIDI Africa Infrastructure Development Index GIZ German Agency for International Cooperation ASPIRE Atlas of Social Protection Indicators of Resilience and Equity GNI Gross National Income ASYCUDA Automated System for Customs Data GPFG Government Pension Fund Global BEAC Bank of Central African States GSMA Global System for Mobile Communications BOE Boletín Oficial del Estado, Official Gazette of HCI Human Capital Index Equatorial Guinea HDI Human Development Index BP British Petroleum HIV Human Immunodeficiency Virus BTI Bertelsmann Transformation Index ICT Information and Communication Technology CEM Country Economic Memorandum IFC International Finance Corporation CEMAC Central African Economic and Monetary IHR International Health Regulation Community IIASA International Institute for Applied Systems CET Common External Tariff Analysis COBAC Central African Banking Commission ILO International Labor Organization CWON Changing Wealth of Nations IMF International Monetary Fund DE4A Digital Economy for Africa INAP National Institute of Public Administration DMFAS Debt Management and Financial Analysis INEGE National Institute of Statistics – Equatorial System Guinea DHS Demographic and Health Survey INPYDE Investment fund of the National Institute of DRM Domestic Revenue Mobilization Promotion and Development ECCAS Economic Community of Central African INSESO Institute of Social Security States IPA Investment Promotion Agency ECOWAS Economic Community of West African States IPCC Intergovernmental Panel on Climate Change EFF Extended Fund Facility ITU International Telecommunication Union EGDI E-Government Development Index KIA Kuwait Investment Authority EIP Eco-industrial park LNG Liquid Natural Gas EITI Extractive Industries Transparency Initiative LPI Logistics Performance Index EMEG Entrepreneurs Association of Equatorial LTGM Long-Term Growth Model Guinea MFTR Memorandum on Foreign Trade Regime ESG Environmental, Social, and Governance MICS Multiple Indicator Cluster Surveys EU European Union MINASIG Ministry of Social Affairs and Gender FAO Food and Agriculture Organization of the Equality United Nations MPO Macro Poverty Outlook FDI Foreign Direct Investment MSMEs Micro, Small, and Medium Enterprises FHI Family Health International MTBF Medium-Term Budgetary Framework FLFP Female Labor Force Participation FSPs Financial Service Providers 12 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Table of Contents MTCT Ministry of Transport, Post and New SEZ Special Economic Zone Information and Communications SINPIP National Public Investment Programming Technologies System MVD Marburg Virus Disease SMEs Small and Medium Enterprises NAPHS National Action Plan for Health Security SMP Staff Monitored Program NCR New Convergence Rules SOEs State-owned Enterprises NDCs Nationally Determined Contributions SPAR States Parties Self-Assessment Annual ND-GAIN Notre Dame Global Adaptation Index Report NDP National Development Plan SSA Sub-Saharan Africa NGOs Non-governmental Organizations STEM Science, Technology, Engineering, and Mathematics NIIP Net International Investment Position SWFs Sovereign Wealth Funds NTMs Non-Tariff Measures TFP Total Factor Productivity OAG Official Airline Guide TSA Treasury Single Account OAPI African Organization of Intellectual Property TVET Technical and Vocational Education and OBI Open Budget Index Training OBS Open Budget Survey UMIC Upper-Middle Income Countries OEC Observatory of Economic Complexity UN United Nations OECD Organization for Economic Cooperation and UNCTAD United Nations Conference on Trade and Development Development OHADA Organization for the Harmonization of UNDP United Nations Development Programme Business Law in Africa UNESCO United Nations Educational, Scientific and ONCC National Agency for Climate Change Cultural Organization ORTEL Oficina Reguladora de Telecomunicaciones UNICEF United Nations International Children’s en Guinea Ecuatorial, Telecommunications Emergency Fund regulator in Equatorial Guinea UNIDO United Nations Industrial Development PANA National Action Plan for Adaptation Organization PFM Public Financial Management UPI Unique Project Identifier PIF Public Investment Fund WAEMU West African Economic and Monetary Union PIM Public Investment Management WBG World Bank Group PIP Public Investment Program WCO World Customs Organization PNDS National Health Development Plan WDI World Development Indicators PPP Public Private Partnership WEF World Environment Fund PREF Programme des Réformes Economiques et WGI Worldwide Governance indicators Financières WHO World Health Organization PSG Public Social Guarantees WITS World Integrated Trade Solution REDD Reduce Emissions from Deforestation and forest Degradation WTO World Trade Organization REER Real Effective Exchange Rate RGI Resource Governance Index RUS Registro Único Social, Unique Social Registry SDGs Sustainable Development Goals Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 13 © Imago/alamy.com 14 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Executive Summary Overview There is an urgent need for Equatorial Guinea to adopt a new development model and better leverage the remaining hydrocarbon resources to unlock alternative sources of growth Without strong reforms, per capita income is projected to continue falling for decades to come. Under the baseline scenario, which assumes a progressive decline in hydrocarbon reserves and the absence of future shocks or major economic reforms, Equatorial Guinea is projected to remain in recession with per capita income decreasing by more than half by 2050. As a result, fiscal space for much needed expenditures for development will diminish. While the Government has planned projects to develop the hydrocarbon sector with a focus on the gas sector, these projects are not expected to compensate for the decline in oil production amid maturing fields. Equatorial Guinea is at a crossroads and the Government must urgently leverage the remaining hydrocarbon resources to diversify the economy. Equatorial Guinea’s natural resource abundance has propelled the country into the exclusive group of African upper-middle income nations. However, as oil reserves dwindle, finding alternative sources of growth has become a top priority. This report proposes elements of a strategy that would help counter the country’s economic decline and enable Equatorial Guinea to embark on a new growth trajectory that is sustainable and inclusive – This report grounded in the development of human capital, an enabling environment proposes elements for private sector activities, and strengthened institutions and governance. of a strategy that The government has initiated reforms in all three areas; the challenge is to deepen and sustain the reform agenda. would help counter Equatorial Guinea's The secular decline of Equatorial Guinea’s hydrocarbon revenues, economic decline combined with past shortfalls in diversifying the economy, has resulted in and enable the a prolonged recession, reversed notable economic gains, and jeopardizes country to embark social progress. The discovery of large oil reserves in the 1990s made on a new growth Equatorial Guinea the third-largest oil producer in Sub-Saharan Africa (SSA), and one of its fastest-growing economies. Between 1996 and 2004, trajectory that is annual per capita GDP growth averaged 40 percent with Equatorial Guinea sustainable and reaching Upper-Middle Income status in 2004 (Figure ES1a). However, inclusive. growth has faded since 2014, and per capita income has fallen by over 60 percent from its peak in 2008 (Figure ES1b). The economy has suffered six years of economic contraction since 2015 which, combined with the impact of the COVID-19 pandemic, has likely curtailed progress in shared prosperity and poverty reduction for the country’s estimated population of 1.6 million. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 15 Executive Summary FIGURE ES1 Equatorial Guinea’s income per capita a. GNI per capita (current US$), Equatorial Guinea, 1989-2023 b. GDP per capita (constant 2015 US$), Equatorial Guinea and Peers, 1990-2023 14000 16000 12000 14000 12000 10000 10000 8000 8000 6000 6000 4000 4000 2000 2000 0 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 GNI per capita - Atlas method (current US$) Equatorial Guinea Upper middle income (Lower Threshold) Structural Peers Upper middle income (Upper Threshold) CEMAC Source: World Development Indicators, Equatoguinean authorities, and World Bank staff calculations Note: The performance of Equatorial Guinea is benchmarked to other countries, structural and aspirational peers. Structural peers were identified using a data- driven approach and include Azerbaijan, Congo, Rep., Gabon, and Timor-Leste. CEMAC shows the average GDP per capita for Central African Economic and Monetary Community members. At present, the hydrocarbon sector still dominates the Equatoguinean economy, and progress towards diversification has been slow. The hydrocarbon sector represents 32 percent of GDP, 76 percent of total exports, and about 86 percent of government revenues, but provides few job opportunities (Figure ES2). On the other hand, agriculture, forestry, and fishing remain underdeveloped. The production of cash crops, primarily cocoa and coffee, was largely abandoned following independence, relegating most rural activity to subsistence agriculture. The industrial sector (excluding extractive activities and petroleum refining) is dominated by small- scale manufacturing (including textiles and leather) and construction, which has lost dynamism due to the government’s sizeable arrears to construction contractors. The services sector (including public administration and public services, trade, transport, finance and communication) has been growing in recent years but remains concentrated on low-value-added services. FIGURE ES2 Equatorial Guinea – Sectoral share of GDP and employment share by sector a. Sectoral share of GDP, in percent, 2007-2023 b. Employment share by sector, in percent, 2000-2021 100 100 90 80 80 70 60 60 50 40 30 40 20 10 20 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 0 2000 2005 2010 2015 2021 Services Industry, extractive Industry, other Agriculture, forestry, and shing Agriculture Industry Services Source: WDI, ILO and World Bank staff calculations Note: Industry, extractive includes extractive activities and petroleum products refining; industry, other includes manufacturing, electricity, gas, and water supply, and construction. 16 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Executive Summary © Jon Rosenthal/alamy.com The current state- and oil-driven model needs to change if Equatorial Guinea is to lay the foundations for private sector-led growth and economic diversification. Non-hydrocarbon economic activities are being constrained by several interrelated factors. These include (a) economic distortions created by the dominance of the hydrocarbon sector, (b) an unbalanced national portfolio of assets short of human capital, (c) an unattractive business climate, and (d) a weak institutional environment. Economic distortions created by the dominance of the hydrocarbon sector, generally known as ‘Dutch disease ’and ‘resource curse’, are amply manifested in Equatorial Guinea. These include i) an overvalued exchange rate which renders other exports, and import substitutes, less competitive, ii) a ‘resource movement effect’ whereby capital and labor shift towards the booming export sector to the detriment of other sectors, iii) macro-economic volatility due to resource cycles and shocks, and iv) state dominance in the economy, where resource rents help sustain a relatively large public sector, including state-owned enterprises (SOEs), government spending, and significant subsidies and transfers. As a result, Equatorial Guinea’s private sector, aside from a small number of large companies in the extractive industries, is still in its infancy, mostly informal, and highly dependent on demand from the public and hydrocarbon sectors. Converting natural resource rents into a balanced portfolio of physical and human capital will create the basis for economic growth and inclusive development. A country’s wealth consists of natural, physical, human, social, and institutional capital. To prevent a nation’s wealth from depletion, its non-renewable natural resources must be converted into a balanced portfolio of physical, human, and institutional capital. To date, Equatorial Guinea has used resource rents primarily to invest in large infrastructure projects to create physical capital which, despite significant inefficiencies in public investment management, has grown significantly over the past two decades. However, as these investments in physical capital were not matched by improvements in Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 17 Executive Summary the business environment for private investors, much of it remains underused. In contrast, the increase in public spending following the rise of the oil sector has not translated into significant progress in human development outcomes and the quality of institutions remains poor. Figure ES3 shows Equatorial Guinea’s assets. FIGURE ES3 Equatorial Guinea’s wealth – natural, physical, and human capital, and institutions a. Top 10 Sub-Saharan countries in terms of natural capital per b. Produced capital per capita (in constant 2018 US dollars), capita (in constant 2018 US dollars), 2018 Equatorial Guinea and peers, 2018 300000 Equatorial Guinea 250000 Gabon 200000 150000 Congo, Rep. 100000 Angola 50000 0 Seychelles Equatorial Guinea Azerbaijan Congo, Rep. Gabon Malaysia Oman Kuwait Bahrain United Arab Emirates Qatar Botswana Zambia Namibia Structural Aspirational peers Eswatini peers South Africa Produced capital per capita Structural peers, average 0 10000 20000 30000 40000 Aspirational peers, average c. Human Development Index (HDI) ranking, Equatorial Guinea d. Worldwide Governance Indicators, Equatorial Guinea and and peers, 2022* peers, percentile rank (0 (lowest) to 100 (highest), 2022 160 80 133rd out 140 of 193 70 60 120 50 100 40 80 30 60 20 10 40 0 20 Control of Corruption Political Stability** Government Effectiveness Regulatory Quality Rule of Law Voice and Accountability 0 Bahrain Qatar Kuwait Aspirational peers Oman UMIC Structural peers Equatorial Guinea Equatorial Guinea Structural peers Aspirational peers Source: Changing Wealth of Nations (World Bank), UNDP Human Development Reports, Worldwide Governance Indicators (World Bank). Note: Natural capital comprises nonrenewable assets, including fossil fuel energy and minerals, and renewable assets, including agricultural land, forests, mangroves, fisheries, and protected areas. Structural peers include Azerbaijan, Congo, Rep., Gabon, and Timor-Leste. Aspirational peers include Bahrain, Kuwait, Oman, and Qatar. Produced capital is defined as the value of machinery, buildings, equipment, and residential and nonresidential urban land. For HDI ranking, the lower the number the better human development indicators in the country. UMIC = average for Upper-Middle Income Countries. *The back-to-the-envelope calculations using the newly completed II Equatorial Guinea household survey (2022-2023) indicate a higher HDI ranking for Equatorial Guinea (127th vs. 133rd in HDR). In comparison, Gabon and Congo rank 123rd and 149 th on the HDI, respectively. **Political stability and absence of violence. Renewable resources like agricultural land, fisheries, and forests also need to be better utilized while ensuring their sustainability. Dependence on oil and gas has led to neglect of these traditional sources of wealth, yet in the long run they are more viable. They also remain the primary source of income for the majority of the population and most of the poor. Ample land, rich volcanic soil and plentiful rainfall hold the promise of significant agricultural potential, both for import substitution and exports. The country’s exclusive maritime 18 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Executive Summary fishing zone is comparable in size to that of the Philippines, with a large variety of marine species. Forests cover 87 percent of the land, and prior to the discovery of oil they contributed 20 percent of GDP. However, forests are being degraded, largely due to the expansion of subsistence agriculture, so the two sectors need to be managed in a coordinated and sustainable manner. Gabon’s experience with a ban on log exports to promote domestic value-added suggests a way forward. While the management of renewable resources is not the primary focus of this report, a few suggestions are offered. Equatorial Guinea’s institutions are weak and do not reflect the country’s income level. The quality of governance and institutions is important to enable resource-rich countries to reap the full benefits of their natural wealth. It determines how effectively natural resources are converted into human and physical capital, the quality of public service delivery, how level the playing field is for companies, and whether opportunities can be provided for both individuals and firms. Yet Equatorial Guinea ranks in the very low percentiles on most Worldwide Governance indicators. The gap with peers is particularly large in key governance dimensions that support economic growth, including regulatory quality, control of corruption, and government effectiveness. With a shrinking hydrocarbon sector, government revenue that currently originates primarily from that sector is set to decline, requiring major reforms and adjustments to improve fiscal management including through strong institutions. Adequate domestic revenue mobilization in both the hydrocarbon and non- hydrocarbon sectors, a gradual diversification of revenue sources, and efficient management of resources are essential for expanding Equatorial Guinea’s ability to finance its development goals and promote sustained and inclusive growth. Enhancing the allocative and operational efficiency of public spending will be key to obtaining better outcomes from a declining resource envelope. Prioritizing the social sectors in resource allocation will be critical to achieve the much-needed diversification of assets. A more favorable business environment is needed to promote resilient, private sector-led economic growth. Equatorial Guinea lags, on average, Central African Economic and Monetary Community members (CEMAC) and SSA on indicators related to the business environment. Its scores on the Worldwide Governance Indicators are below the CEMAC average and show little sign of improvement. The country ranks worst in CEMAC on the Bertelsmann Transformation Index (BTI) which measures the extent to which conditions exist for stable, market-based competition. Moreover, businesses face high levels of operational risks stemming from weak market regulation, according to the Economic Intelligence Unit. Reversing the downward trend in income per capita will require building the foundations for private sector-led growth by fostering a strong business environment, reducing entry barriers, and promoting healthy competition (Figure ES4). FIGURE ES4 Transitioning towards an economy that is less reliant on the hydrocarbon sector Balanced Asset Base Strengthened Enabling Environment for Institutions Private Sector Activities Source: Authors elaboration Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 19 Executive Summary The government’s National Strategy for Sustainable Development 2035 and Economic Diversification Initiative aim to launch the transition to a diversified economy The National Sustainable Development Strategy for 2021-2035 (AGENDA 2035), adopted in April 2021, aspires to achieve structural transformation and promote industrialization and productivity to reduce poverty and increase social inclusion in a sustainable manner. The economic diversification strategy focuses on export promotion and import substitution. AGENDA 2035 considers a series of fundamental AGENDA 2035 reforms including in institutions (in the public administration and the considers a series judicial system), social sectors (in education, health and social protection), of fundamental macroeconomic planning and management (including the national reforms including statistical system), and in the business environment and market competition in institutions, to support private sector and financial sector development. In 2023, the authorities adopted an interim plan, the Economic Diversification Initiative, social sectors, with a focus on short-term reforms that can advance the objectives of macroeconomic AGENDA 2035. The interim plan is focused on five priority sectors namely, planning and the ‘blue economy’ (marine resources), the ‘green economy’ (environment, management, and agriculture, and forestry), the ‘yellow economy’ (energy), the digital in the business economy, and the tourism sector, alongside enabling policies focused on environment and attracting investment, building human capital, and improving governance. In February 2024, the authorities highlighted their commitments to improve market competition the sustainability of the Equatoguinean economy and public finances for the to support private period 2024-2028 in a Presidential Decree (no. 009/2024). The decree sets sector and out reforms in two complementary and reinforcing policy areas, namely financial sector (a) fiscal consolidation to eliminate the structural fiscal deficit and reduce development. the non-oil primary deficit, and (b) implementation of structural reforms to promote the “reactivation” of the economy. Some of the necessary reforms have begun. The Government’s plan to monitor the national development strategy in 2025 in order to take stock of the goals that have been achieved and revise the plan for the next years is critical. The focus of this Country Economic Memorandum (CEM) is to review key policy and reform options for Equatorial Guinea to build the foundations for renewed, diversified, and more inclusive growth. The CEM thus aims to contribute to the government’s economic development and diversification agendas, based on the Diversified Development Analytical Framework of the World Bank’s flagship report “Diversified Development” (Gill et al., 2014). The report argues that countries should focus on converting natural resources into other forms of wealth, investing in a better balance between natural resources, physical capital, human capital, and institutions (or intangible capital) (see Figure ES5). Human capital is fundamental for a thriving and productive economy but requires effective provision of public services, including health, education, and social protection. Physical capital, both in terms of coverage and quality of infrastructure in strategic sectors such as energy and transport, is key to supporting private sector development and boosting trade. Both require efficient use of public finances to support the large recurrent costs of the social sectors, and prudent investments in schools, health facilities, and physical infrastructure. Effective institutions are key to helping resource-dependent countries escape the resource curse. Botswana and Chile are success stories thanks to sound economic policies, managing resource wealth and breaking the cycle of pro-cyclical fiscal policies. The government needs a strong private sector partner to provide the necessary tax base and bring its own resources and expertise to supplement public initiatives in a fiscally constrained environment. 20 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Executive Summary The analysis in this CEM is divided into five chapters. The first one examines the drivers of past growth, and the country’s asset portfolio, and discusses possible long-term growth trajectories. The second chapter examines fiscal policy as the main instrument for efficient transformation of natural capital into physical and human capital, and outlines the fiscal challenges associated with the reliance on the volatile oil and gas markets. It identifies the key gaps in public financial management, including the challenges posed by climate change and provides reform options for implementing an effective fiscal policy. The third chapter explores the present state of education, health, and social protection and discusses priority options to boost human capital. The fourth chapter then turns to the private sector and the main cross-cutting issues that need to be addressed to encourage higher investment, innovation, and productivity. The final chapter drills down into some key sectors which are likely to play a prominent role in any new growth strategy. These include digitalization in both the public and private sectors, and integration into the world economy through trade and ecotourism. FIGURE ES5 Analytical outline and structure of the CEM THEMATIC CHAPTERS 1 Diversifying assets for sustained growth PHYSICAL CAPITAL NATURAL GENERATED CAPITAL CAPITAL HUMAN CAPITAL INSTITUTIONS 2 Fiscal policy 3 Human capital Business environment and ECONOMIC 4 competitive markets GROWTH Digitalization, trade, 5 and ecotourism Source: Authors elaboration, updating World Bank (2023) Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 21 Executive Summary Key Findings and Conclusions 1 Effective institutions are needed to reduce macroeconomic vulnerabilities, mobilize new revenues and better manage existing resources Fiscal policy is the main lever for macroeconomic management of the Equatoguinean economy, given the limited role of monetary policy. It includes tax policy and administration, expenditure policy, public spending and investment management, and fiscal institutions. The first role of fiscal policy is to ensure macroeconomic stability, helping to smooth out shocks, both negative and positive, and thereby maintain steady and predictable economic management. Fiscal policy is also critical in promoting economic growth and diversification by creating room to increase physical and human capital. Equatorial Guinea has enjoyed exceptional revenues thanks to an oil and gas boom, but it has also suffered exceptional fiscal instability thereafter. Without adequate buffers, the decline in prices and production of oil and gas has led to major cuts in public investment, growing arrears with private sector suppliers, and increasing debt to preserve past spending levels. Fiscal policy has tended to be procyclical, aggravating rather than mitigating shocks. Fiscal rules are needed to ensure fiscal discipline, credibility, and debt sustainability. Such rules have been adopted by CEMAC, but they are yet to be implemented in Equatorial Guinea. Establishing a Sovereign Wealth Fund (SWF) could help manage windfall gains and support the diversification of the economy through strategic investment. The creation of the Future Generations Fund in 2002 was a promising start, but it lacked the transparency and accountability necessary to achieve its goals. As per the Presidential Decree (no. 009/2024), the Government plans to create another SWF with the objective of promoting economic diversification and supporting public investment. A separate stabilization fund, focused more on smoothing the budget cycle, could also be useful. Public revenues have been overly dependent on oil and gas, which have accounted for around 80 percent of total revenues even after the boom. Non-oil government revenue amounts to only 3.2 percent of GDP, one of the lowest revenue ratios in the world. This is explained by inefficient tax policy, weak tax administration, a large informal sector, and a small formal private sector also heavily dependent on the health of the hydrocarbon economy. With a tax-to-GDP ratio lower than the SSA average, more efforts are needed to improve domestic revenue mobilization in Equatorial Guinea, especially in the non-oil sector, by strengthening tax administration and policy. Customs and tax revenues are below their potential due to poor recording of trade flows and numerous exemptions. There is room to raise excise tax revenue, following the example of Cameroon. The property tax is hard to collect due to the lack of a solid and regularly updated property register. Increased use of information technology and improved record keeping would reduce the scope for tax evasion and corruption. The authorities are taking measures to improve public financial management. The government has been implementing domestic revenue mobilization reforms since 2017, and the Value Added Tax (VAT) administration is relatively good. Recent reforms include (i) the approval of a decree establishing a treasury single account by the Senate in November 2023; (ii) the enactment of a revised tax law in December 2024, which would help broaden the tax base, including amendments to taxes on business and employment income and to the VAT, and the introduction of a special regime for SMEs; and (iii) the passage of a presidential decree in February 2024 improving domestic revenue mobilization. The 2024 Budget Law aims to reduce the non-hydrocarbon fiscal deficit. The ongoing deployment of the ASYCUDA system at the Bata port and the single window for vehicle clearance in Bata as well as the accession to the World Customs Organization in 2021 also strengthen revenue collection. 22 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Executive Summary Amid declining oil revenues, it is more important than ever to ensure that public spending is efficient and aligned with the national strategy. Social spending is very low, with public expenditure on education, health, drinking water and social assistance amounting to only 1.6 percent of GDP in 2022, one-third of the West and Central Africa average. Equatorial Guinea’s public spending and investment efficiency scores remain below the averages for the CEMAC region and SSA. The oil boom permitted a surge in infrastructure investment, but the subsequent recession has led to sharp cuts in public investment. Targeted policy actions can enhance the efficiency of current spending. The government has recently committed to transposing and implementing The quality of all CEMAC directives for the harmonization of public financial management, spending can implementation of the medium-term budget framework, extension of the be enhanced Integrated Expenditure Management System (CONTFIN) to all ministerial by increasing departments and state institutions, and control and rationalizing of public the budget expenses including telephone expenses, fuel costs, and fuel subsidies. for education, Audits of the largest state-owned oil and gas companies have also been health, and completed. This should be followed by: developing a strategy to reduce subsidies to SOEs, addressing SOE underperformance, and cutting back on social protection, transfers to public entities, to enhance the allocative efficiency of spending. while addressing Expanding the Unique Social Registry (Registro Único Social ) would help inefficiencies within identify the poor and vulnerable and improve targeting of social spending, these sectors which currently comes mostly in the form of universal subsidies. The quality and controlling of spending can be enhanced by increasing the budget for education, health, other current and social protection, while addressing inefficiencies within these sectors and controlling other current expenditures such as universal price subsidies. expenditures. The authorities will need tools to allocate effectively the limited funds available for investment. Most of the provisions of the decree establishing and regulating public investment management are not currently implemented. While most CEMAC countries have a set of criteria for the prioritization of their Public Investment Programs (PIP), Equatorial Guinea lacks such criteria. As a result, the PIP contains projects that are not yet mature. The public investment institutional framework can be enhanced through improvements in processes, sector ministry capacity, accountability, implementation monitoring, and project evaluation. Specific measures could include creating a unique project identifier (UPI) for all (new) public investment projects, updating the central database to monitor projects throughout their lifecycle, and rationalizing the project portfolio by reviewing the status of all projects and applying the revised prioritization methodology. Fiscal transparency is correlated with better socio-economic and fiscal policy outcomes. It allows citizens to hold governments accountable, improving spending efficiency. It can also improve tax compliance and reduce rent-seeking by public officials. At present, fiscal transparency in Equatorial Guinea, as measured by the Open Budget Index, is the lowest in the world. The latest year for which data on budget execution is publicly available is 2017. A high priority is the adoption of reforms to regain membership in the Extractive Industries Transparency Initiative (EITI) as initiated by the Presidential Decree of February 2024. This Decree also supports the operationalization of the national commission for the prevention and fight against corruption. Other policy options to consider include prohibiting the approval of new investment projects during the year without being included in a revised budget law and adding proposed new investment projects in an annex to the budget law, and publishing an SOE ownership policy that provides the rationale and objectives of subsidies, definition and costing of SOEs public service obligations, performance agreements with SOEs. Efficient public investment and asset management could help build resilience against climate change. Climate change needs to be mainstreamed in public investment planning and the budget process. There are no legal requirements for mainstreaming climate risk in public financial management. Regulations provide for sustainable green procurement, but in practice its application is limited to environmental impact assessment and Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 23 Executive Summary externally financed projects. There is a legal obligation to conduct environmental impact studies for all public investment projects; however, this regulation is not yet operational. No climate indicator is included in project selection or budget allocation criteria. The law does not require climate-related analysis as part of budgeting, procurement, or accountability. The 2000 PIP framework and the 2013 public finance law do not include considerations of climate change and disaster risks in the allocation and management of public resources and assets. Factoring climate change into public investment and asset management will help safeguard investments, prolong the useful lifetime of public infrastructure, and improve reliability of service delivery. Strengthening the production and dissemination of socio-economic information is essential for transparent and accountable evidence-based decision making. This would include further strengthening of Equatorial Guinea’s statistical institute (INEGE), accelerating the implementation of the 2022-2026 national development strategy for statistics, and strengthening the collection and dissemination of administrative data and information on public service delivery, infrastructure, and SOE performance. 2 Human capital outcomes are low and investing in education, health, and social protection will be key to sustained and inclusive growth Human capital is crucial for individuals to realize their potential as productive members of society. Across economies, higher human capital levels are correlated with higher incomes for individuals and countries, Across economies, stronger societal cohesion, and stability. Education is one of the most critical components of human capital. For those employed in a wage job, each higher human additional year of schooling is generally associated with higher earnings capital levels are – especially when schooling leads to learning. Reading is the gateway to correlated with learning in almost every area – literacy levels at age seven are predictive higher incomes of income levels at age 40. The benefits of educating girls are especially for individuals and far-reaching for themselves and eventually for their children. Good health countries, stronger enables learning as a child and greater productivity as an adult. Human capital development must be fostered and protected through adequate societal cohesion, social protection, allowing households to invest in education and health and stability. while coping with shocks. The evidence that social protection reduces current and future poverty is clear. Access to education in Equatorial Guinea has expanded significantly, but still lags income peers. In 2003, Equatorial Guinea became the first country in Central Africa to develop a national plan for education for all. Net enrollment rates in primary and secondary schools stood at 82.8 percent and 59.5 percent, respectively, well below the average rates for upper-middle income countries. Many rural schools on the mainland only offer classes up to grades three or four. While learning data is scarce, the existing information shows a challenging reality. For instance, a 2011 assessment revealed very low performance in primary schools, with 60 percent of students classified as having “low achievement” in reading. A more recent assessment in 2021 is more encouraging, finding a passing rate of 75 percent for tests at grades three and six, but the lack of a standardized methodology makes the interpretation of results difficult. The qualifications of teachers are not adequate – only 54 percent of primary teachers are qualified, and 69 percent at secondary schools. Other critical inputs such as textbooks and learning materials are insufficient. The enrollment rate for higher education is low and there is a mismatch between the supply and demand for skills. 24 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Executive Summary Public funding for education is low and appears to prioritize higher education. Government spending on education was only 0.9 percent of GDP in 2022, compared to an average of 2.6 percent in CEMAC and 4.1 percent in SSA. Only 45 percent of the education budget is classified by level of education, of which less than 5 percent is assigned to primary and pre-primary education, whereas 54 percent goes to higher education. Prioritizing basic literacy, numeracy, and transferable skills is of utmost importance. Funding levels need to increase even as the overall fiscal situation tightens. Spending priorities need to start with improving access to quality primary and secondary education, investing in skills for economic diversification, and providing better teacher training and support, including, for instance, through structured teacher-training programs. There may be less room for an expansion of higher education, but the allocation of resources can be shifted to align better with the labor market through closer involvement of the private sector. Better data are needed to guide policy. Equatorial Guinea’s human capital development remains constrained by poor maternal and child health outcomes. The neonatal and under-five mortality rates have fallen significantly since 1990 and are comparable to the averages for CEMAC and SSA. However, they remain well above the average rates for structural peers and upper middle-income countries. Malaria, acute respiratory infections, and diarrhea are the primary causes of child mortality. HIV prevalence is higher than the average for SSA. The health sector is characterized by low public expenditure and high out-of-pocket payments borne by users of the system. Government health expenditure has been increasing slowly but remains among the lowest in the world at 0.7 percent of GDP and 5.4 percent of the government budget, well short of the Abuja Declaration target of 15 percent. In per capita terms, annual government spending on health is estimated at US$ 53, less than half of that in Gabon. With very little external funding, out-of-pocket expenditure accounts for 74 percent of total health expenditure, amongst the highest in the world. Spending is biased in favor of the insular region of the country, which accounts for 70 percent of health professionals while the region accounted for only 28 percent of the country’s population in 2015. With progress in fighting communicable diseases, funding priorities need to shift to non-communicable diseases. Health security and epidemic preparedness remain an unfinished agenda. Recent, unprecedented shocks have underscored the importance of adaptive social protection systems to ensure human capital is created, protected, and utilized. Equatorial Guinea is one of the few countries that does not have a national social assistance program in place. Spending on social assistance is among the lowest in the world at 0.1 percent of GDP, while even low-income countries spend an average of 0.7 percent of GDP. Household survey data suggest that only 17.2 percent of workers have access to social security. A new Social Protection Law envisioning universal coverage has been drafted but has not been approved yet. Temporary programs launched to deal with recent crises have provided useful experience, including the digital delivery of cash transfers. A social registry exists to identify and prioritize poor or vulnerable individuals and families and enroll them in appropriate social programs. However, it is not used systematically to register the beneficiaries of social programs, and it is not linked to other databases. 3 Improving the business climate and the competitive environment is essential to enable private sector-led growth and attract investment A welcoming environment and well-functioning markets are key to supporting the government’s AGENDA 2035 and its Economic Diversification Initiative. The government has ambitious plans for land reform, special economic zones, an innovation hub, an international logistics and transportation center, and energy diversification, among others. It has also launched reforms to simplify administrative procedures and improve access to information relevant to business. Recent reforms include the establishment of a One Stop Shop to facilitate business registration; reduction of the minimum capital required to create a business; and the launch of a new e-visa which eases the visa process for investors and tourists. Deeper reforms are now necessary, along with a fuller assessment of the various proposals for diversification. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 25 Executive Summary Uncertainty about the legal framework is frequently mentioned by private sector actors as a significant constraint. Legal uncertainty arises due to: i) outdated legislation; ii) limited public information and accessibility of laws; iii) insufficient public consultation when drafting relevant laws and regulations; iv) a weak judicial system; and v) lack of Spanish translation and/or official validation of key legislation such as the Organization for the Harmonization of Business Law in Africa (OHADA) laws and the new Customs Code. Most ministries and other public entities lack dedicated websites. Within the judicial system, there is a lack of expertise on commercial matters, while judges are appointed by the executive and may be removed at any time. Greater public consultation would help government understand the problems faced by the private sector, and identify appropriate solutions, and therefore improve the effectiveness, fairness and legitimacy of laws and regulations. Outdated regulations are particularly problematic for women as they restrict their participation in the economy. There are also legal limitations on acquisition of land by foreigners, discouraging foreign investment. Privately held land in Equatorial Guinea is often untitled or improperly titled. Secure land titling is essential for private sector development as it promotes investment, facilitates access to credit, stimulates market activity, and helps Secure land resolve land disputes. Property registration is costly and time consuming. Property titling is records are not digitized and not available countrywide. Equatorial Guinea does essential for not have a comprehensive cadaster system or a collateral registry which would private sector encourage the use of movable assets as collateral. There is also inequality between the property rights of married women and those of married men. development as it promotes Despite progress in improving the business registration process, there are investment, many constraints to market entry. Barriers to entry include cumbersome facilitates bureaucratic procedures, high licensing fees, complex regulations, limited access access to credit, to financing, and inadequate infrastructure. The creation of one-stop shops has stimulates led to some improvements, but they are constrained by a shortage of notaries and public registrars. There are several other ways to improve the process, market activity, including: removing the need to notarize articles of association and renew and helps business licenses annually, enabling on-line registration, digitizing the database of resolve land the Commercial Registry, and reducing the minimum capital required for limited disputes. liability companies (XAF 100,000) which is far higher than the minimum allowed by OHADA legislation (XAF 5,000). Competitive public procurement can be a first step to boost private sector development and encourage investment. Given the relatively large size of the public sector in Equatorial Guinea, promoting competition in these markets can allow a wider range of firms to develop their capabilities and product offering. It can also provide better value for money, helping the government achieve savings and improve public services. Local content rules intended to promote local firms and employment need to be used carefully, so as not to undermine value for money and set aside demand that local firms might not have the capacity to meet. As a first step, Equatorial Guinea needs to update its public procurement legislation to promote competition and lay the foundations for public-private partnerships (PPPs). To further attract investment and ensure effective management of government assets (for example in infrastructure), a comprehensive framework for PPPs needs to be established to ensure competitive selection of partners, sound management of fiscal risks, and higher value for money. The Presidential Decree of February 2024 recognizes this. Even after such reforms, factors that limit competition will continue to hold back market entry or growth of new or foreign firms. Reportedly, restrictions in Equatorial Guinea primarily affect foreign companies and all those without connections. Such companies face significant challenges in entering the market, for example, when trying to obtain licenses. Essential input markets for business face regulatory constraints to competition, for example in finance, telecommunications and transportation. In finance, barriers to the operation of non-bank financial institutions constrain competition in lending to small and medium enterprises (SMEs). Weak regulation 26 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Executive Summary of the telecommunications SOE, with its significant market power in the national fiber backbone, constrains competition in downstream retail data services. Improving the governance and performance of SOEs is a first step toward enhancing competition. There are 15 commercial SOEs whose operational and financial performance tends to be opaque. SOEs with privileged access to government support or subsidies have an unfair advantage over private enterprises. Furthermore, the government has started reviewing the SOE portfolio, assessing the financial status and business strategy of key SOEs, and identifying firms for divestment, which could create opportunities for productive private investment if market regulations in the sectors SOEs operate are updated and divestment processes are transparent and competitive. Disclosing economic support provided to SOEs, separation of accounts for commercial and non- commercial activities, and elimination of regulatory advantages of SOEs are intermediate steps to ensure a more level playing field between SOEs and private firms. Moreover, greater transparency and governance of business support programs (including tax incentives) would boost their effectiveness and reduce unintended negative effects on market competition and fiscal risks. Accelerating digitalization will play a pivotal role in improving productivity. Digital technologies and digitalization are more than just telecommunications and can support an entire economy. It can improve firm and farm productivity, support public service delivery, improve the business environment, facilitate financial inclusion, and raise consumer welfare. To reap of the benefits of digitalization, the Government should strengthen the telecom sector competitiveness, increase technology adoption and participation in the digital economy for firms, boost digital skills and promote the development of digital businesses. Economic transformation will inevitably require new sources of foreign direct investment. Recent proposals to establish an investment promotion agency (IPA) can benefit from global experience. Not all such agencies succeed. Most importantly, an IPA cannot make up for weaknesses in the investment environment. Consequently, significant reforms of the investment environment are needed before an IPA can be successful. The experience of Costa Rica suggests that the establishment of an IPA must be accompanied by streamlined regulatory processes, infrastructure and workforce development, a focus on sectors where the country has a clear comparative advantage, an emphasis on sustainable and responsible investment, and strong aftercare services. The government strategy also calls for the establishment of special economic zones, which have been important in some countries. However, their success has often depended on additional advantages such as large pools of low-cost labor and adequate infrastructure. Equatorial Guinea will need to carefully examine whether this instrument is suitable for its particular circumstances. The success of regulatory reforms depends on implementation. Successful reformers, such as Singapore, share common characteristics including strong commitment at the highest levels, long-term vision, effective inter-agency coordination mechanisms, and private sector engagement in the reform process. Roadmaps, with clear actions, deadlines, and assigned responsibilities serve as essential tools for monitoring progress and ensuring accountability for results. Effective public institutions with adequate capabilities are necessary for implementation. As Equatorial Guinea embarks on regulatory reforms, it will need to draw on the experience of countries that have been successful in improving their business environment and attracting investment in their economic transformation. © alarico/istockphoto.com Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 27 Executive Summary Summary of Recommendations This CEM provides several policy options with the objective of building the foundations for renewed, diversified, and more inclusive growth. Table ES1 provides a set of policy options focused on building Equatorial Guinea’s assets, notably human capital, physical capital, and legal, fiscal, and economic institutions that are necessary to the development of non-hydrocarbon sectors. Each chapter of the report focuses on the development of one or more types of assets. TABLE ES1 Summary of Recommendations 1 Improve governance and strengthen institutions Policy options Timeframe • Implement the CEMAC regional fiscal rule, explore options for creating a stabilization fund, and factor in transparency and accountability in the design of the SWF to reduce SHORT TERM fiscal instability and avoid procyclical spending. • Raise non-oil revenues by rationalizing tax exemptions, increasing excise taxes, SHORT TO streamlining administrative procedures, finalizing the implementation of ASYCUDA, and MEDIUM TERM improving risk management of tax compliance. • Increase the share of social sectors spending in the national budget, while addressing SHORT TERM inefficiencies within those sectors and controlling other current expenditures. • Develop a strategy to reduce subsidies to State-owned enterprises (SOEs), explore SHORT TO divestment and other private sector participation options, and enhance accountability to MEDIUM TERM improve performance. • Strengthen the public investment management through the adoption of a set of criteria for the prioritization of projects, improved processes and ministry capacity for SHORT TO project preparation, creation of a unique project identifier to facilitate implementation MEDIUM TERM monitoring, and the incorporation of environmental factors in public investment planning and infrastructure asset maintenance. • Align public financial management (PFM) regulations with the CEMAC PFM directives and implement the Integrated Expenditure Management System (CONTFIN) in all SHORT TERM ministries. • Fully operationalize the Anti-Corruption Commission. SHORT TERM • Put in place a comprehensive register of fixed assets, such as buildings, roads, power SHORT TO lines, including a condition report on each asset. MEDIUM TERM • Include a first stage screening for climate risk integrated into early stages of project SHORT TO development presenting potential adaptation needs, together with conformity with MEDIUM TERM climate change national objectives. • Accelerate the implementation of the 2022-2026 national development strategy for SHORT TERM statistics. • Strengthen statistical and monitoring capacity and improve public expenditure SHORT TO monitoring and tracking. MEDIUM TERM SHORT TO • Develop functional classification of budget for all years going forward. MEDIUM TERM • Publish on the website of the Ministry of Finance the finance laws and detailed budget SHORT TO execution, and pursue Extractive Industries Transparency Initiative (EITI) membership MEDIUM TERM and compliance. 28 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Executive Summary 2 Rectify the asset imbalance by boosting human capital Policy options Timeframe • Increase the share of social sectors spending in the national budget, while addressing SHORT TERM inefficiencies within these sectors and controlling other current expenditures. • Prioritize primary education on improving access, teacher training, and a structured SHORT TERM pedagogy program to ensure learning. • Invest in skills for economic diversification by implementing remedial skills development SHORT TO programs and boot camps, expanding availability and affordability of trainings, and MEDIUM TERM increasing digital skills. • Shift the emphasis on health towards non-communicable diseases with the help of MEDIUM TO alternative financing mechanisms. LONG TERM • Strengthen public health through enhanced community surveillance and laboratory management, a One Health platform to increase animal and environmental health MEDIUM TERM capacity, and better cross-border surveillance. • Obtain approval of the new Social Protection Law, broaden use of the social registry to SHORT TERM cover all social programs and establish a cash transfer program. Improve the business climate to increase private sector 3 investment and promote economic diversification Policy options Timeframe • Reduce the minimum capital required for limited liability companies from XAF100,000 to SHORT TERM XAF5,000 in line with OHADA legislation. • Amend the Judiciary Organic Law to introduce clear criteria and processes to select, SHORT TERM appoint, and promote judges. • Improve property rights by simplifying the procedure to register a property, increasing SHORT TERM the legal protections of property rights; and establishing a digitized cadaster with GIS mapping of properties improve the legal security of land. MEDIUM TO LONG TERM • Establish an Investment Promotion Agency to promote domestic and foreign MEDIUM TO investments, streamline bureaucratic procedures, and provide aftercare services. LONG TERM • Revise the public procurement legislation to enable private sector participation on a SHORT TO level playing field (e.g., through adjusted local content rules and digitalization) and MEDIUM TERM establish the legal framework for competitive PPPs. • Ensure business support measures are targeted and effective to minimize market SHORT TO distortions including when deciding on SEZs, investment incentives and subsidies (to MEDIUM TERM SOEs) by creating a system for monitoring and evaluation of business support measures. • Map the footprint of state ownership of enterprises, assess the rationale of ownership, SHORT TO refocus ownership, and improve governance of retained SOEs to crowd in private MEDIUM TERM investment. • Build institutions to enforce the CEMAC competition regulations and develop a competition framework starting with more effective competition rules in key sectors MEDIUM TO (e.g., telecom, finance, energy) and transitioning to an economy-wide competition LONG TERM framework. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 29 30 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth © fotocinema/istockphoto.com CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth The discovery of large oil reserves in the 1990s has allowed Equatorial Guinea to become one of the fastest growing economies in Africa during that decade. The growth momentum, however, faded especially since the end of the last commodity super cycle of 2014. The economy has since then been on a decline, reflecting oil price shocks and broader economic malaise. This chapter frames the report by examining (i) Equatorial Guinea’s past growth trajectory and its drivers, (ii) its existing asset portfolio (natural capital, human capital, physical capital, and intangible assets), and (iii) different potential long-run growth trajectories. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 31 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth 1.1 Understanding Equatorial Guinea’s drivers of past growth After years of rapid growth, the hydrocarbon sector has experienced a sharp deceleration, pushing Equatorial Guinea into a prolonged recession Six years of recession have reversed some noticeable economic gains and social progress in Equatorial Guinea. The discovery of large oil and gas reserves in the 1990s propelled Equatorial Guinea to become the third-largest oil producer in Sub-Saharan Africa, and one of the fastest-growing economies on the continent for close to two decades. Between 1996 and 2004, per capita growth averaged 40 percent and the country reached Upper-Middle Income status in 2004 (Figure 1a). The vigorous growth momentum has faded since the end of the last commodity super-cycle of 2014 (Figure 1b). Overall, the economy registered six years of negative growth since 2015, which combined with the impact of the COVID-19 pandemic, has likely curtailed progress in shared prosperity and poverty reduction for the estimated 1.6 million people. The welfare consequences are not estimated in this report because of data unavailability (see Box 1). The national poverty rate stood at 50.7 percent in 2023, down from 76.8 percent in 2006 (INEGE, 2024 and World Bank, forthcoming). FIGURE 1 Equatorial Guinea’s income per capita has been on a declining trend over the recent years a. GNI per capita, Equatorial Guinea, 1989-2023 b. Real GDP per capita growth, Equatorial Guinea and peers, 1990-2023 14000 145 12000 125 10000 105 Current US$ In percent 85 8000 65 6000 45 4000 25 2000 5 0 -15 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 GNI per capita - Atlas method (current US$) Equatorial Guinea Structural peers Upper middle income (Lower Threshold) Aspirational peers Aspirational peers+ Upper middle income (Upper Threshold) Source: WDI, Equatoguinean authorities, and World Bank staff calculations Note: Structural peers include Azerbaijan, Congo, Rep., Gabon, and Timor-Leste. Aspirational peers include Bahrain, Kuwait, Oman, and Qatar. Aspirational peers+ include also Malaysia and United Arab Emirates. The performance of Equatorial Guinea is benchmarked to other countries, including structural and aspirational peers. These peers were identified using a data-driven approach. 32 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth BOX 1 Better statistics and data provision will improve economic monitoring and evidence-based policy design Despite recent progress in the production of macroeconomic data, provision of statistics and data has shortcomings in Equatorial Guinea. In recent years, the INEGE – the national institute of statistics created in 2015 – has compiled and published macroeconomic data, including monthly inflation and quarterly and annual national accounts thanks to technical assistance (TA) provided by the World Bank and the International Monetary Fund (IMF). The INEGE also produces statistical yearbooks and other reports such as Equatorial Guinea in figures and monthly inflation reports. The authorities (directorate of budget) prepare quarterly and annual budget execution data, but they are not publicly available (see Chapter 2). A summary table of financial operations of the state (Tableau des Opérations Financières de l'Etat, TOFE) for the years 2015 to 2020 is available on the website of the Ministry of Finance, Planning, and Economic Development. However, there is a need to improve the timeliness, quality, and coverage of fiscal data. While INEGE publishes international trade reports, the timeliness and coverage of external sector data, including trade flows and external public debt, remain limited. Preliminary net international investment position (NIIP) data was compiled following TA received from the IMF, but they have not been disseminated. The full implementation of ASYCUDA to all ports in the country and the use of the DMFAS (Debt Management and Financial Analysis System) software would help strengthen external sector statistics. Efforts are underway to produce reliable and timely statistics for evidence-based policy design and economic surveillance. The business census was recently completed by INEGE with support from the World Bank. A report was recently published and INEGE has started the dissemination of the results of the census nationally. However, the underlying data are not available to the public yet. Equatorial Guinea’s first National Household Survey was in 2006 and is outdated. A report including the results of the second National Household Survey (ENH2) was recently published by INEGE but the survey data are not yet publicly available. The household survey will help close the evidence gap by generating microdata to estimate the welfare consequences of the declining hydrocarbon sector. The efficient and steadfast implementation of the 2022-2026 National Statistics Development Strategy (NSDS) is critical. The objective of the Equatorial Guinea’s NSDS is to promote an efficient statistical system that generates harmonized, timely, relevant, reliable, and quality information and statistical data for the monitoring and evaluation of AGENDA 2035 and the regional and international development agendas. The NSDS outlines forthcoming statistical operations as well as the budget requirements until 2026. Statistical operations planned by the Equatoguinean authorities include the second Demographic and Health Survey, the second Labor Force Survey, the fifth Census of Population and dwellings and the second Agriculture Census. These operations would help address gaps in the provision of economic statistics. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 33 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth National per capita income has been on a declining trend and its current level is less than half that of 2008. GDP per capita (in constant US$) grew rapidly in the 1990s after the start of the exploration of oil and gas reserves to reach its peak in 2008 with a level of US$14,223, compared to only US$5,506 in 2023 (Figure 2a). Over the commodity boom period (2000-2014), Equatorial Guinea recorded a higher GDP per capita growth rate compared to its regional, structural, and aspirational peers (Figure 2b). However, the country’s income per capita has fallen over the 15 years as GDP growth has not kept up with population growth. On average, the annual growth rate of Equatorial Guinea’s GDP per capita has been negative since 2009. GDP per capita growth in Equatorial Guinea was about -7.5 percent, on average, after the commodity boom period (2015-2023), lower than that of the CEMAC region (-2.3 percent), the country’s structural (-0.7 percent) and aspirational (-0.4 percent) peers (Figure 2b).1 Equatorial Guinea’s GDP per capita in 2023 was 61 percent lower than in 2008 during the commodity boom period (Figure 2a). FIGURE 2 Increases in per capita income during the last commodity boom have been eroded a. GDP per capita (constant 2015 US$), Equatorial Guinea b. Real GDP per capita growth (in percent), Equatorial Guinea and peers, 1990-2023 and peers, period averages 16000 12 10 14000 8 12000 6 10000 4 2 8000 0 6000 -2 4000 -4 -6 2000 -8 0 -10 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 Equatorial Structural CEMAC Aspirational Aspirational Guinea peers peers peers+ Equatorial Guinea Structural peers CEMAC 2000-2014 2015-2023 Source: WDI, Equatoguinean authorities and World Bank staff calculations Equatorial Guinea’s economic growth trajectory has been markedly volatile, largely linked to the hydrocarbon sector. Equatorial Guinea’s growth path over the past three decades can be decomposed into three main periods: (i) structural transformation from an agriculture-based economy with low growth to exponential growth driven by the discovery of large oil and gas reserves in the late 1990s; (ii) sustained economic growth and high public investment during the oil boom between the early 2000s and 2014; and (iii) sharp economic slowdown amid the oil bust and maturing oil fields with a concomitant drop in public spending. Annual average growth rates over these three periods varied widely from 32.7 percent in the first period (1990-2003), to an average of 9.0 percent in 2004-2014, and down to -4.6 percent post-oil boom (2015-2023). 2 1 The performance of Equatorial Guinea is benchmarked to other countries, including regional, structural and aspirational peers. Structural peers include Azerbaijan, Congo, Rep., Gabon, and Timor-Leste. Aspirational peers include Bahrain, Kuwait, Oman, and Qatar. Aspirational peers+ also include Malaysia and United Arab Emirates. These peers were identified using a data-driven approach (see Table A1.1 in Annex 1). 2 Crude oil prices have rebounded post-COVID while Equatorial Guinea’s oil production continued to decline. 34 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth Over recent years, Equatorial Guinea’s economic growth has been hampered by a shrinking hydrocarbon sector and external and domestic shocks. Overall, the economy was in recession for six consecutive years, with real GDP declining at an average rate of 6.7 percent from 2015 to 2020 (Figure 3). The growth of the hydrocarbon sector declined to an average rate of about 8 percent per year between 2015 and 2020 amid maturing oil fields and multiple incidents in both gas and oil production sites. The double shock of the COVID-19 pandemic and the Bata explosions of March 2021 aggravated Equatorial Guinea’s macroeconomic situation (Box 2). The estimated direct losses of the Bata explosion, including substantial damages to infrastructure, reached 2.5 percent of GDP in 2021. The non-hydrocarbon sector contracted because of the containment measures during the pandemic and mounting fiscal pressures amid lower oil prices. Equatorial Guinea’s GDP expanded by 3.2 percent in 2022 thanks to a rebound in the gas sector. However, the country reentered recession with a -5.1 percent GDP growth in 2023 amid a shrinking hydrocarbon sector. FIGURE 3 Equatorial Guinea’s post-oil boom economic growth has been well below that of regional peers Real GDP growth, Equatorial Guinea, and regional averages, 2015-2023 6 4 2 0 -2 -4 -6 -8 -10 2015 2016 2017 2018 2019 2020 2021 2022 2023 Equatorial Guinea Sub-Saharan Africa CEMAC Source: World Development Indicators (WDI), World Bank As expected, supply-side growth decomposition shows that the hydrocarbon sector has been the main driver of GDP growth in Equatorial Guinea. The oil and extractive sectors have been a key contributor to growth for a couple of decades (Figure 4a). Equatorial Guinea’s economic growth was driven mainly by strong hydrocarbon sector activity in early 2000s. However, with the decline in crude oil prices and production in 2009 and 2010, mainly owing to the global crisis, the oil sector dragged down GDP growth. This dynamic continued in the post-oil boom period. Given their interlinkages, the service sector has mostly followed the declining performance of the oil sector. Construction (included in the industrial sector other than extractives), which is mostly dependent on public contracts and hydrocarbon sector investment, also negatively impacted growth in more recent years as the underlying fiscal adjustment decelerated public investment and private sector construction. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 35 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth BOX 2 The COVID-19 pandemic, the Bata explosions and, more recently, Russia’s invasion of Ukraine were consecutive setbacks to Equatorial Guinea’s economic growth COVID-19: While the spread of COVID-19 was relatively contained with a total of 17.2 thousand confirmed cases (and 183 fatalities, as of end-2022), the pandemic intensified the economic slowdown in 2020. The government swiftly declared a state of health emergency in March 2020 and proactively implemented containment measures, including the closure of borders, businesses, and schools, among other restrictions. Containment measures led to a sharp deceleration in economic activity, which was exacerbated by low oil prices and the contraction of the hydrocarbon sector due to lower domestic and international demand. Despite the decline in government revenues, the government adopted a broad emergency health spending package (1 percent of the GDP), a social assistance scheme (0.3 percent of GDP), temporary support to the private sector (0.3 percent of GDP), and devoted additional resources to the education sector (0.4 percent of GDP). Vaccination rates remained low at 27.3 percent of total population. Bata explosions: On March 2021, a series of explosions occurred at a military warehouse in Bata, the country’s largest city and commercial capital. The explosions resulted in widespread human and physical damage, with a total of 107 fatalities, over 600 people injured, and vast destruction of infrastructure throughout the city, including residences and public buildings such as schools and hospitals. The estimated direct losses were estimated at 2.5 percent of GDP in 2021. The Bata explosions occurred while a second wave of COVID-19 was still unfolding, aggravating an already challenging situation. The government increased fiscal spending for the reconstruction of Bata and provided immediate emergency support for victims. The latter included temporary shelters, targeted assistance in the form of basic nutrients, water, and hygiene supplies, and cash transfers to 300 families. The cash transfers initiative was co-led by UNICEF and the government in coordination with non-governmental organizations (NGOs). In 2021, the pandemic and Bata-related spending amounted to 0.4 percent of GDP. Russia’s invasion of Ukraine: The impact of Russia’s invasion of Ukraine on Equatorial Guinea has been felt mostly through an increase in oil and food prices. In 2022, oil prices rose to US$97.1 a barrel (from US$69.1 in 2021),4 which boosted the country’s oil revenues to CFAF 1406 billion (17.6 percent of GDP), from CFAF 845.6 billion in 2021 (13.3 percent of GDP). While direct food imports from Russia and Ukraine amount to only 0.7 percent of Equatorial Guinea’s total imports of food, the rise of food prices globally has led to higher food inflation domestically (5.8 percent in 2022, from 1.2 percent in 2021). While no comprehensive data is available for Equatorial Guinea, it is likely that food insecurity has increased since the country imports about 70 percent of its food consumption needs. 4 World Bank Commodity Price Data (March 2023). 36 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth Despite the steady decline in hydrocarbon production since the late 2000s, the hydrocarbon sector remains the country’s largest economic sector. Extractive activities dominate the industrial sector and represented about 22 percent of GDP in 2021-2023, while agriculture, forestry, and fishing remained underdeveloped (Figure 4b). 3 In particular, the production of cash crops, traditionally focused on cocoa and coffee, was, for the most part, relinquished following independence and has not been revamped. Most agricultural activities are confined to subsistence agriculture but represent the largest source of employment in rural communities. The industrial sector (excluding extractive activities and petroleum products refining) is dominated by small-scale manufacturing (including in textile and leather), and to a lesser extent, construction, which has lost dynamism due to the government’s still sizeable arrears (mainly to construction contractors) since the end of the oil-boom cycle of 2014. The services sector (including public administration and services, trade, transport, finance and communication) has been emerging in recent years. FIGURE 4 The decline of the largest driver of economic growth the hydrocarbon sector explains Equatorial Guinea’s long cycle of recessions a. Supply-side contribution to growth, Equatorial Guinea, b. Sectoral share of GDP, in percent, 2007-2023 2007-2023 20 100 90 15 80 10 70 60 5 50 0 40 -5 30 20 -10 10 -15 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Services Industry, extractive Services Industry, extractive Industry, other Agriculture, forestry, and shing Industry, other Agriculture, forestry, and shing GDP growth Source: Equatoguinean authorities and World Bank staff calculations Note: Industry, extractive includes extractive activities and petroleum products refining; industry, other includes manufacturing, electricity, gas, and water supply, and construction. The Equatoguinean economy’s reliance on the capital-intensive hydrocarbon sector has provided few opportunities for job creation. Industry, including the hydrocarbon sector, is the smallest employer in the country, constituting only about 14 percent of total employment (Figure 5a), while agriculture remains the largest employment source in the country, providing more than half of all jobs (55.5 percent). The employment share of the tertiary sector has also increased in recent years. The young generation, in particular, has difficulties accessing the labor market, with youth labor force participation rate at only 28 percent and the youth unemployment rate reaching 16.5 percent in 2022, compared to an overall unemployment rate of 8.7 percent. At the same time, the population is estimated to have grown by about 3.3 percent, on average, in 2015-2022 (United Nations world population prospects, 2022). Low labor market opportunities are explained by a small formal private sector, and a mismatch between available skills and those needed by the private sector. 3 The extractive activities and petroleum products refining represented about 40 percent of GDP in 2022-2023. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 37 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth FIGURE 5 While labor productivity decreased, industry remains the most productive sector; however it provides limited employment opportunities a. Employment share by sector, in percent, Equatorial Guinea, b. Value added per worker by major sector, in constant 2015 2000-2021 US$, 2006-2019 100 200000 80 160000 in constant 2015 US$ 60 120000 In percent 40 80000 20 40000 0 0 2000 2005 2010 2015 2021 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Agriculture Industry Services Agriculture Industry Services c. Change in labor productivity, in Equatorial Guinea, (base 1=2006) 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Agriculture Industry Services Source: WDI, ILO and World Bank staff calculations Labor productivity has been declining in Equatorial Guinea. While industry has been historically the most productive sector since mid-2000s, the value added per worker in the sector has decreased in recent years (Figure 5b and Figure 5c). Labor productivity in the agriculture and service sectors has also declined. The contribution of agriculture remains marginal as it is mostly informal and small-scale while forestry and fishing are under-exploited. Overall, negative Total Factor Productivity (TFP) growth has lowered GDP growth during the last decade. The contribution of TFP growth in Equatorial Guinea has been negative over the past decade, and, on average, lower compared to structural and aspirational peers (Figure 6). Labor and capital accumulation were the drivers of economic growth in 2010-2020. Capital accumulation was growing particularly fast during the oil boom (2011-2014). However, its growth turned negative following the drop in oil prices. 38 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth FIGURE 6 Declining TFP growth has dragged down economic growth Growth accounting in Equatorial Guinea and peers, 2010-2020 12 Growth rate (percentage points) 8 4 0 -4 -8 -12 Equatorial Azerbaijan Congo, Rep. Gabon Timor-Leste Bahrain Oman Qatar Malaysia United Arab Guinea Emirates Capital Stock (gK) Labor (gL) Total Factor Productivity (gA) Real GDP (gY) Source: WDI (CEM scan tool), World Bank and World Bank staff calculations On the demand side, exports and investments have been key drivers of economic growth in Equatorial Guinea. Investment and exports drove economic growth in most years during the oil boom (Figure 7a). However, since 2010, investments as a share of GDP declined substantially, falling behind the averages of structural, aspirational, and regional peers (Figure 7b). FIGURE 7 Lower exports and investments, which are highly concentrated in the hydrocarbon industry, have been the main contributors to Equatorial Guinea’s negative growth in the recent years a. Contribution to real GDP growth in Equatorial Guinea – b. Gross xed capital formation (in percent of GDP), 2010-2020 Expenditure side, 2007-2023 20 45 15 40 10 35 Percentage points 5 30 0 25 -5 20 -10 15 -15 10 -20 5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 0 Equatorial UMC Structural Aspirational SSA Change in inventories Private consumption Guinea peers peers Net exports Government consumption Gross xed capital formation Real GDP growth 2010 2015 2020 Source: Equatoguinean authorities, WDI, and World Bank staff calculations Note: UMC and SSA stands for upper-middle income countries and Sub-Saharan Africa, respectively. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 39 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth BOX 3 Does Equatorial Guinea suffer from the natural resource curse and Dutch disease? The “natural resource curse” hypothesis refers to the observation that resource rich economies tend to grow more slowly and register higher inequality, on average, than resource-poor economies (Auty, 1993, 2001; Sachs and Warner, 1995, 2001). Of course, there are exceptions, such as Botswana or Norway. The literature has identified several channels through which natural resources can negatively affect economic growth. First, the resource curse is often explained by an absence of strong governance and institutions, which allows powerful groups to appropriate national resource rents, which in turn results in a transfer of resources from an efficient sector to inefficient sectors and elite consumption (“the voracity effect” coined by Tornell and Lane, 1999). Second, the volatility of commodity prices – partly emanating from the fact that natural resources generally have low price elasticities of supply – undermines consumption and investment (Ramey and Ramey, 1995; Aizenman and Marion, 1999; Oomes and Kalcheva, 2007). Third, the phenomenon of Dutch disease can arise when the windfall from natural resources undermines other tradable sectors by crowding out factors of production and results in real exchange rate appreciation due to the large increase in domestic spending and hence higher inflation (Sala-i-martin and Subramanian, 2013). Frankel (2012) explains the symptoms of Dutch disease as follows: • A large real appreciation in the currency taking the form of (i) nominal currency appreciation in case of a floating exchange rate regime, and (ii) inflation for a fixed exchange rate regime; • An increase in spending, mostly government spending, following a surge in resource revenues; • An increase in the price of nontraded goods, relative to traded goods; • Shift of labor and land out of traded commodities toward non-tradeable, largely service, sectors; and • Sometimes a current account deficit despite the increased revenue from commodity exports. FIGURE 8 Real and nominal effective exchange rates in Equatorial Guinea, 2000-2023 130 120 110 100 90 80 70 60 50 40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 REER NEER Source: Bruegel, Darvas, Zsolt (2021), Utz et al. (2023), and Frankel (2012) 40 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth Equatorial Guinea has experienced a large real effective exchange rate appreciation during the commodity boom period. Given the country’s CEMAC membership – its currency (the CFA Franc) is pegged against the Euro, therefore real appreciation occurs when the domestic price level of Equatorial Guinea increases faster than that of its trading partners. Equatorial Guinea’s local currency in real terms, as well as in the real effective exchange rate, appreciated significantly since 2000 (Figure 8). The real effective exchange rate started to depreciate in 2020, but it has been increasing again since end-2022 due to higher inflation. Public spending increased significantly following the oil windfall, especially in the 2000s (see Chapter 2). Moreover, since the discovery of hydrocarbon resources, production in other tradable sectors of the economy has not expanded significantly. While Equatorial Guinea has shown some signs of Dutch Disease during the oil boom period, other factors may have played a role in the appreciation of REER and the lackluster expansion of other tradable sectors. The predominant role of the hydrocarbon sector has been associated with an appreciation of the real effective exchange rate (REER) in Equatorial Guinea over the commodity boom period . The weight of hydrocarbon exports in the country’s current account means that the REER goes in tandem with oil price movements. The REER in Equatorial Guinea has seen a steady appreciation in the commodity boom years (World Bank, 2013, see Box 3). The oil windfall and associated appreciation of the REER have likely accelerated the “resource movement effect” – typical of the Dutch Disease – whereby capital and labor shift towards the booming export sector (in this case, oil and gas), to the detriment of other lagging and less competitive sectors (Same, 2008). However, non-price factors tend to be more binding constraints to economic activity (including in the non-booming sectors) – notably difficulties in doing business, weak governance, and the low level of human capital. The expected decline in oil production combined with the long-lasting social and economic impacts of COVID-19 has added urgency to the government’s objective to diversify the economy away from the hydrocarbon industry and change the current growth model. While Equatorial Guinea is endowed with proven crude oil reserves estimated at 1.1 billion barrels, oil production has been declining as most of the country’s largest oil fields are reaching maturity. Following only two years of economic recovery in 2021 and 2022, Equatorial Guinea reentered recession in 2023. The country is projected to remain in recession over the medium term, barring new substantial hydrocarbon discoveries and progress in structural reforms. As a result, fiscal space will shrink, constraining resources for much-needed development projects that would help close gaps in human capital and trade-related infrastructure and logistics. This underlines the urgency to change the country’s current economic model which is unlikely to generate quality jobs and sustained economic growth going forward. Equatorial Guinea would need to adopt an ambitious reform agenda to develop the non-oil sector, based on strong institutions and improved physical and human capital. The country is well endowed with natural resources, including arable land and mineral resources (gold, oil/petroleum, uranium, diamond, and columbite- Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 41 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth tantalite). Apart from oil, most natural resources remain largely under-exploited. The low quality of institutions and poor governance (including a high perception of corruption, vested cronyism, and a weak judiciary system) undermine the development of the private sector. Foreign Direct Investment (FDI) away from the hydrocarbon sector has been discouraged by the onerous treatment of foreign companies. Despite good quality infrastructure – including road infrastructure, a deep-water port in Bata, a new airport terminal in Malabo as well as a reliable energy supply in the country’s largest cities (Malabo and Bata), the remaining parts of the country lack sufficient infrastructure and internet services remain inadequate. 5 Moreover, Equatorial Guinea’s human capital lags that of countries with similar gross national income, which, along with limited credit to the private sector, low levels of financial inclusion, and an unfavorable regulatory environment, is a constraint to firm productivity and innovation. The government’s National Strategy for Sustainable Development 2035 aims to initiate the transition to a diversified economy. The National Development Strategy for 2021-2035 (AGENDA 2035), adopted in April 2021, aspires to achieve structural transformation to reduce poverty and increase social inclusion in a sustainable manner and promote productivity and industrialization. The focus of the economic diversification strategy is built on the promotion of exports and import substitution. The AGENDA 2035 considers a series of fundamental reforms structured around five key pillars: (i) institutions (at public administration and judicial system level); (ii) social sectors (in health, education, and social protection); (iii) macroeconomic planning and management (including public finances and the national statistical system); (iv) local production and private sector development (agrarian/land restructuring, financial sector development and market competition) and; (v) territorial development (focused on promoting sustainability, land rights, local community development). In 2023, the authorities adopted an interim plan – Economic Diversification Initiative – with a focus on short- term reforms that support the objectives of AGENDA 2035 (see Box 4). The interim plan is focused 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. The new strategy provides an entry point for engagement with Equatorial Guinea to advance key reforms to promote economic diversification. Equatorial Guinea’s efforts are part of the ongoing regional reform momentum following the CEMAC Heads of the State Summit in August 2021. The second generation of reform commitments, with a revised matrix (Programme des Réformes Economiques et Financières, PREF II), includes reforms in the areas of governance, business environment, connectivity infrastructure, financial and private sector development and human capital. The new endorsed agenda, which aims to tackle the region’s critical vulnerabilities, offers an opportunity to push forward policies in Equatorial Guinea that support the transition to a more sustainable growth and development model. The next sections of this chapter assess Equatorial Guinea’s existing asset portfolio using the “Diversified Development” (World Bank, 2014) analytical framework and discuss possible long-term growth trajectories. The analytical framework of the “Diversified development: making the most of natural resources in Eurasia” suggests that countries should focus on diversifying their asset base, ensuring a better balance between natural capital (e.g., oil, gas, forests, timber), produced capital (value of machinery, buildings, equipment, and residential and nonresidential urban land), human capital, and intangible assets (institutions). 5 For instance, 90.3 percent of the Equatoguinean urban population have access to electricity while in rural areas less than 2 percent have access to electricity. 42 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth BOX 4 Government’s national strategy for sustainable development © Uwe Michael Neumann/alamy.com Equatorial Guinea’s AGENDA 2035 is framed around four main objectives: (i) Eradication of Poverty, through improvements in food security, education, health, social protection and housing ; (ii) Social Inclusion and Sustained Peace, built around policies that increase decentralization, government effectiveness and rule of law, as well as to promote youth participation and culture; (iii) Productivity and Industrialization, organized in both cross-sectoral/enabling policies (in macro-fiscal policy, financial sector, competition, and R&D) as well as sectoral policies (fisheries, mineral, energy, transport, water, communication, tourism, and logistics); (iv) Environmental Sustainability and Territorial development, focused on environmental policies that promote a sustainable exploitation of natural resources. AGENDA 2035 also puts an emphasis on green growth as reflected by axis four – Environmental Sustainability and Territorial development. The overall objective is to ensure the existence and quality of natural resources and promote their sustained use for present and future generations through appropriate legal frameworks and societal involvement. More specifically, AGENDA 2035 commits to protect and restore terrestrial ecosystems, sustainable forest management, combat desertification, conserve marine resources, enhance climate resilience, ensure affordable and sustainable energy access, minimize environmental impacts, promote sustainable consumption and production, and integrate climate change considerations into planning and development. To better align planned reforms with current development objectives, the Government will undertake a monitoring exercise of the national development strategy in 2025. This will allow to take stock of the goals that have been achieved and revise the plan for the next 5 years to align with current development objectives. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 43 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth 1.2 Diversifying the asset portfolio to promote greener and sustained economic growth Equatorial Guinea’s diversification and growth strategy should focus on diversifying its asset portfolio by investing in its people, maximizing its capital stock, and strengthening its institutions Economic diversification has different dimensions. These include the diversification that relates to the expansion of economic sectors that contribute to employment and GDP; export diversification; the diversification of assets; as well as fiscal diversification. One policy option often implemented in resource-dependent countries is diversifying the country’s product base and exports. However, export diversification is challenging for many oil-dependent countries. Over the last few decades, oil-dependent economies have diversified more slowly than the rest of the world. Only 8 out of 36 oil producers grew more diverse between the 1990s and the 2010s, while the export of the others became more concentrated (Ross, 2019) including due to Dutch disease.6 But as oil production declines, it becomes essential to find new ways to integrate into the global economy. Achieving sustained long-term growth requires far-reaching measures to diversify national asset portfolios. Asset diversification is measured through tangible (natural and produced capital) and intangible (human capital and institutions) assets (see Box 5). International experience indicates that measures to diversify the economy appear to be successful only when they are supported by asset diversification (World Bank, 2014). Ensuring a better balance between natural, physical, and human capital and institutions would lead to diversified development and enable sustained International growth in the long run. Diversified asset portfolios are also associated experience indicates with better economic performance, namely output stability, and higher that measures productivity and employment. to diversify the Equatorial Guinea’s asset portfolio is not diversified. The country falls economy appear behind its peers in efficiently converting natural resources into productive to be successful capital. The value of Equatorial Guinea’s natural resources increased nearly only when they are tenfold from 1995 to 2018, reaching its peak level of US$86.81 billion during supported by asset the oil boom in 2011. The natural asset mix is dominated by nonrenewable diversification. resources, which represent more than four-fifths of total natural capital. Produced capital increased significantly over the past two decades, in line with large infrastructure investments during the oil boom period. In contrast, human capital development falls short compared to the country’s peers. The following sections analyze three components of Equatorial Guinea’s wealth, namely natural capital, physical capital, and institutions. Chapter 3 is devoted to a detailed discussion on human capital. 6 Ross (2019) finds that the price boom that began around 2000 led about three-quarters of the oil producers to become more concentrated, regardless of the size of their populations or the quality or accountability of their governments. Some countries like Equatorial Guinea grew more concentrated as new discoveries caused their oil and gas exports to soar. See Ross (2019) for more detail. 44 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth BOX 5 Wealth measurement and diversified development framework World Bank (2021), The Changing Wealth of Nations, provides estimates of a country’s wealth and its decomposition into four main types of assets (see Figure 9): • Produced capital, which is defined as the value of machinery, buildings, equipment, and residential and nonresidential urban land. • Natural capital, which comprises nonrenewable assets, including fossil fuel energy (oil, gas, hard and soft coal) and minerals, and renewable assets, including agricultural land (cropland and pastureland), forests (timber and forest ecosystem services), mangroves, fisheries, and protected areas. • Human capital, which constitutes the value of the country’s working population, their experience, skills, and capabilities over their lifetime. The Changing Wealth of Nations (CWON) database does not cover Equatorial Guinea’s human capital due to data limitations. • Net foreign assets, the total net value of a country’s foreign assets and liabilities held by public and private entities. The diversification of wealth i.e., balancing the asset mix, can make growth more resilient to external shocks. Wealth is considered as a complementary indicator to GDP for measuring economic performance and sustainable development in a country. Assessing the change in wealth per capita sheds light on the drivers of long-term sustainable growth. For example, wealth accounts could also help to assess whether a country is becoming efficient in building capital faster than depleting nonrenewable resources. They also provide insight on whether the different assets (human, produced, and natural capital) are at adequate levels to ensure a country’s development goals. Using wealth accounting, this report will rely on the Diversified Development framework (World Bank, 2014) that shows that a diversified portfolio of assets is important for economic efficiency and sustainable development. FIGURE 9 Structure of wealth accounts Sustainable prosperity and material well-being Long-term growth Total wealth Non- Produced renewable Renewable Human Net foreign capital natural natural capital capital assets capital Male/ Machinery, Forest female, Fossil fuels, Cropland, Protected Fisheries, Assets- structures, timber and employed/ minerals pastureland areas mangroves liabilities urban land eco services self- employed Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 45 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth 1.2.1 Natural resources The oil sector has helped promote Equatorial Guinea to upper-middle income status but other natural resources remain underexploited Wealth creation in Equatorial Guinea is mainly driven by natural capital. The country ranks first in Sub- Saharan Africa in terms of natural capital per capita, due to its sizeable natural resources and limited population (Figure 10). Among others, Equatorial Guinea is endowed with significant crude oil reserves (est. 1.1 billion barrels) and natural gas (est. 39 billion m3), forests and timber, and fisheries. Equatorial Guinea’s natural resources have increased in value since 1995, before declining at the end of the oil boom. The composition of the country’s resources has also evolved over time: while forests (timber and ecosystem services) represented 65 percent of total natural capital in 1995, oil wealth represented 66 percent of natural wealth in 2018 (Figures 11a and 11b). The natural asset mix is dominated by nonrenewable resources (oil, gas, coal, and minerals), with their share representing 83.6 percent of total natural capital in 2018, higher than the average share of 68 percent in peer countries. Moreover, Equatorial Guinea is the fifth largest oil producer in SSA (Figure 12).7 FIGURE 10 Equatorial Guinea is the richest country in natural capital per capita in SSA Top 30 Sub-Saharan countries in terms of natural capital per capita (in constant 2018 US dollars), 2018 Equatorial Guinea Gabon Congo, Rep. Angola Seychelles Botswana Zambia Namibia Eswatini South Africa Guinea-Bissau Ghana Cameroon Central African Republic Mauritania Liberia Guinea Chad Cote d'Ivoire Mali Benin Zimbabwe Nigeria Malawi Sierra Leone Congo, Dem. Rep. Sao Tome and Principe Kenya Mozambique Tanzania 0 5000 10000 15000 20000 25000 30000 35000 40000 Source: Changing Wealth of Nations (CWON, 2021). Note: Natural capital is the valuation of nonrenewable assets including fossil fuel energy and minerals, and renewable assets including agricultural land (cropland and pastureland), forests (timber and forest ecosystem services), mangroves, fisheries, and protected areas. Forests (timber and forest ecosystem services) constitute the country’s largest renewable natural resources. Between 1995 and 2018, Equatorial Guinea’s renewable natural capital increased by 77 percent, as compared to a more than fifty-fold increase in its nonrenewable natural capital. 8 In per capita terms, renewable natural resources started decreasing in the early 2000s and decreased by one-third since the mid- 1990s while nonrenewable resources increased twenty-fold. In September 2020, Equatorial Guinea issued a 7 BP 2022 World Energy Statistics Report. 8 Renewable natural resources include forests (timber and forest ecosystem services), mangroves, fisheries, protected areas, and agricultural land (cropland and pastureland). 46 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth presidential decree banning logging exports throughout the country to protect the ecosystem in line with the government’s commitment to improving the sustainable use of its resources and consistent with the REDD+ National Investment Plan (PNI-REDD+), officially launched in July 2020. The Equatoguinean government lifted the ban on logging exports in October 2020 following the economic crises. Equatorial Guinea’s wood production increased to 138.571 m3 in 2021. CEMAC initiated a logging ban in January 2023 then instated a 3-year log export authorization in April 2023. The commencement has recently been postponed to 2028, allowing countries involved ample time to adapt to this transformative agenda. FIGURE 11 Non-renewable resources constitute the largest share of the country’s natural resources a. Composition of natural capital in Equatorial Guinea, b. Composition of natural capital in Equatorial Guinea and 1995-2018 peers, 2018 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 1995 2000 2005 2010 2015 2018 Equatorial Congo, Azerbaijan Gabon Timor-Leste Guinea Rep. Forests, timber Agricultural land Forests, timber Agricultural land Forests, ecosytem services Oil Forests, ecosytem services Oil Mangroves Gas Mangroves Gas Fisheries Coal Fisheries Coal Protected areas Minerals Protected areas Minerals Source: Changing Wealth of Nations (2021) and World Bank staff calculations. FIGURE 12 Equatorial Guinea is the fifth largest producer of oil in SSA Oil production in Equatorial Guinea and SSA, (avg 2017-2022; thousand barrels daily) Nigeria Angola Congo, Rep. Gabon Equatorial Guinea Chad 0 200 400 600 800 1000 1200 1400 1600 1800 2000 Source: Statistical Review of World Energy – BP (2022) Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 47 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth Since their discovery, Equatorial Guinea’s oil and gas resources have attracted significant direct foreign investments, mostly from the United States. Net FDI inflows grew from about 10 percent of GDP in the early 1990s to more than 160 percent of GDP in the mid-1990s. During the oil boom period (2000-2014), net FDI inflows as a percent of GDP were, on average, higher in Equatorial Guinea compared to peers (Figure 13). Oil companies operating in Equatorial Guinea include the American companies ExxonMobil, Marathon Oil Corp, Kosmos Energy, Chevron (previously Noble Energy); and the London-based company Panoro Energy. ExxonMobil’s upstream affiliate in Equatorial Guinea, Mobil Equatorial Guinea Inc. (MEGI), is the largest oil producer in the country. 9 Despite recent decreases in hydrocarbon production, the Equatoguinean economy continues to depend heavily on the sector for both fiscal revenue and export earnings. More than 80 percent of revenues emanate from the hydrocarbon sector (Figure 14a). The hydrocarbon sector represents nearly 32 percent of GDP as of 2023. Equatorial Guinea’s exports are concentrated in the oil sector and are less diversified compared with peer economies. Crude petroleum and petroleum gas represented nearly 75 percent of the country’s total exports in 2022 (Figure 14b). Revenue mobilization in both hydrocarbon and non-hydrocarbon sectors and the management of natural resource rents are key to longer-term economic prosperity (see Chapter 2). FIGURE 13 FDI in Equatorial Guinea, highly concentrated in the oil sector during the early 2000s, has dropped significantly since the end of the oil boom FDI net in ows (% of GDP) in Equatorial Guinea and peers, 2000-2022 65 55 45 35 25 15 5 -5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Equatorial Guinea Structural peers Aspirational peers Aspirational peers+ UMC SSA Source: WDI and World Bank staff calculations. Note: UMC=upper middle-income countries, SSA= Sub-Saharan Africa. 9 Equatorial Guinea’s oil production is grouped by platforms, including Zafiro, Alba, Okume Complex, Ceiba, Aseng, with Zafiro being the leading asset. . Regarding the gas sector, the country’s gas production is categorized by assets including Alba and Alen. Sonagas, the national natural gas company, manages the exploration, distribution, and marketing of natural gas assets. GEPetrol, the national oil company, is responsible for contract negotiations (acting as an agent for the Ministry of Hydrocarbons and Mining Development) and managing the government’s interests in the oil sector, including royalties and carries and participating interests. ExxonMobil is currently exiting Equatorial Guinea (its license expires in 2025). 48 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth FIGURE 14 The country’s fiscal and external earnings are heavily dependent on the oil sector a. Hydrocarbon and other revenues, Equatorial Guinea, in b. Export composition by product, Equatorial Guinea, in percent of total revenues, 2009-2023 percentage of total exports, 2022 100 90 80 70 60 50 40 Gas, 31% 30 20 10 Medica- ments, Cars, 2% 2% 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Alco- Mine- Crude Petroleum, Other Products, hols, 1% rals, 1% 44% 17% Hydrocarbon revenues Other revenues Wood, 1% Source: Equatoguinean authorities and World Bank staff calculations Source: The Observatory of Economic Complexity (OEC) To slow down the decline of the hydrocarbon sector, the Equatoguinean Government is taking actions to diversify the sector. The authorities are continuing their efforts to optimize hydrocarbon reserves and their objective of transforming Equatorial Guinea into a gas processing center through the Punta Europa facilities. Planned projects include (i) the development and processing of transboundary gas resources in the Douala Basin (Yoyo-Yolanda, Carmen-Diegan, Etinde), the negotiation of the final agreements for the Mega Gas Hub (phase II-Alba and phase III-Aseng) and the Nigeria Gas Pipeline project. The exploitation agreement for the Yoyo-Yolanda project was signed by the Heads of State of Cameroon and Equatorial Guinea and was recently approved by the Equatoguinean Parliament. Moreover, the companies – Trident Energy and Kosmos – are working on the exploration of new oil sites. More recently, Chevron and GEPetrol (Equatorial Guinea’s state- owned oil company) have signed two production sharing contracts (PSCs) for offshore blocks EG-06 and EG-11 in Equatorial Guinea- representing a US$2 billion investment.10 The signing of the new PSCs will allow the start of a new exploration and production campaign at these blocks. Equatorial Guinea’s vast endowment of renewable wealth offers untapped economic potential. Apart from oil and gas, most natural resource wealth in Equatorial Guinea is underexploited. Agriculture, forestry, and fishing constitute a negligible share of GDP, averaging 2.3 percent between 2015-2022. Yet, some 26 percent of the population still lives in rural areas.11 They represent economic actors who could contribute much more to the creation of national wealth, and their productivity must be raised if poverty and inequality are to be reduced. Abundant land, fertile volcanic soil, and plentiful rainfall offer significant agricultural opportunities. The country is largely covered by forests which account for 87 percent of the land area, resulting in potential for agroforestry and a timber industry. The country’s exclusive maritime fishing zone is significant at 314,000 sq km (comparable to that of the Philippines or Thailand), with a large variety of marine species. Investing in renewable resources with high potential but not fully exploited, such as forestry, agroforestry, fishing and sustainable agriculture, could be one way to diversify Equatorial Guinea’s natural capital mix and generate income. 10 https://www.worldoil.com/news/2024/6/23/chevron-inks-offshore-2-billion-exploration-production-deal-with-equatorial-guinea-following-multiple-oil-and- gas-discoveries/ 11 Equatorial Guinea signed the Comprehensive African Agriculture Development Programme (CAADP) Compact in 2013, committing to prioritize agricultural transformation and development. The 2016 Malabo Declaration on Accelerated Agricultural Growth and Transformation for Shared Prosperity and Improved Livelihoods reaffirms the central commitment of the Maputo era, namely to allocate 10 percent of national budget to agriculture development. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 49 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth Agriculture has been neglected and lost resources to the hydrocarbon sector. Youth and capital have been drawn to the urban economy, but with the decline in oil and gas it is time to reinvest in agriculture and make it a more attractive livelihood. Equatorial Guinea is heavily dependent on imported food, some of which could be produced locally. Export opportunities include cocoa, coffee, abaca, palm oil and coconuts. Many of the challenges facing the agriculture sector have real and achievable solutions. In the short term, policymakers can: (i) maximize the country’s export capacity by increasing access to storage, improving connectivity between rural and urban areas, and facilitating the adoption of post-harvest transformation technologies; (ii) improve quality control of agricultural inputs and raise the standard of domestic produce; (iii) promote agricultural commercialization through greater regional trade integration; (iv) encourage the formation of industry cooperatives to foster the exchange of agricultural best practices and allow farmers to achieve economies of scale; (v) attract younger workers to the agriculture sector by creating employment opportunities in agro-tech research and technologically advanced agricultural industries; (vi) manage risks by adopting sustainable and modern agricultural practices; and (vii) develop an index-based agricultural insurance scheme.12 Despite its large fishery resources, Equatorial Guinea is a net importer of fish. Due to the lack of a national fleet (only one trawler recently acquired), industrial fishing is mostly artisanal, or licensed to foreign industrial trawlers. The main contribution of the industrial fishery is the payment of taxes and licenses. Notwithstanding, in recent years, the government reported an increase in tuna catches by the national industrial fleet, although the expansion of the sector has been affected by the rise of maritime piracy in the Gulf of Guinea. Key recommendations for the sector focus on institutions, planning, data, and the role of women. First, authorities should develop medium- and long-term strategies, and adopt international fisheries agreements promoted by the United Nations, to demonstrate its commitment to international governance. Second, they should establish a long-term management plan to ensure the sustainability of the fisheries sector. The reduced number of industrial vessels fishing in Equatorial Guinea and their small catch, the low capacity of artisanal fisheries, and recent assessments of the fish biomass suggest there is margin to increase the volume of fish caught and processed. Third, the government should underpin their strategy with a data collection system consistent with international standards. Fourth, authorities should strengthen monitoring, control and surveillance to strictly enforce the number of licenses issued to industrial fisheries and prevent overfishing. Finally, to reduce poverty and strengthen food security through higher productivity and household incomes, the government will need to adopt a gender-based approach in the fisheries sector that ensures that women, who play a major role in the artisanal fisheries industry, receive targeted training and can access credit.13 Strong reforms are required for Equatorial Guinea to reap the benefits of its forest endowments There are few countries in the world that have a higher percentage of territory covered by forests. With 87 percent of its terrestrial area covered by forests, Equatorial Guinea has the 7th highest forest cover in the world and 2nd highest in Africa (only slightly behind Gabon).14 These forests hold immense value for many stakeholders. There are at least 500,000 (30 percent of total population) rural Equatoguineans that live within forests and are dependent on forests for their livelihoods.15 Prior to the discovery of petroleum, Equatorial Guinea’s forests were one of the main contributors to the national economy (20 percent of GDP in 199516) with commercial timber harvesting an important source of tax revenues and foreign currency reserves. At the international level, “for its size, there is probably no single site in the world with more taxa of threatened primates than Bioko” 17 and the continental forests are part of the immense Congo Basin Forest, crucial for global attempts to limit climate change. 12 See the Equatorial Guinea Diagnostic Trade Integration Study (DTIS) 2019 for more details. The 2019 DTIS provides detailed analysis of the agricultural sector and recommendations. 13 See the Equatorial Guinea Diagnostic Trade Integration Study 2019 for more details. 14 FAO.2023. Land Use. In: FAOSTAT. Rome 15 INEGE (Equatorial Guinea National Institute of Statistics). 2015 Population census: Republic of Equatorial Guinea. 16 National REDD+ Investment Plan 2020 17 Butynski et al. 2009. Body measurements for the monkeys of Bioko Island, Equatorial Guinea. Primate Conservation 24(1): 99-105. 50 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth Although deforestation rates have been low over recent decades, the forest asset base is being rapidly degraded. Deforestation is considered moderate (about 0.3 percent annually since 2004), but forest degradation is high and increasing from 0.9 percent annually (2004-2014) to 1.2 percent (2014-2018).18 Since 2000, Equatorial Guinea has lost approximately 50 percent of its “intact forests” 19 and has the lowest forest landscape integrity index score amongst the 6 Congo Basin countries. 20 Relative forest loss has been highest on the islands (Bioko and Annobón) overlapping with the most threatened biodiversity. Equatorial Guinea was a signatory to the Glasgow Declaration (2018) that calls for an end to deforestation and land degradation by 2030, but both targets are not currently on-pace to be achieved. Forest degradation has been mainly driven by the growth of subsistence agriculture (41 percent), followed by infrastructure development (36 percent) and forest harvesting (23 percent). 21 As most of the planned infrastructure has already been built, future forest loss risks should focus primarily on small-scale agriculture and forestry operations. The joint FAO- Government analysis (2018) subdivided forest degradation by forestry into three categories with relative weightings: (i) timber harvesting outside of commercial concession boundaries (either by artisanal operators, concessionaries, or illegal companies) was 14 percent of total forest degradation, (ii) timber harvesting within limits of concessions was 9 With 87 percent of percent, and (iii) charcoal and non-timber forest products was 1 percent of its terrestrial area total forest degradation. covered by forests, Equatorial Guinea Although not a primary source of forest degradation, commercial forestry has the 7th highest operations have been leased around 40 percent of the forest area and this sector is not meeting its job generating and economic potential. There forest cover in are 98 forestry concessions leased for 15-year terms covering 1,064,900 the world and 2nd hectares. 22 Recognizing that exporting round logs (without any processing) highest in Africa. was minimizing the number of jobs and economic returns generated for These forests hold Equatorial Guinea, the Government banned the export of unprocessed immense value for timber in 2009 and then reaffirmed this ban in 2019 (after not consistently many stakeholders. implementing the original ban). However, during the global Coronavirus pandemic in 2020, the round log export ban was officially lifted, and this has been continued to the present despite the regional CEMAC efforts to ban the export of round logs. Despite the Government’s long-term ambitions, since 2015, round logs have accounted for 98 percent of forestry exports. There are an estimated 5,000 formal jobs in the forestry sector (not including informal jobs) with almost all jobs in harvesting trees, not processing timber. 23 In December 2023, the Government announced that it will implement a new round log export ban by June 2024. 24 In contrast, Gabon consistently implemented its 2009 log-export ban and has seen dramatically different results. Although forestry production initially declined sharply when implementing the log export ban, in the medium-term it has resulted in significant job growth and expanding GDP contributions. From 2010 to 2022, formal, full-time forestry sector jobs have increased 203 percent (to 12,000 jobs in 2022), and contribution to 18 National REDD+ Investment Plan 2020 19 “Intact forest” is defined as an unbroken expanse of natural ecosystems showing no signs of significant human activity and large enough that all native biodiversity, including viable populations of wide-ranging species, could be maintained. Data from: Intact Forest Landscapes (https://intactforests.org/) 20 Forest Declaration Assessment. 2022. Regional Assessment 2022. 21 National REDD+ Investment Plan 2020, using data from 2004-2014. 22 CIFOR. 2021. The Forests of the Congo Basin: State of the Forests 2021. 23 CIFOR. 2021. The Forests of the Congo Basin: State of the Forests 2021. 24 Website https://ahoraeg.com/politica/2023/12/14/guinea-ecuatorial-prohibira-la-exportacion-de-madera-en-rollo-a-partir-de-junio-del-2024/ retrieved on January 24, 2024. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 51 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth GDP has increased by 322 percent (to 489 billion XAF in 2022). 25 In Gabon, forestry is the second largest exporter behind only petroleum (15 percent of exports by value), is responsible for 40 percent of all tax revenues, and the largest private sector employer. This growth in jobs has been exclusively because of the growth of forestry processing, with harvesting jobs declining slightly throughout this period. In the future, Gabon aspirations are to move further up value-chains and increase job growth by a factor of twenty. For Equatorial Guinea to also grow jobs and its forest economy, a broad agenda of reform is required. Currently the foundational legal document (Forest Use and Management Law (1997)) governing the forestry sector is pending an update to address some shortcomings and inconsistences with other laws. Sector governance is a major concern, with long-term accusations of endemic corruption undermining the implementation of the law. 26 Despite the legal requirements, no forestry inventories have been completed since 1992, no Forestry Management Building Plans have been formulated or implemented, there are no third-party certified the forestry concessions (e.g., Forest Stewardship Council), and concessionaires’ compliance economy of with social commitments is considered low. 27 There is not an effective system of Equatorial traceability for logs from cutting to export. The Equatoguinean forestry industry Guinea holds has been hindered by being denied market access beyond China, including access promise, but to European markets due to legality concerns. Hence, 95 percent of all forestry exports go to China (by value, 2010-2021). 28 will require considerable Furthermore, to ensure forestry sector growth is inclusive and sustainable policy reform, there needs to be an integrated approach to sector development across many increase in interrelated sectors, particularly agriculture and land governance. Greater government participation of local communities in forest governance is an aim of national forestry capacity, and legislation that has not yet been realized in practice. 29 The current dual tenure system combining customary, and state legal instrumental aspects generates a investments. level of uncertainty around legal compliance that is compounded by a lack of a digital land registry. The current tenure system is an underlying driver linked to all direct drivers of deforestation and forest degradation. Moreover, a growing population that depends on subsistence agriculture will require interventions to minimize their impacts on forest loss. To have forestry reach its potential and fulfil the economic diversification vision of AGENDA-2035, urgent investment is required as results will largely manifest over the medium to long-term. Building the forestry economy of Equatorial Guinea holds promise, but will require considerable policy reform, increase in government capacity, and investments. To be ready to support economic diversification in the 2030s, there is a need to act urgently as the forest economy will take decades to fully develop. Furthermore, Equatorial Guinea remains behind regional peers in developing the policy and tools necessary to mobilize climate finance and needs to catch-up to be included in any potential Congo Basin financial flows related to forest carbon. External funding is essential in the country as climate finance remains mostly public with public funding allocated in 2019-2020 through the government representing only about 22 percent of the financing that Equatorial Guinea needs each year (US$472 million). Over the same period, private financing represented only 0.2 percent of the country’s climate funding inflows (US$ 112.04). 30 Mobilizing more private finance will require creating an enabling environment (see Chapter 2). 25 EY & Mays Mouissi Consulting. 2023. Impact du secteur bois sur l’économie du Gabon entre 2018-2022. 26 Wood, Geoffrey. 2004. Business and politics in a criminal state: the case of Equatorial Guinea. African Affairs, 103/412, pg. 547-567. 27 National REDD+ Investment Plan 2020. 28 Environmental Investigation Agency. 29 National REDD+ Investment Plan 2020. 30 AfDB. 2023. Equatorial Guinea country report. 52 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth © Jan Ziegler/istockphoto.com Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 53 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth 1.2.2 Physical and human capital Equatorial Guinea has not efficiently converted its natural resources into quality physical and human capitals Equatorial Guinea’s produced capital per capita has increased fifteen-fold since mid-1990s, mainly thanks to high investment in infrastructure. 31 The country’s produced capital per capita increased from US$2,742 in 1995 to US$41,473 in 2018, which is higher than the average level of structural peers but below that of aspirational peers (Figure 15a and Figure 15b). The significant accumulation of physical capital stems from the sharp increase in public investment, following the discoveries of large oil and gas reserves. The investment, amounting to a total of US$41 billion over 2008-2017, 32 was carried out mostly during the “Transformation” stage of the National Development Plan 2020 (NDP2020), whose goal was to build the foundations for long- term growth by addressing the large infrastructure gap in the country. Significant investments were also made in improving transportation connectivity (road infrastructure, two deep-water ports, and airport terminals), electricity generation, telecommunication infrastructure, public administrative buildings, and social housing. This led to a considerable improvement in the country’s capital stock. For instance, more than 63 percent of the 3,971 km road network of Equatorial Guinea is paved, compared to only 31 percent in Africa but below that of most aspirational peers (Table 1). Physical capital accumulation slowed markedly with the end of the oil boom, despite still lingering needs in access and quality of infrastructure, including digital. Since the end of the oil boom, capital expenditure decreased from an average of 25.9 percent of GDP during 2009-2014 and reached a minimum of 2.1 percent of GDP in 2021 (Figure 16a). Equatorial Guinea’s access to electricity and quality internet services remains inadequate, especially outside the largest cities of Malabo and Bata. While access to electricity is better in Equatorial Guinea (66.7 percent) than the SSA average, it still remains low compared to the average access rate among structural and regional peers (Figure 16b). Indicators of telecommunications development point to lower internet penetration in Equatorial Guinea compared with peers and the SSA average. This can be explained by the higher cost of the broadband connectivity in the country. The average price of data-only broadband in Equatorial Guinea represented more than 23 percent of monthly GNI per capita, and most citizens earn considerably less than that average level. The limited quality and access to ICT services constrain digital adoption by both individuals and firms, which are important for promoting economic diversification and growth (see Chapter 5). Much of the existing infrastructure in the country remains underused. Despite the existing capital stock which includes 3 deep maritime ports, 5 airports and significant road connectivity, most infrastructure remains unused or under capacity. Port container traffic in Equatorial Guinea is below that of the country’s peers and operated under capacity, despite adequate infrastructure and the country’s potential for maritime trade due to its strategic geographic position (Table 1). The government has recently signed a management contract for the maritime port of Bata and is searching for potential concession agreements with private companies in order to recover some of the investment cost. Road and airport infrastructure, on the other hand, is mostly underutilized due to lack of tourist arrivals amid difficulties of getting a visa as well as significant barriers, including required permissions to travel within the country. In July 2023, the government launched an electronic visa system which could remove an important barrier to foreign visitors (see Chapter 5). Moreover, the new terminal at the international airport in Malabo (with an extension of more than 45,000 square meter), inaugurated in early 2022, became operational only in mid-2023. The country also made major investments, including for the construction of the Ciudad de la Paz, in the administrative province of Djibloho, which in 2014 accounted for about 78 percent of the budgeted public capital spending. It was initially built to replace the current capital Malabo, but the transfer has yet to take place. 31 Produced capital includes physical capital (machinery, buildings, equipment) and urban land. 32 IMF Article IV 2022. 54 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth FIGURE 15 Physical capital accumulation, in per capita terms, in Equatorial Guinea dropped after the end of the oil boom and remains among the lowest when compared to peers a. Produced capital per capita, Equatorial Guinea, 1995-2018 b. Produced capital per capita, Equatorial Guinea and peers, (constant 2018 USD) 2018 60000 300000 250000 50000 200000 150000 100000 40000 50000 0 30000 Equatorial Guinea Azerbaijan Congo, Rep. Gabon Malaysia Oman Kuwait Bahrain United Arab Emirates Qatar 20000 10000 Structural Aspirational peers peers 0 Produced capital per capita Structural peers, average 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Aspirational peers, average Source: CWON (2021) and World Bank staff calculations TABLE 1 Quantity of infrastructure, Equatorial Guinea and peers, latest data available Road network Port container Air passengers Country Total Paved traffic carried (in km) (in percent of total) (TEU thousands) (thousands) Equatorial Guinea 3,971 63.7 10 139 Structural peers Azerbaijan 19,228 99.5 545 Congo, Rep. 23,324 13.3 557 226 Gabon 10,344 21.5 193 Timor-Leste 6,040 43.1 53 Aspirational peers Bahrain 4,940 85.2 454 1,451 Kuwait 8,288 100.0 864 1,824 Malaysia 267,045 74.3 26,664 15,894 Oman 76,359 52.9 5,142 2,496 Qatar 7,039 100.0 1,410 10,641 United Arab Emirates 83,766 100.0 19,298 26,117 Source: WDI, http://wdi.worldbank.org/table/5.10, National Statistical Institute of Equatorial Guinea (INEGE), and International Road Federation. Note: A TEU (twenty-foot equivalent unit) is a measure of volume in units of twenty-foot long containers. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 55 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth FIGURE 16 The decline of public capital spending since the end of the oil boom has hampered improvements in infrastructure quality in the country a. Capital expenditures (percentage of GDP), Equatorial Guinea, b. African Infrastructure Development Index, Equatorial Guinea 2009-2023 and peers, 2022 40 20 18 35 16 30 14 25 12 20 10 8 15 6 10 4 5 2 0 0 Equatorial Guinea CEMAC SSA average 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Electricity ICT Source: Equatoguinean authorities, Africa Infrastructure Development Index (AIDI), and World Bank staff calculations The government’s significant investment in infrastructure was not followed by corresponding improvements in Equatorial Guinea’s logistics performance. The country’s score on the Logistics Performance Index (LPI), which measures performance along the logistics supply chain within a country, is low by international standards. In 2018, Equatorial Guinea’s LPI score was comparable to that of its structural peers but below the average for SSA, UMIC, and its aspirational peers. While the quality of international shipments improved between 2014 and 2018, the country’s overall logistics performance index slightly deteriorated (see Chapter 5). The deterioration of the quality of infrastructure and logistics raises pressure on service delivery and operational costs for businesses. The increase in public spending following the rise of the oil sector did not successfully translate into significant progress in human development outcomes. Investing in people is necessary to allow the country to break into new economic activities and secure sustained growth. Yet, Equatorial Guinea Investing in people ranks 133rd (out of 193 economies) on the Human Development Index (HDI), with is necessary to an index of 0.650, below that of most of its structural and aspirational peers allow the country and not in line with its upper-middle-income status. Mean years of schooling in to break into Equatorial Guinea at 8.3 is below that of structural peers like Azerbaijan (10.6) and Gabon (9.6). According to the World Health Organization, stunting still new economic affects 16.1 percent of children under 5 in Equatorial Guinea, hindering their activities and learning potential and economic opportunities. Progress in human capital secure sustained development has been slow because of insufficient social spending and poor growth. public service delivery. Chapter 3 examines the education, health, and social protection sectors and discusses how Equatorial Guinea can boost human capital to achieve faster and more diversified growth. 56 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth 1.2.3 Institutions Weak institutional capital hampered the conversion of natural capital into other forms of wealth Equatorial Guinea ranks below its peers in governance and quality of institutions. For countries with low levels of produced and human capital, the quality of institutions determines how well public services are delivered, how level the playing field is for companies, and whether opportunities can be provided for both individuals and firms (Izvorski et al., 2018). 33 The quality of governance and institutions is important in allowing resource- rich countries to reap the full benefits of their natural wealth. Ensuring efficient use of natural resources for present and future generations requires stronger institutions. Better fiscal management is especially critical in resource-dependent countries like Equatorial Guinea (see Chapter 2). Yet, Equatorial Guinea ranks in the very low percentiles on most Worldwide Governance indicators (WGI), including for control of corruption, regulatory quality and voice and accountability (Figure 17). Equatorial Guinea ranks below structural and aspirational peers in all WGI except for political stability and absence of violence and terrorism. The gap with peers is particularly large in key governance dimensions that support economic growth, including, regulatory quality, control of corruption, and government effectiveness (Doumbia, 2019). FIGURE 17 Equatorial Guinea lags peers in terms of enabling institutions Estimate of Worldwide Governance Indicators, Equatorial Guinea and peers, percentile rank (0 (lowest) to 100 (highest), 2022 80 70 60 50 40 30 20 10 0 Control of Political Stability Government Regulatory Quality Rule of Law Voice and Corruption and Absence of Effectiveness Accountability Violence/Terrorism Equatorial Guinea Structural peers Aspirational peers Source: WGI, World Bank The quality of Equatorial Guinea’s policies and institutions has not significantly improved in recent years. The quality of government effectiveness measured by the WGI shows that the score for Equatorial Guinea deteriorated over time and remains below that of most of its structural and aspirational peers (Figure 18a). Equatorial Guinea underperforms especially in public sector management. This poor performance is explained by lack of transparency in the public sector, low efficiency of government spending and revenue collection (see Chapter 2). For example, Equatorial Guinea scores very low at 17 (on a scale from 0 to 100) on the Corruption 33 https://openknowledge.worldbank.org/server/api/core/bitstreams/5daf6ef7-6eaf-5b85-9bca-4aab617da647/content Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 57 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth Perception Index, well below the average scores of structural and aspirational peers (Figure 18b). Equatorial Guinea is no longer a member of the Extractive Industries Transparency Initiative (EITI), the global standard to promote the open and accountable management of oil, gas, and mineral resources. The country was delisted from the EITI in 2010 and later submitted a candidature application in 2019, which was not accepted. More recently, in February 2022, the government submitted a new application for EITI, which is pending one key milestone – a conference on EITI membership with the participation of civil society. The country has recently made efforts to put in place a framework to control and limit the incidence of corruption, including with the passage of an anti-corruption law in late 2021, allocation of funds to the anti-corruption commission (ACC) in the 2023 and 2024 budget laws, ongoing finalization of the regulations operationalizing the ACC and asset declaration process; the completion of the audits of the largest state-owned oil and gas companies; the drafting of a law limiting the recourse to non-competitive tenders in the public procurement code and the signature of a decree establishing a treasury single account. However, these efforts have not yet translated into significant improvements in the quality of governance. © mtcurado/istockphoto.com 58 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth FIGURE 18 Equatorial Guinea’s government effectiveness deteriorated in recent years and perception of corruption remains higher compared to peers a. Government effectiveness in Equatorial Guinea and selected b. Corruption Perception Index: Equatorial Guinea and peers, peers, 2000-2022 (Overall estimate, -2.5 (low) to 2.5 (high)) 2023 (100 (low) to 0 (high)) 1.0 60 0.5 50 0 40 -0.5 30 -1.0 20 -1.5 2000 2010 2020 2022 10 Azerbaijan Bahrain Congo, Rep. Equatorial Guinea 0 Gabon Kuwait Equatorial Structural Aspirational Aspirational Oman Guinea peers peers peers+ Source: WGI, World Bank and Transparency International Weak governance and institutions result in a challenging business environment in Equatorial Guinea. The development of Equatorial Guinea’s private sector, including the non-oil sector, is held back by a range of regulatory and political factors (see Chapter 4). Currently, the Judiciary of Equatorial Guinea is facing several challenges, including, for instance, the lack of a judicial career, lack of specialization in commercial matters, and obsolete procedural laws. While the country is a member of OHADA (Organisation pour l’Harmonisation en Afrique du Droit des Affaires) and OAPI (Organisation Africaine de la Propriété Intellectuelle), it has not yet adopted the legal framework for the management of intellectual property and copyrights. Equatorial Guinea’s WGI scores for the rule of law and the regulatory environment are low at -1.4 and -1.5, respectively, in 2022 (Figure 17). The social sector is hampered by weak institutional capacity and management, leading to significant shortcomings in human capital. Overall, human development outcomes in Equatorial Guinea are not aligned with the country’s level of GNI per capita. Weak governance and institutions can lead to inefficient redistribution of resource revenues and underinvestment in productive and social sectors such as education and healthcare (Mehlum et al. 2006; Cockx and Francken, 2014). Equatorial Guinea lacks funding for social programs and a coordinated, integrated, and stable planning to address health and education priorities. The country spending on education and social assistance programs is very low by international standards. For instance, education spending in the country is only 0.9 percent of GDP, well below the standard level of 4-6 percent of GDP. 34 On health, domestic expenditure is low while out of pocket payments borne by users are high (see Chapter 3). The authorities have started taking measures to improve human capital by setting a higher budget for social spending in the 2024 Budget Law and the objective of phasing out most of the existing fuel subsidies which would free up resources for investments in human capital and to support Equatorial Guinea’s economic diversification efforts (World Bank, 2023). 34 The international benchmarks agreed in 2015 as part of the Education 2030 Incheon Declaration correspond to an allocation to education of at least 4-6 percent of GDP and/or at least 15-20 percent of public expenditure to education. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 59 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth 1.3 Boosting long-term growth The report relies on the World Bank’s long-term growth model (LTGM) to examine the trajectory of Equatorial Guinea’s economic growth until 2050. The LTGM generates trajectories for economic growth based on assumptions on growth fundamentals such as investment and productivity. This report uses the Natural Resource Extension (NR) of the LTGM which allows to explore in more detail economic growth fundamentals specific to resource-dependent countries such as Equatorial Guinea. In particular, the LTGM-NR adds the natural resource sector to the standard LTGM and allows the disaggregation of the economy into the resource and non- hydrocarbon sectors. The model assesses the evolution of long-run growth, and it also allows for additional analysis such as the impact of commodity price shocks and resource discoveries on long-term growth. The non-resource sector takes assumptions on ”standard” drivers of growth, including total factor productivity (TFP), human capital, investment, and demographics (e.g., population growth, labor force participation). The LTGM-NR includes two sets of simulations (i) a business-as-usual or baseline scenario in which the assumption is that growth drivers follow their historical or recent trends, 35 and (ii) a simulation based on reform scenarios. Table A1 in Annex 1 shows the overview of growth drivers under the baseline and the moderate and ambitious reform scenarios. 1.3.1 Baseline projections of GDP growth Without strong reforms and amid declining hydrocarbon reserves, Equatorial Guinea’s economic growth is projected to remain on average negative throughout the projection period (2024-2050) Under the business-as-usual scenario, which assumes a progressive decline in hydrocarbon reserves, GDP growth rate is negative at -1.6 percent in 2024-35 and at -1.2 percent in the 2030s, on average. 36 The baseline simulations measure the economic growth potential in the absence of future shocks or economic reforms. The simulations show that Equatorial Guinea’s GDP growth would remain negative, from -2.5 percent in 2024 to -1.3 percent in the 2040s (Figure 19). GDP per capita is projected to contract annually by -4.3 percent in the medium term (2024-30) and then by -2.9 percent in the longer term, 37 after already contracting by -7.2 percent on average in 2010-2019. All in all, under the baseline scenario, GDP per capita is projected to decline to US$ 2,379 (in constant 2015 US$) in 2050 (less than half that of 2024) while GNI per capita will also continue on a declining trend until 2050, with Equatorial Guinea moving from an upper-middle to a lower-middle income status in end-2025. The business-as-usual scenario shows a slightly increasing GDP growth rate in the non-resource sector but a decreasing growth rate in the resource sector. Non-resource GDP is projected to grow at a negative 0.38 percent, on average, until 2050, increasing from -1.02 percent over 2024-2035 to 0.13 percent over 2036-2050. The non-resource GDP growth would turn positive only toward the end of the 2030s. In contrast, the hydrocarbon 35 The baseline model uses oil prices as per the World Bank pink sheet and World Bank forecast until 2025 which remain above US$80 from 2023 to 2025. The business-as-usual scenario assumes a linear decrease in oil prices from 2025 to 62.8 USD by 2040 (equivalent to the 2000-19 average oil price), factoring in a decrease in prices since climate pledges from countries would accelerate the decarbonization of the economy. An alternative scenario considers a stronger reduction in oil prices (see section 1.3.3). 36 The chapter uses an alternative assumption under the baseline model that oil prices stay constant at USD80/barrel from 2026 until 2050. The findings are in line with those of the original baseline scenario. Under the alternative baseline scenario, GDP growth rate is negative at -1.54 percent in 2024-35 and at -1.13 percent in the 2030s, on average. 37 This also reflects the fact that population growth is higher than GDP growth. 60 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth sector is projected to decline at 3.0 percent, on average, from 2024 to 2050, from -2.2 percent between mid- 2020s to mid-2030s to -3.7 percent from mid-2030s to the 2040s. The baseline GDP growth would decline because of the still important, though declining, role of the hydrocarbon sector in the Equatoguinean economy. FIGURE 19 Baseline GDP and GDP per capita, annual growth rate, percentage 3.0 1.5 0 -1.5 -3.0 -4.5 -6.0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 GDP growth, Baseline (LTGM) GDP Growth, Resource sector, Baseline (LGTM) World Bank (WDI and MPO SM 2024) Per capita GDP growth, Baseline (LTGM) GDP growth, Non-Resource sector, Baseline (LGTM) Source: World Bank’s staff estimates based on the LTGM. Note: WDI stands for World Development Indicators, and MPO SM 2024 represents the projections of the Macro and Poverty Outlook of the 2024 Spring Meetings. The projections were made using data available as of June 2023. 1.3.2 Reform scenarios: non-oil TFP growth, human capital, investment, and female labor participation This section examines how Equatorial Guinea could increase its growth potential with moderate or ambitious reforms to improve the drivers of growth. The aim for each growth driver is based on regional, income, or aspirational peers—typically SSA, upper-middle income countries (UMICs) and some of the Gulf countries and Malaysia. Moderate scenarios for non-resource TFP growth target the 75th percentile of the distribution of SSA countries while ambitious reforms scenario target the 75th percentile of the distribution of UMICs. Equatorial Guinea should attract more investments by, for instance, adopting reforms to improve the business environment and competition (see Chapter 4). Under the moderate reform scenario, the target for public investment is based on the 75th percentile of the distribution of UMICs while that of private investment is based on the median of the distribution of Equatorial Guinea’s aspirational peers. The ambitious scenario targets the median and the 75th percentile of the distribution of aspirational peers for reforms to boost public investments and private investments, respectively. Reform assumptions to boost human capital growth are based on the median of the distribution of UMICs and SSA (moderate reforms) and on the 75th percentile of the distribution of Equatorial Guinea’s aspirational peers (ambitious reforms). The share of female labor force participation (FLFP) targets the median and the 75th percentile of the distribution for SSA under the moderate and ambitious reform scenarios, respectively. Table A1.2 in Annex 1 provides the detailed assumptions for moderate and ambitious reforms. This section considers the individual reforms one by one, and the following section aggregates them to analyze the overall effect of a holistic reform package. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 61 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth An increase in non-energy TFP would, on average, have the strongest boost on GDP growth over the next 25 years. Reforms to increase non-energy TFP growth, including to improve innovation, infrastructure, institutions, education, and market efficiency, would lead to an incremental growth in GDP in 2024-2049 by 1.1 and 1.7 percentage points per annum under moderate and ambitious reforms, respectively (Figure 20a). Over the same period, the non-resource GDP would grow annually by about 1.5 percentage points (moderate reform scenario) and 2.3 percentage points (ambitious reform scenario). FIGURE 20 Reforms to growth drivers (LTGM-NR simulation) a. Total Factor Productivity, annual GDP growth rate, in percent b. Private Investment, annual GDP growth rate, in percent 2 1.0 0.5 1 0 -0.5 0 -1.0 -1 -1.5 -2.0 -2 -2.5 -3 -3.0 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 Ambitious Moderate Ambitious Moderate Baseline Baseline reform reform reform reform c. Public Investment, annual GDP growth rate, in percent d. Human Capital, annual GDP growth rate, in percent 0 0 -0.5 -0.5 -1.0 -1.0 -1.5 -1.5 -2.0 -2.0 -2.5 -2.5 -3.0 -3.0 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 Ambitious Moderate Ambitious Moderate Baseline Baseline reform reform reform reform Source: World Bank staff calculations based on the LTGM-NR 62 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth Although a boost in investment will have a positive impact on economic growth, an increase in private investment to GDP would yield a higher impact compared with an increase in public investment. Reforms that promote a more conducive business environment would increase private investment to GDP from 5.5 percent to 7.5 percent by 2030 and until 2050 (moderate reform scenario) and boost GDP growth by 0.8 percentage points while an increase to 10 percent by 2030 (ambitious reform scenario) would yield an incremental growth of 1.1 percentage points over 2024-49 (Figure 20b). Moderate (ambitious) reforms to increase public investment would boost GDP growth by approximately 0.2 (0.5) percentage points over the same period, on average (Figure 20c). The ambitious reforms could reflect larger improvements in the business environment and stronger domestic revenue mobilization than the baseline. Equatorial Guinea would experience a gradual and important boost to GDP growth by improving the quality and quantity of human capital to the 75th percentile of SSA. As a country lagging its income peers in terms of years of schooling, Equatorial Guinea has room to implement economic reforms to improve human capital. Increasing human capital to reach a 0.9 percent growth, (i.e., the median level of UMICs and SSA, moderate reform) and the 75th (ambitious reform) percentile of SSA economies would boost GDP growth by approximatively 0.3 percentage and 0.5 percentage point on average, respectively, over the period 2024- 49 (Figure 20d). The moderate (ambitious) reforms would have a gradual impact on GDP growth which would increase by 0.07 pp (0.11 pp) in 2024 to 0.60 (0.92 pp) by 2050. This gradual increase means that the implementation of policies would start first to affect the cohort of children who are in the old education regime before reaching the full benefits when the children who started under the new regime would join the labor force. A rise in female labor force participation would also boost GDP growth in the long run but the impact would be on average limited compared to the other drivers of growth. An increase from 56.2 percent to the median (moderate reform), or 75th (ambitious reform) percentiles of FLFP of SSA countries would boost average GDP growth over 2024-49 by 0.1 and 0.2 percentage points, respectively, relative to the baseline scenario. 1.3.3 Reform packages, climate scenario, and oil and gas discoveries scenario A holistic reform package in Equatorial Guinea could yield a significant improvement in the country’s economic growth rate A mix of reforms would benefit from complementarities, be self-reinforcing, and create synergies, resulting in the strongest impact on GDP growth. A moderate package of reforms that combines reforms targeting all individual growth drivers – non-energy TFP growth, human capital, private and public investments, and female labor force participation – would yield an incremental annual GDP growth of 2.8 percentage points over the period 2024-49, while an ambitious reform package would result in the strongest growth trajectory, boosting GDP per capita growth by 4.45 percentage points on average over the same period (Figure 21a, 21b, and 21c). Under the strong reform scenario, the GDP growth rate is expected to be 5.6 percent in 2050, compared with -1.4 percent in the baseline scenario. Under a moderate reform scenario, GDP is expected to grow from -1.7 percent to 2.4 percent over the next 25 years. The GDP growth rate would remain negative over the next 25 years under the baseline scenario but would turn positive in 2028 (under the moderate reform scenario) and two years earlier under the ambitious reform scenario. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 63 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth FIGURE 21 Real GDP growth and decomposition of incremental GDP growth under different reform scenarios a. Real GDP Growth under different reform scenarios 6 4 2 0 -2 -4 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 Baseline Moderate reform Ambitious reform b. Moderate Reforms: decomposition of incremental GDP c. Ambitious Reforms: decomposition of incremental GDP growth, Percentage growth, Percentage 6 6 5 5 0.3 0.4 4 4 0.2 0.2 0.5 0.6 0.9 0.2 0.2 3 3 0.1 0.2 1.1 0.5 1.4 0.7 0.1 0.2 0.3 0.7 2 0.1 2 1.2 0.8 0.2 0.5 1.0 0.5 0.5 0.3 0.9 0.3 2.4 1 0.3 1 0.2 1.5 1.7 1.5 1.1 1.0 1.0 0.7 0 0 Avg. 2024-49 Avg. 2024-35 Avg. 2030s Avg. 2040s Avg. 2024-49 Avg. 2024-35 Avg. 2030s Avg. 2040s Non-energy TFP Human capital Private investment Non-energy TFP Human capital Private investment Public investment FLFP Public investment FLFP Source: World Bank Staff calculations using the LTGM-NR model. Note: The model is non-linear. Therefore, this decomposition is an approximation, and the sum of the incremental growth attributed to each growth driver does not match exactly the actual impact of the combined reforms package. FLFP and TFP stand for Female Labor Force Participation and Total Factor Productivity, respectively. Other scenarios of Equatorial Guinea’s potential economic growth over the next 25 years are analyzed. In the scenario in which oil and gas discoveries do not decrease as much as in the baseline scenario mentioned beforehand, the difference in the impacts is larger on resource GDP growth. 38 A lower-than-expected decrease in oil and gas discoveries would imply a higher but still negative GDP growth. GDP growth would increase, on average over the period 2024-49, by 0.34 percentage point (baseline scenario), 0.25 percentage point (moderate reform scenario), and 0.18 percentage point (ambitious reform scenario) (Figure 22a). On the other 38 The discoveries scenario implies that discoveries of oil and gas fall to half their initial values by 2050, reflecting potential increased production from planned and future projects (see Chapter 1, section 1.2.1). The authorities are continuing their efforts to optimize hydrocarbon reserves and their objective of transforming Equatorial Guinea into a gas processing center through the Punta Europa facilities. However, the projections of hydrocarbon production still indicate a secular decline, especially that Exxon Mobil is exiting the country with its contract expiring in 2025 and given the expected limited production from planned projects. 64 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth side, if the growth drivers follow the current trajectory the discoveries scenario projects higher impacts on hydrocarbon GDP which would fall by -2 percent by 2050 compared with -5.2 percent under the business-as- usual scenario. Regarding the impact of climate change, GDP growth would be slightly lower than expected, including under the reform package scenario. The climate scenario considers a stronger decrease in oil prices under climate pledges or net-zero emissions which would create pressure to decarbonize the economy faster. The scenario assumes that the oil price falls to US$20 (which is the 25th percentile of oil prices over the period 1990- 2021) by 2050. Under the climate scenario, two possibilities are considered: (i) the fall in oil prices does not affect public investment; and (ii) the government reduces public investment due to the decrease in revenues emanating from the drop in oil prices. The projections show that lower oil prices would not impact substantially GDP growth. However, if the government decreases public investment in response to lower oil prices, GDP growth would be 0.02 percentage points lower on average in 2024-2050 compared to the scenario in which public investment is not reduced (Figure 22b). The difference in GDP growth under the two scenarios will be gradually noticeable with the gap reaching about 0.04 percentage points in 2050. In the climate scenario with no reduction in public investment, GDP growth would be, on average, 0.33 percentage point lower over the next 25 years. FIGURE 22 Discoveries and climate scenarios (LTGM-NR simulation) a. Oil and Gas discoveries scenario, annual GDP growth rate, b. Climate scenario, annual GDP growth rate, in percent in percent 7 8 6 7 5 6 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 Baseline Baseline Baseline (Discoveries scenario) Baseline (Climate scenario) Moderate reforms Baseline (Climate scenario, IR) Moderate reforms (Discoveries scenario) Moderate reforms Ambitious reforms Moderate reforms (Climate scenario) Ambitious reforms (Discoveries scenario) Moderate reforms (Climate scenario, IR) Ambitious reforms Ambitious reforms (Climate scenario) Ambitious reforms (Climate scenario, IR) Source: World Bank Staff calculations based on the LTGM-NR model. Note: IR stands for the climate scenario with no reduction in public investment. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 65 CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth 1.3.4 How can Equatorial Guinea reinvigorate and sustain more diversified growth over the long-run? Equatorial Guinea needs to implement strong reforms in key areas in order to turn GDP growth positive, diversify its assets, and avoid a long-term recession. These reforms should specially focus on investment, human capital, and productivity. The report focuses on four key pillars which will be developed in four different chapters – (1) implementing an effective fiscal policy for sustained growth; (2) boosting human capital development for sustained and inclusive growth, (3) setting the framework for economic diversification and private sector-led growth; and (4) enhancing trade, digitalization, and ecotourism to further connect and transform the economy – to sustain faster, more inclusive and diversified growth in Equatorial Guinea. Policy recommendations provided in each chapter strengthen one or more assets. Pillar 1 Implementing an effective fiscal policy for sustained growth The Equatoguinean economy is undiversified and heavily dependent on the hydrocarbon sector. Total fiscal revenues are highly concentrated in the hydrocarbon sector with more than 80 percent of the revenues emanating from that sector. This exposes Equatorial Guinea to risks stemming from volatility in oil prices and exhaustibility of resources, generating large fiscal vulnerabilities. Fiscal policy has moved in tandem with oil prices: expansionary during the oil boom period, when government revenue stood at 30.7 percent of GDP over 2006-2014, and contractionary during the low commodity price-cycle, with revenues averaging 18.4 percent of GDP over 2015-2021. In this context, decoupling the volatility of revenues from the capacity of expenditure policy to sustainably support development needs is essential, including to ensure macroeconomic stability. Maximizing hydrocarbon revenues by strengthening the management of natural resource rents and improving the efficiency of spending are also important. Chapter 2 discusses how to enhance fiscal sustainability to support economic growth, strengthen domestic (oil and non-oil) revenue mobilization, and improve public expenditure efficiency and fiscal transparency. Boosting human capital development for sustained and inclusive Pillar 2 growth Human capital accumulation in Equatorial Guinea significantly lags that of regional, structural, and aspirational peers. Only 0.9 percent of GDP is allocated to the education sector in Equatorial Guinea, compared with the threshold of at least 4-6 percent of GDP as per the international benchmarks of education financing adequacy. Diversifying assets requires investing in human capital. Chapter 3 discusses in detail how to promote human capital development, including education, social protection, and health, for faster and more inclusive growth and economic diversification. 66 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 1 Diversifying Assets for Faster and Sustained Economic Growth Setting the framework for economic diversification and private sector- Pillar 3 led growth Constraints to competition and private sector development in Equatorial Guinea are more severe compared to structural and aspirational peers. The country is among the world’s lowest ranking countries in global indicators for corruption, transparency, and ease of doing business. The Bertelsmann Transformation Index (BTI) ranks Equatorial Guinea below peer countries on anti-monopoly policy, market-based competition, and legal safeguards protecting private firms. Constraints that impede private sector development include high levels of legal uncertainty, significant barriers to business entry, limited digitalization of public services, low internet usage, gender inequality, limited access to credit, and land titling issues. Improving competition and protecting firms would enhance innovation and support productivity growth. Chapter 4 provides a detailed analysis and policy options to improve private sector development and competition, and attract investment. Enhancing digitalization, trade and ecotourism to further connect and Pillar 4 transform the economy Exploiting opportunities from the global economy through trade, digitalization, and ecotourism would allow Equatorial Guinea to further connect with the world and promote economic diversification. However, despite a potential to become a regional trade hub thanks to its geographic localization and good port, road, and airport infrastructure, exports to African countries remain very limited. Improving the country’s LPI – which is below that of peers – will be critical to promote a further integration in regional and global value chains which can catalyze greater economic diversification and competitiveness. In addition to increasing productivity gains, digitalization also provides a powerful means to connect countries and reduces barriers and costs associated with distance. For Equatorial Guinea, economic diversification through ecotourism can provide more sustainable jobs and revenues to reduce inequality in lagging regions while serving as an entry point for reforms to further connect the insular country to the world. However, ecotourism remains at an incipient stage and will require various structural reforms and long-term investments. Chapter 5 focuses on how to improve trade connectivity and integration, digitalization, and ecotourism. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 67 68 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth © Djeneba Doumbia/World Bank CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth The heavy reliance on oil revenues exposes Equatorial Guinea to risks stemming from volatility in oil prices and exhaustibility of resources. Effectively implemented fiscal policies can help mitigate these risks, boost employment, productivity, and investment, contributing to long-term economic growth. In particular, efficient fiscal rules can mitigate the volatility of public spending and promoting long-term stability. Special fiscal institutions such as sovereign wealth funds and savings funds can be used to finance diversification efforts help address intergenerational inequity from the depletion of nonrenewable resources. Moreover, domestic revenue mobilization is one of the most important tools to create fiscal space for financing sustainable development investments. Countries can also boost their economic growth by raising and efficiently spending their own resources on social sectors and infrastructure that promote growth and support poverty reduction. This chapter examines how Equatorial Guinea could implement effective fiscal policies to improve fiscal sustainability, domestic revenue mobilization, and public expenditure efficiency. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 69 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 2.1 Enhancing fiscal sustainability in the presence of commodity price volatility to support economic growth 2.1.1 Fiscal policy as a tool for supporting economic growth and macroeconomic stability Well-designed fiscal policy is critical in managing the economy and achieving sustained economic growth The empirical literature suggests that fiscal policies, encompassing government spending and taxation, can generate significant potential gains. Following fiscal reforms, per capita growth is estimated to have increased by about 0.75 percentage points in advanced countries and the effects could be even higher in developing economies (IMF, 2015). The widely supported hypothesis is that investment in public infrastructure investment and education spending are positively associated with economic growth (Zagler and Durnecker, 2003; Nourzad and Vrieze, 1995; Sanchez-Robles, 1998; Kamps, 2004). Fiscal policy is the main lever for macroeconomic management of the Equatoguinean economy, given the limited role of monetary policy. Equatorial Guinea remains highly dependent on the hydrocarbon sector in terms of GDP, government revenue and exports. The country is part of a monetary union with the currency pegged to the Euro. In this context, ensuring and strengthening the management of resource revenue is critical for growth-enhancing policies and improving social outcomes, while safeguarding fiscal sustainability. Despite their potential, resource revenues have often created significant stabilization challenges because of their size, uncertainty, volatility, and finite nature (Basdevant and Imamoglu, 2021). Fiscal reforms, which encompass tax policy, expenditure policy, and institutional reforms, affect economic growth through several channels. According to the endogenous growth theory, fiscal reforms can affect growth through four main transmission channels—investment in human and physical capital, total factor productivity (TFP), and labor supply (Figure 23; IMF, 2015, Lopez et al., 2010). First, tax and spending policies can help promote human capital accumulation which is one of the main drivers of long-term growth (Lucas, 1988; Barro, 2001; Guellec and van Pottelsberghe, 1999; King and Rebelo, 1990; see also Chapters 1 and 2). Second, fiscal policy can influence physical capital. Efficient public investments can improve the productivity of the private sector, and increase returns on private investment (Nourzad and Vrieze, 1995; Sanchez-Robles, 1998). Capital tax cuts can also stimulate investment (Rebelo, 1991; Devereux and Love, 1994). Third, TFP can be improved using fiscal policy: (i) improved public infrastructure and services can promote private sector productivity and technological progress; (ii) higher government spending on R&D or introducing tax incentives to encourage private R&D spending can promote technological progress; (iii) higher public spending on education can bolster the absorption of new technologies. Fourth, decisions on whether to participate in the labor market (extensive response) and how much to work (intensive response) are affected by the tax-benefit system (Devereux and Love, 1994; Turnovsky, 2000). Moreover, some governments provide tax incentives to attract investment, though these tend to be ineffective in countries with a weak investment climate (World Bank, 2010). At the macro level, fiscal policy plays a critical role in ensuring macroeconomic stability, which is key to promoting sustained economic growth. Fiscal policy can contribute to macroeconomic stability through three main channels (Debrun and Kapoor, 2010). First, the automatic increase in government saving during upturns and reduction during downturns help cushion shocks to national expenditure (Blinder and Solow, 1974). Second, 70 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth authorities can use taxes, spending, and transfers to offset business cycle fluctuations. Third, fiscal policy can be designed to improve the resilience of the economy in the face of shocks by boosting economic efficiency and market flexibility. The remainder of this chapter assesses the status of fiscal policy and challenges in Equatorial Guinea and discusses how the country can use the three key policy tools – tax policy (section 2.2, domestic revenue mobilization), expenditure policy (including the efficiency of public expenditure) and public financial management (section 2.3) – to boost long-term and sustainable economic growth. FIGURE 23 Fiscal policy and economic growth: Main transmission channels • Human capital • Macroeconomic • Physical capital stabilization • Total factor productivity • Tax policy and Fiscal administration • Labor supply Long-term policy growth • Expenditure policy • Conducive business environment • Public Financial Management • Stable macroeconomic environment Source: World Bank staff elaboration updating IMF (2015). 2.1.2 Understanding fiscal challenges associated with resource volatility Fiscal dependence on the hydrocarbon sector has rendered fiscal management challenging in Equatorial Guinea Fiscal policy in Equatorial Guinea has been moving in parallel with hydrocarbon prices. From early 2009 and up to the end of the oil boom in 2014, international crude oil prices were high at an average of US$/ bbl 91.7. Amid favorable oil prices and the lack of efficient countercyclical fiscal measures, Equatorial Guinea undertook an expansionary fiscal policy in line with the Government’s National Development Plan Horizonte 2020 (NDP2020) launched in 2007. 39 During the period 2009-2014, capital expenditures averaged 25.9 percent of GDP and represented about 80 percent of total spending (Figure 24a). Current expenditures also marked a positive trend to reach 7.3 percent of GDP by 2014, albeit from a very low base of 4.9 percent of GDP in 2009. The sharp drop in crude oil prices in 2015 forced the country into fiscal consolidation. In 2015, crude oil prices fell sharply to US$/bbl 50.6 (from US$/bbl 96.2 in the previous year) and remained historically low at an average of US$/bbl 52.9 over 2015-2021. Low oil prices, along with the decline of hydrocarbon production, decreased the government’s fiscal space. Hydrocarbon revenue, which historically represented most of total 39 In 2007, the Government launched the National Development Plan Horizonte 2020. The first phase of Transformation (2008-2012) was focused on the development of physical and social infrastructure, human capital, and institutional and social transformation. The second phase of Emergence (2013-2020) had ambitious goals in terms of economic diversification and improvements in well-being of the population. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 71 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth revenue, fell to an average of 14.7 percent of GDP over 2015-2021 (10 percentage points below the 2009-2014 average) (Figure 24b). As a result, limited fiscal buffers forced the country into years of fiscal consolidation, with total spending dropping to 19.4 percent of GDP, on average, in 2015-2021. FIGURE 24 The end of the oil boom led to a sharp decline in capital spending a. Capital spending, Equatorial Guinea, 2009-2023 b. Public revenues and expenditures, Equatorial Guinea, boom and post-boom period 40 35 30 35 Percentage of GDP 25 30 20 25 Percent of GDP 15 20 10 5 15 0 10 Total spending Capital expenditures Total revenues Hydrocarbon revenues 5 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Boom (2009-2014) After the boom (2015-2021) Source: Equatoguinean authorities and World Bank staff calculations Large swings in the fiscal position, driven by oil price shifts, contributed to the volatility of Equatorial Guinea’s economic growth (Figure 25). Capital expenditures, which were historically a significant direct and indirect driver of economic activity, were cut significantly to 8.6 percent of GDP, on average, over the period 2015-2021 (17.3 percentage points below the level during the oil boom period). With reduced fiscal space, the government accumulated a significant amount of domestic arrears, especially with construction companies, with most still to be cleared. The sharp contraction in spending amplified the economic recession and limited capital accumulation, which in turn affected Equatorial Guinea’s long-term growth. The literature finds that, on average, cutting public investment has a significant negative impact on growth, especially, when compared to public consumption.40 Equatorial Guinea’s history of procyclical fiscal policies follows a similar trend to that of the other CEMAC member states. The recent literature finds evidence that the fiscal policy stance in the CEMAC region has been procyclical, and at a higher rate than other SSA countries (World Bank, 2022).41 Procyclical fiscal policies are more common in resource-rich CEMAC countries. The limited economic diversification due to the high dependency on commodity exports and institutional weaknesses reduce the likelihood of governments in the CEMAC region to move to a countercyclical stance. 40 Bou-Habib et al. (forthcoming)“Public Expenditures and Growth: A Long-run Analysis” World Bank with data for 112 countries over the period 1960-2019 finds that a 10 percentage-points permanent increase in government consumption and public investment is associated with 1.5 percentage points and 0.4 percentage-points permanent increase in growth, respectively. Moreover, cuts in government consumption have no statistically significant impact on growth, but the long-term growth impact of changes in public investment is symmetric. Nonetheless, within government consumption, policymakers should be cautious when dealing with goods, services, and maintenance spending. 41 CEMAC Quarterly Economic Barometer (2022). 72 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth FIGURE 25 Government spending in Equatorial Guinea has been highly pro-cyclical Growth in real GDP and public spending (in percentage), Equatorial Guinea, 2009-2023 20 60 15 40 10 20 5 0 0 -5 -20 -10 -40 -15 -20 -60 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Real GDP growth (lhs) Growth of public spending (rhs) Source: Equatoguinean authorities, World Bank staff calculations, and World Bank Commodity Prices The volatility inherent in commodity prices significantly impacts governments’ budgets, raising concerns about fiscal policy’s capacity to achieve macroeconomic stability and fiscal sustainability In addition to the issue of fiscal policy procyclicality, the volatility of resource revenues poses fiscal sustainability risks. 42 Large fiscal expansions during resource price booms can expose resource-dependent countries, depending on the availability of financing, to rapid and painful fiscal adjustments during periods of busts, increasing their fiscal vulnerabilities. The empirical literature suggests that spending tends to increase when prices go up, but this increase is not proportional to the decrease in spending when prices decline (Eyraud et al., 2023). Sizeable and unforeseen fluctuations in public spending can imply fiscal costs, including in terms of the quality and efficiency of spending (Ossowski and Halland, 2016). Furthermore, many expenditure programs are difficult to contain or streamline following expansions, which can generate negative implications for fiscal sustainability. Equatorial Guinea’s public debt peaked soon after the decrease in international oil prices. Public debt, at 35.1 percent of GDP in 2022, is sustainable but at a level well above that recorded prior to the 2014/2015 negative oil price shock (Figure 26). During the period 2015-2017, the increase in debt was mostly driven by an accumulation of domestic arrears with construction companies amid reduced fiscal space due to lower oil revenues. Debt with external bilateral creditors is relatively small at 12.4 percent of total public debt, and it includes an oil-backed loan with EximBank China for infrastructure projects. While the country’s current debt level is sustainable, oil price volatility and potential depletion of hydrocarbon resources still constitute risks to debt sustainability. The literature finds that oil price volatility poses significant risks to debt sustainability through various channels, including fiscal imbalances, external debt burdens, and macroeconomic instability (Arezki and Blanchard, 2014).43 A sustained drop in prices or resource 42 Fiscal procyclicality is the tendency for fiscal policy to expand during economic booms and contract during economic downturns. 43 Arezki, R., and Blanchard, O. (2014). Sept questions sur la chute récente des cours du pétrole. Rafiq, S., and Salim, R. (2014). Does oil price volatility matter for Asian emerging economies?. Economic Analysis and Policy, 44(4), 417-441. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 73 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth depletion in Equatorial Guinea can lead to disruption of government revenues. Besides, sudden increases in oil prices can trigger inflation, as felt following the onset of the war in Ukraine, leading to higher interest rates and reduced investment. Conversely, prolonged periods of low oil prices can result in deflationary pressures and economic contraction, also impairing debt sustainability. While Equatorial Guinea’s external debt is relatively low, oil price volatility can lead to fluctuations in export revenues, affecting the country’s ability to service its external debt obligations. FIGURE 26 While still sustainable, the country’s public debt increased considerably following the end of the oil boom 3500 120 3000 100 2500 Billions of CFA Franc 80 2000 60 1500 40 1000 500 20 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 External debt Domestic debt Crude oil price, US$/bbl (rhs) Oil production, million barrels (rhs) Source: Equatoguinean authorities, World Bank staff calculations, and World Bank Commodity Prices The exhaustibility of subsoil resources also poses intergenerational equity challenges. The Equatoguinean hydrocarbon production decreased by 45 percent between 2015 and 2023 amid maturing oil fields and multiple incidents at both gas and oil production sites. Depending on the resource horizon, overconsuming the current revenue windfall from exhaustible resources increases the risk of large fiscal adjustment following the depletion of resource wealth. This creates intergenerational inequity as current generations achieve higher welfare to the detriment of future generations (Eyraud et al., 2023). Hence, the exhaustibility of oil means that countries should consider how to allocate finite resource wealth between the current and future generations. These intertemporal decisions could be challenging because of the significant uncertainty regarding the estimation of future resources (e.g., size of resource reserves, prices, and production costs). 74 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 2.1.3 Fiscal rules and sovereign wealth funds can mitigate commodity price volatility Enhancing the institutional setup, including transparency and accountability mechanisms, could help tackle issues related to commodity price volatility and macroeconomic instability Fiscal rules can be powerful tools in mitigating the volatility of public spending and promoting long-term stability. Fiscal Rules are institutional measures that set limits on budgetary aggregates to ensure fiscal discipline, credibility, and debt sustainability. Country examples show that well-designed fiscal rules have been associated with better fiscal and debt outcomes.44 Flexibility in design is found to be strongly associated with enhanced countercyclicality (Guerguil et al., 2017). The literature generally defines a good fiscal rule as: (a) simple: clearly stated, transparent, and with realistic targets for expenditures and debt levels; (b) flexible: allows for course correction with clear escape clauses and, for resource-rich countries, allows for cyclical adjustments to the business cycle (or booms and busts); and (c) enforceable: there are clear and credible mechanisms to monitor and oversee the implementation of the rule. However, fiscal rules are not sufficient on their own. The literature suggests that the adoption of fiscal rules does not have a significant impact on reducing procyclicality, unless supported by strong political institutions as well as better transparency (Bova et al., 2016). 45 A workable fiscal rule requires enhanced transparency in the implementation of the budget and the fiscal rule, and access The adoption to the information by lawmakers, markets, and citizens, to hold governments of fiscal rules accountable (World Bank, 2022). does not have Institutional reforms such as the New Convergence Rules (NCR) in the CEMAC a significant region are a welcome step to attain less procyclical fiscal policies. In recent impact on years, the CEMAC region has taken some steps to reduce the historical pattern of reducing procyclical fiscal policies. In particular, CEMAC countries adopted in 2016 a new procyclicality, reference fiscal criterion under the NCR.46 The new reference fiscal balance (with unless a floor of -1.5 percent of GDP) can be defined as the overall non-oil balance plus supported by 80 percent of the average oil revenue-to-GDP ratio over the three previous years (Martin and Perinet, 2017). It is, therefore, disconnected from the current year’s oil strong political revenue and thereby does not allow governments to increase spending immediately institutions as following a surge in oil revenue.47 In addition to its counter-cyclicality, this rule has well as better other qualities in terms of design, including simplicity, country specificity, and transparency. debt dynamics.48 While the regional fiscal rule is a welcome initiative, its efficacy is also dependent on improving transparency in the implementation of the budget. Furthermore, strengthening enforcement mechanisms for the CEMAC regional fiscal rule is important to ensure its effective implementation by member states. 44 Chile is another successful country that, through trial and error over many years, managed to move from procyclical to countercyclical fiscal policies by improving its fiscal framework and introducing a workable fiscal rule. See Izvorski et al., 2018. 45 Institutions include broader political institutions such as bureaucratic quality, corruption, political risk and strength of the institutional and legal setting. 46 In 1999, a fiscal rule was established under the Central African Economic and Monetary Community (CEMAC) regional convergence framework based on the fiscal balance criterion. This rule proved to be, however, pro-cyclical as it allowed governments to increase their spending proportional to any increase in oil revenue. See also IMF (2019), “Implementing the new CEMAC regional convergence framework”, Report No. 17/393.”. 47 The reference fiscal balance is defined as the overall fiscal balance minus: 20 percent of oil revenue; and 80 percent of the difference between oil revenue and their average relative to GDP over the three previous years. See Martin and Perinet (2017). 48 The fiscal balance rule can be monitored accurately and easily since it only requires the measurement of the overall fiscal balance and of government oil revenue. It is country specific as the oil producing countries are expected to generate higher overall fiscal balances, so that they will save some of their oil revenue for future generations. The rule allows for a better control of debt dynamics as it considers all forms of budgetary spending and debt accumulation (including the external financing of capital expenditures). See Martin and Perinet (2017) for more details. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 75 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth Many resource-rich countries use sovereign wealth funds to hedge against the volatility of oil prices and to support intergenerational equity. The funds can be accounts within the treasury, created for pre-defined spending commitments (e.g., in education) or more independent institutions (also called “extra-budgetary funds”), subject to different rules than the regular government financial transactions. Sovereign Wealth Funds (SWFs) can have many functions. For example, saving funds help ensuring inter-generational equity by investing surplus oil revenues and generating long-term returns. Precautionary/stabilization funds, which are more relevant compared to intergenerational saving funds in the case of Equatorial Guinea, are aimed at smoothing fluctuations in resource-related revenues and providing liquidity. SWFs can also fund productive infrastructure projects to support economic diversification and, therefore, reduce a country’s reliance on oil revenues (see Box 6, Gelb et al., 2014). However, rigid rules have proved in most cases to be unsustainable, with countries often changing, bypassing or eliminating them.49 Experiences in many resource-rich countries have shown that managing these funds is challenging and is often influenced by the country’s political economy, implying important downside risks. The Equatoguinean authorities implemented a SWF – the Future Generations Fund ( Fondo para las generaciones futuras) in 2002. While there are no public accounts, the Fund was estimated to be worth US$ 80 million in 2020 according to the UNDP (UNDP, 2020). According to available information, the government places 0.5 percent of annual oil revenues into the fund (UNUWIDER, 2022). Transparency of the SWF is limited as there is no public information on the objectives and structure of the fund’s asset. In 2019, the Equatoguinean SWF ranked at the bottom of PPIE’s SWF scoreboard which assesses the transparency and accountability of SWFs, with a score of 11/100. In contrast, Nigeria Sovereign Investment Authority ranked 15 (out of 64 funds) with a score of 83/100 (Maire et al., 2021). The Future Generations Fund was once, but is no longer, a member of the International Forum of Sovereign Wealth Funds which promotes best practices within the field. The government plans to implement another SWF whose functions are to diversify the economy and support public investment. The authorities highlighted their commitments to improve the sustainability of the Equatoguinean economy and public finances for the period 2024-2028 in a presidential decree (no. 009/2024) published in February 2024. The decree sets out reforms in two complementary and reinforcing policy areas, namely (a) fiscal consolidation to eliminate the structural public deficit and reduce the non-oil primary deficit, and (b) implementation of structural reforms to promote the “reactivation” of the economy. The decree provides several provisions, one of which is the establishment of a SWF. 50 The success of SWFs depends on a set of pre-conditions, including an efficient governance structure that ensures transparency, accountability, and independence from political interference (Alhashel, 2015 and Johnson, 2007). First, it is crucial that the fund’s purpose is clearly articulated, whether it is to stabilize the economy, save for future generations, promote economic diversification, or support specific developmental goals. Second, trust in the fund is dependent on a strong legal and regulatory framework that provides stability as well as transparency and accountability through regular reporting and responsible investing practices. Third, the fund should have professional and experienced management teams to guarantee prudent investment decisions. Fourth, funds need a long-term investment horizon, strategic asset allocation, and diversification to capture opportunities and manage risks. Finally, conducting rigorous due diligence, monitoring investment performance, and adapting strategies as needed help ensure the fund remains aligned with its objectives and mitigates potential risks. 49 For example, Mexico’s legislature authorized the depletion of its oil fund in 2002 and Venezuela changed the operating rules of its stabilization fund several times since its creation and suspended its operation for an extended period. Ossowski, R., Villafuerte, M., Medas, P. A., & Thomas, T. (2008). Managing the oil revenue boom: the role of fiscal institutions (No. 260). Washington, DC: International Monetary Fund. 50 See the presidential decree: https://www.guineaecuatorialpress.com/noticias/decreto_por_el_que_se_establecen_medidas_economicas_financieras_y_de_ reactivacion_economica#:~:text=Decreto%20N%C3%BAm.,para%20el%20periodo%202024%2D2028 76 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth BOX 6 Examples of Sovereign Wealth Funds for resource- exporting countries Inter-generational Equity Funds have the objective of saving/investing a portion of resource wealth for future generations, to ensure long-term sustainability and equitable distribution of resources. The Kuwait Investment Authority (KIA) is responsible for managing and investing the country’s surplus wealth with a long-term investment horizon. The KIA has invested in international companies that have yielded positive results and played a crucial role in supporting infrastructure development projects (e.g., airports, seaports, transport systems) both within Kuwait and abroad. Stabilization Funds help mitigate the impact of volatile oil prices by accumulating surplus oil revenues during periods of high prices and using them to support government budgets during periods of low prices. Precautionary/stabilization funds can either have price- or revenue-contingent deposits and/ or withdrawal rules, with the objective of absorbing revenues during high oil prices and smoothing expenditures. For example, Norway’s Government Pension Fund Global (GPFG) has played a crucial role in stabilizing the country’s economy by managing oil wealth and providing a stable source of income to the government. The GPFG has achieved remarkable growth and amassed significant assets under management. As of 2021, it held over US$1.4 trillion in assets, making it the largest sovereign wealth fund in the world. The GPFG is known for its commitment to ethical investment practices as it incorporates responsible investing principles, including environmental, social, and governance (ESG) considerations, into its investment decisions. The GPFG also maintains a high level of transparency and accountability. It provides regular reports on its investments, holdings, and performance, ensuring public access to information about its activities. This transparency enhances public trust and facilitates informed discussions on the fund’s management and objectives. Economic Diversification Funds support economic diversification by investing in non-oil sectors and strategic industries. The Abu Dhabi Investment Authority (ADIA) in the United Arab Emirates has made significant investments in sectors such as infrastructure, real estate, technology, and renewable energy to promote economic diversification. Notwithstanding, the ADIA has faced criticism for its limited transparency and disclosure practices. The fund does not disclose detailed information about its holdings, investment strategies, or performance metrics. This lack of transparency raises concerns about accountability and makes it challenging for external stakeholders to assess the fund’s activities. Moreover, as a government-owned entity, the fund’s investment decisions may be influenced by political considerations, potentially compromising its ability to pursue optimal investment strategies. Infrastructure Development Funds are devoted to infrastructure projects, which contribute to economic growth and development. Saudi Arabia’s Public Investment Fund (PIF) has been actively investing in projects both domestically and internationally, including the NEOM mega-city development and renewable energy projects, as part of the country’s Vision 2030 diversification strategy. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 77 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 2.1.4 Policy options to build fiscal buffers and manage oil price volatility risks Effective management of oil price volatility risks is crucial for maintaining Equatorial Guinea’s economic growth, macroeconomic stability, and fiscal sustainability. Oil-exporting countries often adopt prudent fiscal rules and establish SWFs to achieve a stronger fiscal discipline. However, the effectiveness of these policies varies depending on specific country circumstances, including institutional and political arrangements. In general, policies that maintain strong fiscal discipline through prudent expenditure policies, efficient tax collection, and avoiding excessive borrowing can enhance fiscal and debt sustainability and reduce vulnerability to oil price volatility. It is important for the Equatoguinean government to build fiscal buffers through counter-cyclical fiscal policies, by strengthening the management of their SWF. Such counter-cyclical fiscal policies imply saving part of the oil revenue windfalls to create reserves that can be used during downturns. There is a need to clearly define the objectives of the current and future SWFs, and ensure that they are backed with a robust legal and regulatory framework. Additionally, the establishment of a stabilization fund could be explored. The fund would provide a dedicated resource to mitigate the adverse effects of economic volatility, ensuring a more robust and resilient fiscal framework. Enhancing transparency in budget implementation, including for the existing and future SWFs, would help ensure the effectiveness of fiscal policies. To promote trust and accountability, it is crucial to improve transparency in both budget implementation and the enforcement of the fiscal rule. This can be achieved by enhancing reporting mechanisms, providing comprehensive information on budget allocations, expenditure, and revenue collection. Furthermore, establishing clear guidelines and processes for monitoring and evaluating fiscal performance will contribute to greater transparency and enable effective oversight. TABLE 2 Policy recommendations for oil volatility management and to build fiscal buffers Recommendations Timeframe  Responsible Agency  • Adopt strong fiscal discipline through prudent SHORT TO • Ministry of Finance, Planning, expenditure policies and efficient tax collection MEDIUM TERM and Economic Development system (see Tables 4 and 5 for details). • Ministry of Finance, Planning, • Adopt counter-cyclical fiscal policies. SHORT TERM and Economic Development • Strengthen the management and transparency • Ministry of Finance, Planning, of the country’s SWF “Future Generations SHORT TERM and Economic Development Fund” and the planned SWF. • Ministry of Finance, Planning, • Create a Stabilization Fund. SHORT TERM and Economic Development • Ministry of Finance, Planning, • Implement the CEMAC regional fiscal rule. SHORT TERM and Economic Development 78 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 2.2 Strengthening domestic revenue mobilization 2.2.1 Analyzing Equatorial Guinea’s revenue performance Over the past two decades, Equatorial Guinea’s government revenue performance has been linked to developments in the oil sector Equatorial Guinea’s government revenue significantly decreased after the oil boom due to fluctuations in the oil sector. Oil revenue rose sharply after 2006 as the Exxon Mobil’s Zafiro field, the first main oilfield in Equatorial Guinea, came on stream and the first liquid natural gas (LNG) exports were produced. During the oil price boom (2007-2014), government revenue averaged 28.1 percent of GDP (Figure 27a) and Figure 27b). The average crude oil price dropped to US$ 42.81 in 2016 (compared with US$ 96.24 in 2014 and US$ 50.75 in 2015). As a result, government average revenue plummeted to 19 percent of GDP over the 2015-2020 period, pushing the economy into recession. Government revenue dropped again to 14.1 percent of GDP in 2020 owing to the drop in oil production and the pandemic-driven collapse in oil prices. Despite a secular decrease in oil production, total government revenue increased to 22.8 percent of GDP during 2021-2022 thanks to the recovery in oil prices amid the war on Ukraine. In the absence of any new major oil discovery, the share of oil revenue in total government revenue decreased between 2015 and 2020. The share of oil revenue to government revenue averaged 91 percent over the period 2009-2014 thanks to the commodity price boom and an increase in hydrocarbon production. The fiscal weight of the oil sector then decreased to 79 percent, on average, in 2015-2020 amid a drop in oil prices and production, maturing oil fields and multiple incidents in hydrocarbon production sites (Figure 27c). The share of oil revenue in government revenue increased to 85.3 percent in 2021-2023 in a context of high oil prices. In 2022, gas production, including LNG, propane, and other gases, increased by 11 percent, to reach 170 thousand barrels per day. The increase reflected mostly a base effect, as in 2021, total production amounted only to 151 thousand barrels per day because of a fire incident in Punta Europa, which led to a drop in gas production of 32 percent in the fourth quarter of 2021 (q-o-q). However, gas production decreased by 13.5 percent in 2023 including due to a damage in the gas compressor at the FPSO Serpentina that occurred in July 2023. Meanwhile, crude oil production dropped by 32.4 percent (y-o-y) to about 54.8 thousand barrels per day in 2023 (from a peak of 321 thousand barrels per day in 2004), the lowest level registered since the start of production. The contribution of non-oil revenue, while increasing, remains small. In addition to the country’s heavy dependence on the oil sector, this performance also reflects the limited effectiveness of tax administration and an inefficient tax system. In recent years, the Equatoguinean authorities have implemented multiple tax reforms aimed at enhancing revenue performance and boosting non-resource tax incomes to mitigate the volatility of total revenue. Many of these efforts were implemented with the support of the IMF, first under the 2018 Staff Monitored Program (SMP) and then under the 2019 Extended Fund Facility (EFF) program. The share of non- oil revenue to government revenue was very low at 8.7 percent, on average, over the period 2007-2014 due to the oil boom. The fiscal weight of the non-oil sector then significantly increased to 20.4 percent, on average, in 2015-2020. Meanwhile, its share to GDP increased from 2.4 percent in 2007-2014 to 3.9 percent in 2015-2020 thanks to the initiatives implemented by the government to increase tax revenue. This also contributed to a fiscal surplus in 2018, the first one after six successive years of fiscal deficits. The share of non-oil revenue in government revenue then decreased to 13 percent (3.6 percent of GDP) in 2021-2022. The positive trend in the level of non-oil revenue was halted by the onset of the COVID-19 crisis in 2020, while its share was then reduced by the rise in oil prices. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 79 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth FIGURE 27 Equatorial Guinea’s government revenue depends considerably on the oil sector, which makes the country vulnerable to oil price swings a. Total government revenue and crude oil prices in Equatorial b. Government revenue (in percent of GDP) in Equatorial Guinea, 2007-2023 Guinea, oil boom vs. post-oil boom 120 40 30 28.1 35 Total revenue, Percent of GDP 100 25 22.8 30 Crude oil prices, $/bbl 80 20 19.0 25 60 20 15 15 40 10 10 20 5 5 0 0 0 Oil boom Post oil boom Recovery in 2007 2009 2011 2013 2015 2017 2019 2021 2023 (2007-2014) (2015-2020) oil prices (2021-2022) Crude oil price, Brent ($/bbl) Total revenues c. Oil and non-oil revenues (in % of government revenue) in Equatorial Guinea, 2009-2023 100 80 60 40 20 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Non-oil revenues Oil revenues Source: Equatoguinean authorities, World Bank commodities prices data, and World Bank staff calculation. Since 2017, the Equatoguinean authorities have adopted several tax reforms aimed at increasing non- resource tax revenues. Key elements of the fiscal program supported by the IMF focused on boosting non- tax revenue and reducing tax evasion through better auditing, increasing the tax base, reducing exemptions through better implementation of existing legislation, and the termination of unwarranted tax benefits. The government introduced excise taxes on several products (e.g., alcohol, tobacco, automobiles), and replaced the turnover tax with the VAT. The government has also started implementing several measures to improve tax administration capacity and efficiency. In particular, a single taxpayer identification number was created, and a large and medium taxpayer unit was constituted, though it is not yet fully operational. The ASYCUDA information system for customs was adopted in 2020 and is operational at the port of Malabo, but many companies are still submitting paper-based goods declarations and the system is not fully operational at all airports and ports. The government has established a single window for vehicle registration and payments, as well as a business one-stop shop, which was recently extended to the mainland region. The government also joined the World Customs Organization (WCO) in 2021. Other actions, including the streamlining of tax filing 80 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth and the transfer of tax collection from treasury to both tax and customs administration, are currently ongoing (IMF, 2022). The authorities have received technical assistance from the IMF on improving the compilation of the external sector statistics, including the net international investment position (NIIP). Preliminary NIIP data have been compiled but have not yet been disseminated. The National Institute of Statistics in Equatorial Guinea (INEGE) has established statistical units in all government ministries, making data collection easier (IMF, 2022). While all these actions are significant steps in the right direction, much remains to be done to meet the Equatoguinean authorities’ ambition. Despite these recent efforts, the tax to GDP ratio in Equatorial Guinea is below that of most African countries. Overall, the tax to GDP ratio, at 6.8 percent of GDP in 2022, remains well below 15 percent of GDP, a tipping point above which Overall, the tax growth has been found to accelerate (Gaspar et al., 2016). Despite recent reforms, to GDP ratio, the trend in the tax to GDP ratio shows no clear improvement over the period (Figure 28a). In 2021, based on available data, the tax-to-GDP ratio in Equatorial at 6.8 percent Guinea was well below the SSA and CEMAC averages (Figure 28b). of GDP in 2022, remains The lack of progress in tax revenues stems largely from the fact that they well below 15 also depend on the oil sector. Taxes collected from companies and individuals percent of GDP, operating in the oil sector remain the main sources of tax revenue in Equatorial a tipping point Guinea. The share of oil tax revenue (comprising oil Corporate Income Tax, or CIT, above which and oil Personal Income Tax, or PIT) to tax revenue decreased from 80 percent on average in 2009-2014 to 63 percent in average in 2015-2020 as a result of growth has the decline in the oil sector. In 2022, CIT and PIT collectively rebounded to over been found to 70 percent of tax revenue amid the recovery in oil prices. Most of this is the CIT; accelerate. PIT collected from the oil sector remains marginal at 7 percent of tax revenue in 2007-2022 as the oil sector is capital extensive and creates relatively few jobs. FIGURE 28 Tax to GDP ratio in Equatorial Guinea is below the SSA and CEMAC averages a. Tax to GDP ratio, in percent, in Equatorial Guinea, 2007-2022 b. Tax to GDP ratio in selected countries, in percent, 2021 14 Lesotho Namibia 13 South Africa 12 Mozambique Botswana 11 Angola Mauritius 10 Senegal 9 Zambia Mali 8 SSA Kenya 7 Ghana 6 Côte d'Ivoire Uganda 5 Malawi Cameroon 4 Tanzania 3 Gambia Gabon 2 Congo, Rep. CAR 1 CEMAC 0 Equatorial Guinea Somalia 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 10 20 30 40 Source: Equatoguinean authorities, World Bank staff calculations, and UNU-WIDER Government Revenue Database. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 81 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth While non-oil tax revenue remains a small source of revenue compared to tax revenue, the contribution of other taxes such as non-oil PIT and taxes on foreign trade has increased significantly. Over the period 2007-2022, non-oil tax revenue represented only 2.0 percent of GDP, on average, compared to 6.0 percent of GDP for oil tax revenue (Figure 29). Non-oil tax revenue, which includes income and profit taxes, as well as commercial duties and trade taxes, increased sharply between 2009 and 2022 (Figure 30b). In addition to tax revenues, Equatorial Guinea also received non-tax revenue from rents and royalties generated from property the government owns, especially land, and from prospecting and extracting of non-renewable resources. As these rents and royalties are mainly related to oil activity, they follow the oil sector trend and consequently gradually declined. The government also collects property income and administrative fees which represented, on average, 0.5 percent of GDP and 0.2 percent of GDP in 2021-2022, respectively. FIGURE 29 Taxes collected from companies and individuals operating in the oil sector remain the main sources of tax revenue in Equatorial Guinea Composition of tax revenue, in percent of total tax revenue 100 80 60 40 20 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Corporate income taxes (oil companies) Property tax Taxes on petroleum products Taxes on individuals (oil) Other non-oil taxes Value added tax (VAT) Other concession fees, fees or charges Excise duties Income and pro t taxes Administrative fees Taxes on foreign trade (Customs) Source: Equatoguinean authorities, and World Bank staff calculation FIGURE 30 While there is no major change in tax structure, the government’s efforts to diversify revenue sources and increase domestic revenue mobilization started to show some results a. Evolution of tax composition (% of GDP), 2007-2022 b. Evolution of tax composition (% of tax revenue), 2009, 2018 and 2022 4.0 100 Other non-oil taxes 3.5 90 Excise duties 3.0 80 Taxes on foreign 2.5 trade (Customs) 2.0 70 Taxes on petroleum 1.5 60 products 1.0 Value added tax 50 (VAT) 0.5 40 Corporate income 0 taxes for oil 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 30 companies 20 Taxes on individuals Taxes on foreign trade (Customs) working in oil 10 Value added taxes (VAT) Income and pro t Taxes on goods and services 0 taxes for non-oil Income and pro t tax 2009 2018 2022 Source: Equatoguinean authorities, and World Bank staff calculation 82 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 2.2.2 Challenges in improving domestic revenue mobilization in Equatorial Guinea Equatorial Guinea has untapped potential to improve its domestic revenue mobilization Valued Added Tax (VAT) contributed significantly to the increase in non-oil revenue mobilization; however, its performance remains constrained by a small base. The contribution of taxes on goods and services to revenue mobilization in Equatorial Guinea is much lower than in other African oil-producing countries and the average of all African countries (Figure 31a). However, VAT in particular is performing quite well in Equatorial Guinea compared with African peers. 51 The VAT C-efficiency ratio 52 shows that revenue losses related to exemptions, reduced rates, fraud, evasion and weaknesses in tax administration are relatively low compared with other CEMAC countries. The VAT C-efficiency ratio was estimated at 0.05 for Equatorial Guinea in 2021, compared with 0.30, 0.27, and 0.22 for Gabon, Cameroon, and Congo, respectively (Figure 31b). The standard VAT rate in Equatorial Guinea is 15 percent53 and as per the CEMAC directives, member countries may levy a lower VAT rate (between 5 percent and 10 percent) on a limited number of products. In Equatorial Guinea, in addition to the standard rate, a 0 percent rate is applicable to a specific list of products and equipment provided in the Tax Code (e.g., certain medical products, some equipment for construction) and a reduced rate of 6 percent is applicable to a list of basic consumables and books. While being in line with CEMAC rules, these reduced rates decrease VAT revenues. FIGURE 31 Equatorial Guinea has potential to improve further its domestic revenue mobilization but room for improvement is more limited for VAT a. Contribution of taxes on goods and services to domestic b. Ratio of the difference between the VAT revenue actually revenue in selected countries, in percent of GDP, 2021 collected and VAT revenue potential, 2021 10 0.35 9 0.30 8 7 0.25 6 0.20 5 0.15 4 3 0.10 2 0.05 1 0 0 Africa Cameroon Congo Gabon Chad Equatorial Guinea Gabon Cameroon Congo Chad Equatorial Guinea Source: OECD, National authorities, and World Bank staff calculation 51 All operations performed in Equatorial Guinea are subject to VAT unless they are included in the list of exemptions provided by the Equatorial Guinea Tax Code or a specific tax regime. In particular, VAT is chargeable on goods sold or assigned for valuable consideration, services provided, self-consumed goods and services, imports, and other operations carried on by individuals or legal entities in their area of business, professional, and individual activities, including extraction activities. 52 The VAT “C-efficiency” ratio or VAT revenue ratio is the difference between the VAT revenue actually collected and what would theoretically be raised if VAT was applied at the standard rate to the entire potential tax base and all revenue was collected. 53 Within CEMAC, each country is free to choose its standard VAT rate from within a range of 15 percent to 19 percent. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 83 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth Equatorial Guinea also performs relatively well compared to other CEMAC countries in terms of total CIT collection; however, the limited size of the private sector affects CIT revenue performance. The CIT share in domestic revenue represented 4.1 percent in 2021 in Equatorial Guinea, higher than in Gabon (3.6 percent), Cameroon (3.6 percent), and Congo (2.4 percent) (Figure 32), including due to the higher share of oil companies in the Equatoguinean economy relative to regional peers. The size of the private corporate sector in Equatorial Guinea is relatively small and the CIT has a narrow base focusing on foreign and large domestic companies. A number of studies show that tax incentives do not necessarily attract more foreign investment, especially in the absence of adequate business environment and infrastructure (Holland and Vann, 1998; IMF, 2015; Kinda, 2018). By continuing efforts to improve the business environment and diversifying its economy, Equatorial Guinea would attract more investors and consequently increase tax base as well as the number of taxpayers, with a potential significant positive impact on tax collection. The CIT standard rate is 35 percent to be paid on taxable profits. While it is in line with the CIT rate in other CEMAC countries (with CIT rate ranging between 30 and 35 percent in CEMAC), this rate is high compared with other African countries. FIGURE 32 Equatorial Guinea performs relatively well on CIT and PIT collection compared to other CEMAC countries Contribution of CIT to domestic revenue in selected countries, in percent of GDP, 2021 6 5 4 3 2 1 0 Africa Chad Equatorial Guinea Gabon Cameroon Congo Source: National authorities, and World Bank staff calculation The performance of overall PIT remains low in Equatorial Guinea. Despite Equatorial Guinea’s upper middle- income status, only a small number of taxpayers are eligible to pay PIT based on their revenue, 54 making administration and compliance costs related to PIT high. Oil and non-oil PIT contributions to domestic revenue represented only 0.49 and 0.26 percent of GDP in 2022, respectively. PIT performance is also affected by the significant size of the informal sector in Equatorial Guinea. Also, the large number of brackets (seven) applied makes PIT’s administration complex and increases the chances of evasion. In this context, strengthening tax administration and enhancing compliance are key. The weak effectiveness of tax administration, inefficient tax collection system, corruption, a limited tax base and a large informal sector limit domestic revenue mobilization efforts The poor quality and timeliness of statistics hamper revenue surveillance, affecting taxes on foreign trade revenue. The potential of custom duties, estimated at CFAF 547 billion per year, is much higher compared with the CFAF 13 billion per year collected, on average, over the period 2012-2017 (World Bank, 2018). The efficiency 54 In Equatorial Guinea, individuals with an annual revenue below CFAF 1,000,000 are not subject to PIT. In contrast, in Cameroon, PIT on salaries for individuals earning CFAF 2,000,000 or less is 11 percent while in Congo, Rep. PIT is 1 percent for individuals with salaries between 0 and CFAF 464,000 and 10 percent for those with salaries between CFAF 464,000 and 1,000,000. Source: https://taxsummaries.pwc.com/equatorial-guinea/individual/taxes-on-personal-income 84 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth of duties and taxes collected on imports is very weak in Equatorial Guinea mainly due to poor recording of trade flows and generous exemption regimes. Trade flows captured by Equatorial Guinea’s Customs administration between 2012 and 2017 represented only an average of 6.6 percent of the trade flows recorded by the BEAC, resulting in significant revenue loss (estimated at 80 percent of potential; World Bank, 2018). The full implementation of ASYCUDA at the ports and airports would help improve the recording of trade flows, which would, in turn, help increase the performance of taxes on foreign trade. Excise tax revenue collected in Equatorial Guinea has increased in recent years, but it remains low. Thanks to the enactment of excise taxes on imported beverages, tobacco, and luxury vehicles to help generate additional non-hydrocarbon revenues, excise tax revenue increased from 0.05 percent of GDP in 2019 to 0.36 percent of GDP in 2022. The Equatoguinean Tax Code (article 296) provides a single rate of 30 percent applicable to products subject to excise taxes. Yet, there is still potential to raise excise tax revenue. For instance, in Cameroon, an excise duty between 25 percent and 50 percent is applicable to tobacco, drinks, cosmetics, luxury items, slot machines, and other devices used for games of chance, collecting revenue equivalent to 1.3 percent of GDP. The property tax collection system is also inefficient. While considered a fair tax, relatively low on administrative and compliance costs, and with an immovable revenue base providing predictable and stable revenue projections, property tax in Equatorial Guinea fails to exploit these positive features. Though a single rate is applied to all taxpayers, 55 the lack of a solid and regularly updated property register limits the performance of property tax as it is easy to avoid. For instance, property records are not digitized and are kept in only two locations in Malabo and Bata (see Chapter 4). The weak correlation between imputed rents and property-tax proceeds in Equatorial Guinea indicates collection inefficiencies and therefore scope to increase property-tax revenues (World Bank, 2018). TABLE 3 Tax and customs exemptions granted by category, Billion CFAF 2015 2016 2017 2018 2019 Ad-hoc exemptions granted through agreements 84.5 22.9 17.6 16.7 15.3 Exemptions related to diplomatic status 0.3 1.7 1.6 0.3 0.6 Exemptions granted to domestic public institutions and 7.7 2.0 4.5 6.1 2.7 ministries Exemptions granted to the hydrocarbon sector in line 20.5 47.7 21.2 1.6 1.2 with Production Sharing agreements Total exemptions 113.0 74.3 44.9 24.6 19.8 Exemptions: Percentage of Total tax revenue 5.5% 6.6% 3.6% 1.7% 1.6% Exemptions: Percentage of GDP 1.4% 1.1% 0.6% 0.3% 0.3% Source: Equatoguinean authorities, General Directorate of Customs. Forgone revenue due to tax exemptions in Equatorial Guinea, while decreasing, remains relatively large. Tax exemptions are used by many countries as incentives, including to promote specific sectors or policies. In Equatorial Guinea, these exemptions mainly include ad-hoc exemptions granted to public works companies or to investors in a specific sector the government promotes (Table 3). Total tax exemptions amounted to CFAF 19.8 billion in 2019, representing 0.3 percent of GDP and 1.5 percent of government revenue (down from 1.5 percent of GDP or 5.5 percent of government revenue in 2015). Of total tax exemptions, 77 percent of tax exemptions were granted through ad-hoc agreements with investors, 14 percent were to domestic 55 A 1 percent urban property tax is applied annually to 40 percent of the value of the land and the buildings on such land. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 85 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth public institutions and ministries, 6 percent were to companies operating in the hydrocarbon sector through production sharing agreements, and 3 percent were related to diplomatic privileges and immunities granted to embassies, international organizations, and institutions under the Vienna Treaty. According to BEAC data, an average of 74.6 percent of imports benefited from duty and taxes exemptions, including 29.4 percent granted without a legal basis (World Bank, 2018). Corruption contributes to weak tax compliance in Equatorial Guinea. As in many lower income countries, the existence of inequitable tax burdens, questionable interactions with tax officials (corruption), and the poor translation of tax revenues into public services, are reflected in the limited trust that Equatoguinean taxpayers have in the country’s tax system. Corruption and rent seeking, in particular, prevent the government from maximizing tax revenue collection. Equatorial Guinea scored 17 out of 100 on the 2022 Corruption Perceptions Index (see Chapter 1 on institutions). In most African countries, less than half of taxpayers trust their tax administration, and levels of trust are below 30 percent in some countries (Isbell, 2017). In addition, perception surveys indicate that many citizens of lower-income countries think the taxes they pay do not enhance public services (Bratton and Gyimah-Boadi, 2016; Isbell, 2017). Increased use of information technology and improved record keeping, and data management would reduce the scope for corruption and collusion and strengthen the performance of tax administration. FIGURE 33 The significant size of the informal sector is preventing Equatorial Guinea from potential additional revenues Reasons and motivations for operating in the informal sector in Africa, 2020 Poor tax administration relations 80 Insuf cient tax information 60 Dif cult tax calculations, form lling and reporting 40 Vague tax laws 20 Other reasons 20 Complicated and confusing tax laws 10 0 10 20 30 40 50 60 70 80 90 Source: Informal sector taxation project, African Tax Administration Forum’s survey (country questionnaire), September 2020. Note: Respondents were asked to indicate how many reasons as possible, thus the reasons sum to more than 100%. The significant size of the informal sector limits the size of tax base, preventing Equatorial Guinea from potential additional revenues. In Equatorial Guinea, as in many developing countries, informality is pervasive with 87.4 percent of firms operating in the informal sector. 56 On one hand, taxation of micro, small, and medium enterprises (MSMEs), many of which operate informally, is a major challenge. There are important weaknesses in the existing programs for the informal sector established by tax authorities including, for instance, unfair presumptive taxation focused on the nature of business, the arbitrary nature of turnover-based taxation, the negative impact of the presumptive minimum profit on investment by micro and small enterprises, the rapid graduation of micro-enterprises to taxable business regimes, which can create an unmanageable tax burden, 56 According to the 2020 Business Census report (INEGE, 2023). 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 workers’ social protection fund; and g) pay value-added tax. 86 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth the multiplicity of taxes for informal sector operators, ineffective tax management of the informal sector within tax administrations, and low volume of tax returns from the informal sector (OECD, 2022). On the other hand, the top three major reasons motivating taxpayers to operate in the informal sector include poor relations with tax administrations, insufficient tax information, and difficulties in computing tax, filing, and reporting (Figure 33). For MSMEs, it may be necessary to establish a simplified tax regime, streamline procedures, and to link taxation to some benefits such as preference in institutional financing. Low tax compliance results in significant revenue shortfalls, hampering tax performance. When people in equal circumstances are not taxed equitably, with those with greater ability to pay effectively paying a higher percentage of their income in taxes, the tax system is not perceived as being fair by taxpayers. In Equatorial Guinea, there are no specific tax provisions requiring the wealthiest to pay more taxes or reducing the tax burden for SMEs. 57 As a result, willingness to comply with government tax requirements is low. To protect the government’s potential revenue and send a signal to economic agents on the need to comply with their tax obligations, including those that are overdue, the government introduced the Law number 9/2017 providing amnesty for certain tax liabilities. 58 However, more needs to be done to step up efforts to increase tax compliance. In the specific case of companies, the government could increase the number of audits, with a systematic application of sanctions in the event of fraud. Campaigns to educate taxpayers and increase their awareness could also improve tax compliance. Improving trustworthiness of the tax system through more equitable enforcement, enhanced transparency, and expanded engagement between the government and citizens – is also important to strengthen tax morale and the broader social contract, and therefore encourages tax compliance (Custers et al., 2022; Chang et al., 2018). 59 Building trust also helps mobilize political support for tax reform, encouraging taxpayers to demand the changes to the tax system needed to ensure that everyone pays their fair share. Custers et al. (2022) identified four drivers (fairness, equity, reciprocity, and accountability) that help build trust. All in all, effective tax reforms must be tailored to the specific needs, political dynamics, and circumstances of the country. Inefficiencies in tracking data are another reason for weak tax revenue performance. Although the authorities are taking some steps to improve quality, coverage, and timeliness of statistics, data provision still has shortcomings that significantly hamper revenue surveillance (IMF, 2022). Key gaps remain due to continuing capacity weaknesses within tax and customs administrations. In particular, deficiencies in basic tax information, including the number of firms in each sector and the scale of their activities, prevents the tax administration from determining the accuracy of profits declared in tax returns. An example of inefficiency in tax collection due to poor data tracking is the low performance in collecting concession fees.60 The recently completed business census, developed by INEGE with World Bank support, will provide information regarding firms and help understand the Equatoguinean private sector. The complexity of tax procedures hampers the efficiency of tax revenue mobilization. The complexity of administrative procedures related to tax payment represents a cost which can affect taxpayer compliance (Alm et al., 1995). While there is currently only one file to be filled out by taxpayers in Equatorial Guinea, administrative procedures can be considered as complex due to lack of digitalization. 61 Streamlining administrative procedures, thanks to the digitization of at least part of the process, would facilitate and increase tax compliance. Reorganizing customs service and expediting the full implementation of the ASYCUDA program would also improve the efficiency of tax administration and enhance tax collection. 57 The updated tax law recently enacted introduces a special regime for SMEs. 58 This Law offered personal and corporate taxpayers the ability to normalize their tax situation without the risk of fines. This tax amnesty, which covered the period prior to January 1, 2018, was implemented until December 31, 2019. 59 Section 2.3.4 provides policy recommendations to improve fiscal transparency. 60 As per the 2018 Equatorial Guinea Public Expenditure Review, concession fees mainly apply to telephone and electricity networks, the management of ports and airports, and to fishing rights. Except in the case of the National Electricity Company of Equatorial Guinea (Sociedad de Electricidad de Guinea Ecuatorial, SEGESA) and GETESA, the leading telecom provider, the collection of concession revenue for most companies has been intermittent or non-existent, the case of the other two telephone companies, Equatorial Guinea Communications, S.A. (Guinea Ecuatorial Comunicaciones Sociedad Anonima, GECOMSA) and Muni, being highly representative/symptomatic (World Bank, 2018). 61 According to the Tax Department, a digital tax form exists but it is not operational yet. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 87 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 2.2.3 Policy recommendations Over recent years, the government has adopted a series of measures to enhance domestic revenue mobilization. Measures to expand the tax base include the replacement of the turnover tax with the VAT, the increase in the progressivity of the PIT, and the introduction of excise taxes on selected products. A new tax law (updating the 2004 tax law) – enacted in December 2024 – would help increase the tax base through amendments to taxes on business and employment income, VAT, and capital gains. The new law proposes, for instance, the expansion of the VAT base to include electronic commerce services; the introduction of a special regime for SMEs, taxes on property, and a financial activities tax; and the reduction of the CIT (from 35 percent to 25 percent) and on capital income.62 The ongoing deployment of the ASYCUDA system to the Bata port and the single window for vehicle clearance would also lead to an increase in revenue collected. The accession to WCO is another positive step towards the strengthening of the customs administration. In February 2024, through a presidential decree (no. 009/2024) the government committed to implementing several reforms, including for revenue mobilization. The decree establishes economic and financial measures for the sustainability of the economy and public finances for the period 2024-2028. As per the decree, measures include (i) the preparation and publication of a tax audit plan on an annual basis to optimize tax revenue collection and reduce tax evasion, (ii) the creation of a special body of tax inspectors to improve the efficiency and comprehensiveness of income tax collection, (iii) the computerization of tax services to simplify procedures, (iv) the mandatory use of ASYCUDA when declaring goods for import, and (v) control and rationalization of exemptions and customs duties. To broaden the tax base and attract more private investment, the government is committed to implement the provisions provided by the new tax law. While the government commitment to improve revenue performance is a positive step, further targeted reforms are needed to strengthen tax administration, enhance compliance and tax policy. These reforms include digitizing the tax administration and tax revenue management, and strengthening compliance, improving the quality of information in order to address inefficiencies in tracking data. In the short to medium term, it would also be essential to implement reforms aimed at improving tax policy efficiency to broaden the tax base. This could be achieved by rationalizing exemptions, increasing excise taxes, strengthening the capacity of revenue authorities and diversifying the economy. Table 4 provides policy recommendations to improve domestic revenue mobilization. TABLE 4 Policy recommendations to improve domestic revenue mobilization Policy recommendations Importance Timeframe Responsible Agency Tax administration and compliance • Implement VAT e-invoicing to facilitate tax compliance and potentially encourage the SHORT TO Medium MEDIUM TERM • Tax Department transition from the informal to the formal sector. • Establish a digitized property registration to • Property Registry, MEDIUM TO reduce the risk of tax evasion and increase the Medium LONG TERM Ministry of Cadaster performance of the property tax. and Land Management • Increase the number of operations on the ground conducted by the inspection taskforce to update the property inventory/database Medium SHORT TERM • Tax Department and revise the property value estimate when necessary. 62 See International Monetary Fund Equatorial Guinea 2023 Article IV for more detail on the new tax law. 88 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth • Digitizing at least parts of the process to High SHORT TERM • Tax Department facilitate and increase tax compliance. • Improve companies’ tax compliance by expediting the digitalization of issuance • Ministry of Finance, Planning, of tax identification numbers, improving High SHORT TERM and Economic tax reporting and undertaking appropriate Development checks. • Finalize the implementation of the ASYCUDA import and export registration system at the SHORT TO High MEDIUM TERM • Customs Department airports and the ports in Malabo, Luba, and Bata to enhance duty and tax collection. • Customs Department • Implement measures to fully roll out the (Ministry of Finance) customs IT reform to posts across the country • Ministries of and ensure that the posts have adequate Medium MEDIUM TERM Transports, Public power and connectivity infrastructure to Works, and Electricity improve data tax reporting. and all relevant ministries • Use the new business census to assess the number of firms in each sector and • Statistics Department the scale of their activities to increase tax SHORT TO (INEGE) Medium MEDIUM TERM administration capacity to assess the accuracy • Tax Department of profits declared by the enterprises in tax returns. Tax policy • Implement structural reforms to improve the business environment and diversify • Ministry of MEDIUM TO Finance, Planning, the economy to attract more investors and Medium LONG TERM and Economic increase CIT and PIT tax bases while making Development them less dependent on oil revenue. • Simplify the structure of PIT tax rates by • Ministry of Finance, Planning, reducing the number of brackets applied to Medium SHORT TERM and Economic reduce the incentives for evasion. Development • Rationalize tax exemptions by reviewing • Tax Department outcomes (especially exemptions granted to specific sectors and firms) and remove • Ministry of High SHORT TERM Finance, Planning, exemptions that have not delivered the and Economic targeted outcomes, or whose costs outweigh Development the benefits. • Eliminate exemptions granted without a • Ministry of legal basis/Fully implement the provisions of Finance, Planning, High SHORT TERM decree 134 of 2015 to eliminate ad-hoc tax and Economic exemptions. Development • Increase excise taxes on imported goods such Medium MEDIUM TERM • Customs Department as alcohol, tobacco, and sugary beverages. • Increase tax administration capacity to • Ministry of provide accurate revenue forecasts and Finance, Planning, Medium SHORT TERM assess tax potential in order to optimize tax and Economic structure. Development • Create a well-trained unit dedicated to tax • Ministry of policy within the Ministry of Finance to Finance, Planning, Medium MEDIUM TERM improve the design and the implementation of and Economic tax policy reforms. Development • Organize campaigns to educate taxpayers and Medium MEDIUM TERM • Tax Department increase their awareness and tax compliance. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 89 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 2.3 Improving public expenditure efficiency and investment management 2.3.1 Enhanced public expenditure efficiency matters for economic growth With a secular decline in oil revenues and limited financing options, efficient public expenditure and public investment management are essential to ensure the optimal allocation of resources towards key sectors. Efficient use of public funds allows countries to prioritize investments in areas such as infrastructure, education, healthcare, and economic diversification. This would help oil-dependent countries such as Equatorial Guinea to reduce their dependence on oil revenues, enhance economic resilience, and promote long-term sustainable growth. While public spending is an important instrument to promote economic growth, increases in public expenditure in some developing countries do not necessarily reflect similar improvements in the quality of physical and human capital or lasting social outcomes (IADB, 2018). If used efficiently, public spending can contribute to the creation of opportunities through factor accumulation and productivity. However, the efficiency of public expenditure remains an issue in most developing countries. With a projected decline in hydrocarbon output and hence a deterioration of fiscal outcomes in the long-term in Equatorial Guinea, achieving spending efficiency – i.e., maximizing outputs (e.g., the volume of services provided), minimizing inputs (e.g., the amount of resources, time, or capital required to produce those services) and improving quality – is critical. Public investment management is particularly important as it influences a significant part of the discretionary resources. The literature finds that a sizeable share of the potential benefits of public investment are lost due to inefficiencies (“the efficiency gap”) in the investment process (IMF, 2015). Removing all inefficiencies could increase infrastructure output by 54 percent for emerging countries and 65 percent for low-income countries (Kapsoli et al., 2023). Strengthening public investment management institutions would help make them more predictable, credible, efficient, and productive. 2.3.2 Public expenditure dynamics and spending efficiency Public expenditure dynamics in Equatorial Guinea are characterized by a decrease in total spending driven by a cut in capital spending after the oil boom period, even as current spending increased Equatorial Guinea’s public expenditures increased considerably in the mid-2000s before declining in the aftermath of the 2014 oil price shock. Increased oil revenues during the oil boom allowed a significant increase in public spending after the adoption of the NDP2020. The NDP2020 aimed at making Equatorial Guinea an emerging and diversified economy by 2020. It encompassed two phases (2008-2012 and 2013-2020) and four transformation axes: construction of modern infrastructure to improve productivity and accelerate growth; building a diversified economy based on private sector development; reinforcing human capital and improving the quality of life of each citizen; and implementing high quality governance at the service of the citizen. During the first phase of the plan, government total expenditures grew to about 30 percent of GDP, up from 18.9 percent of GDP in 2000-2007. However, Equatorial Guinea’s public expenditures decreased to 19.1 percent of GDP, on average, after the end of the oil boom over the period 2015-2022. This was below that of comparators 90 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth but slightly above the average for CEMAC (Figure 34a and Figure 34b). The decrease was driven by a drop in capital expenditures. The composition of spending changed significantly over the last decade. Over the recent years, while the spending-to-GDP ratio has decreased, the government allocated a larger proportion of public spending to current outlays compared to capital investment. Current expenditures increased from 3.3 percent of GDP in 2007 to 11.6 percent of GDP in 2022 (Figure 34c). While all categories of current expenditures experienced growth in 2007-2023, debt service increased the most. Spending allocated to servicing debt (as a share of GDP) was 46 times higher in 2023 compared to 2007, driven by a significant increase in public debt. The wage bill also increased as a share of GDP by 1.5 percentage points on average over the period 2009-2021, while its share of public spending increased 2.5-fold (Figure 34c). The increase was mainly due to increases in military salaries and allowances. Spending on transfers and subsidies increased threefold as a share of GDP, notably due to increased fuel subsidies and transfers to SOEs. The fiscal cost of fuel subsidies increased from 0.5 percent of GDP in 2021 to 1.2 percent of GDP in 2023.63 FIGURE 34 Capital expenditures in Equatorial Guinea decreased significantly after the oil boom period while current expenditures increased; the share of public expenditure in GDP is below that of most peers a. Public expenditure composition, 2007-2023 b. Government total expenditures (percent of GDP), 2015-2022, in Equatorial Guinea and comparators 40 4500 90 35 4000 80 70 in billions of CFA francs 30 3500 60 percent of GDP 3000 25 50 2500 20 40 2000 30 15 1500 20 10 1000 10 5 500 0 Timor-Leste Structural peers Aspirational peers Azerbaijan Congo, Rep. Gabon Equatorial Guinea CEMAC 0 0 2007 2009 2011 2013 2015 2017 2019 2021 2023 Capital expenditures Total expenditures (right) Current expenditures c. Composition of current expenditures in Equatorial Guinea, in percent of GDP, 2007-2023 14 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Wages Goods and services Debt service Transfers and subsidies Source: Equatoguinean authorities and World Bank 63 The government aims at removing most of the regressive fuel subsidies. As per the February 2024 Presidential Decree, the Ministry of Finance, Planning, and Economic Development, in coordination with the Ministry of Hydrocarbons and Mining Development, will submit a motivated proposal to the Government for approval to eliminate fuel subsidies. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 91 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth It is critical to improve the quality and efficiency of public spending in Equatorial Guinea The quality of public expenditure in Equatorial Guinea remains weak, with low social spending and quality of budget preparation. Social spending is very low in Equatorial Guinea with public expenditure on education, health, drinking water and social assistance estimated at only 1.6 percent of GDP in 2022, about one-third the West and Central Africa average. In 2022, social assistance spending represented only 0.1 percent of GDP, among the lowest globally (see Chapter 3). Moreover, budget deviations of over 15 percent of the budgeted expenditures were registered in 2021 and 2022. In particular, the government overspent by more than half of the budgeted level on capital expenditures in 2022 (Figure 35). The significant budget deviation in 2022 can also be explained by the oil windfalls and the pro-cyclical spending. In addition to improving the quality of budget preparation, implementing an efficient fiscal rule that channels oil windfalls in a stabilization fund is important (see section 2.1). FIGURE 35 The budget that was spent, including capital expenditures, deviated significantly from the approved budget in 2021 and 2022 a. Realization over Prevision in budget law: expenditure and b. Realization over Prevision: current and capital expenditure, revenue, in percent in percent 247 200 250 157 200 150 139 150 106 116 121 100 89 91 103 107 100 80 53 50 50 0 0 Expenditure Revenue Current expenditure Capital expenditure 2021 2022 2023 2021 2022 2023 Source: Equatoguinean authorities, and World Bank staff calculations Equatorial Guinea lags behinds its peer countries in terms of public spending efficiency.64 The efficiency of public spending improved between 2017 and 2018, resulting in slightly better human development outcomes. Yet, Equatorial Guinea’s public spending efficiency score remains below that of the CEMAC region and SSA, on average (Figure 36). More efficient use of public spending has allowed its peer countries, and SSA and CEMAC countries more broadly, to achieve better outcomes in human development than Equatorial Guinea. The country ranks lower compared to peers on the human development index (HDI). 64 The Data Envelope Analysis (DEA) is used to measure the efficiency of public spending. The DEA is a standard non-parametric method developed by Charnes et al. (1978). The efficiency scores are calculated using an output-oriented DEA model. The input variable is public expenditure, while the output variables are life expectancy at birth (year), mortality rate, under-5, and mean years of schooling. 92 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth FIGURE 36 Public spending efficiency has improved in 2018 but remains below that of CEMAC countries, on average a. Public spending ef ciency in Equatorial Guinea and SSA, b. Public spending ef ciency in Equatorial Guinea and peer 2008-2018, Ef ciency Scores countries, average 2008-2018, Ef ciency Scores 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Equatorial Guinea Congo Gabon WAEMU average CEMAC average (excluding EQG) SSA average (excluding EQG) Equatorial Guinea SSA average (excluding EQG) Source: WDI (2022) and World Bank staff calculations Note: EQG= Equatorial Guinea. The input variable is public expenditure and the output variables include life expectancy at birth (years), mortality rate, under-5, and mean years of schooling. This analysis does not use the health expenditure and education expenditure due to lack of expenditure of education data for Equatorial Guinea. Strengthening expenditure management could help enhance the quality and efficiency of public spending. The government accounts in commercial banks represented 3.7 percent of GDP in 2022 (IMF, 2023). While the recent signature of a decree establishing a treasuring single account (TSA) is a welcome step, more efforts are needed. This would include, for instance, accelerating the creation of the TSA, closing accounts with commercial banks, and transferring resources to the BEAC. Table 5 provides detailed policy recommendations. 2.3.3 Enhancing public investment management The productivity of public investment is important in determining the extent to which resource wealth can be turned into other productive assets that promote sustained growth; however, public investment efficiency and management remain weak in Equatorial Guinea, and there is a need to maintain acquired non-financial assets Public investment in Equatorial Guinea has decreased in recent years. Public investment increased from 9.5 percent of GDP in 2000-2007 to 18.7 percent of GDP in 2008-2014, on average (Figure 37a). 65 The proceeds of oil exports were mainly focused on implementing large infrastructure projects, which now need to be maintained to ensure they support fully to the growth objectives of the country. After the 2014 negative oil price shock, capital expenditure decreased both in percent of GDP (from 17.6 percent of GDP in 2014 to 4.3 percent in 2019) and in total fiscal spending (from 74.9 percent in 2014 to 30.6 percent in 2019). 65 These figures are from the IMF Investment and Capital Stock Dataset, 2021. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 93 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth © Jan Ziegler/istockphoto.com The Equatoguinean government spent about US$41 billion to acquire non-financial assets during the first phase of the NDP2020 (IMF, 2022). The government invested in the construction of new cities such as the Ciudad de la Paz in the province of Djobhoho (which is not yet completed) and Sipopo, public administrative buildings, roads, ports, airports, telecommunications infrastructure, and electricity generation. Thanks to the swift growth in public investment, Equatorial Guinea’s public capital stock (relative to GDP) was higher in 2019 compared to other CEMAC countries and its peers (Figure 37b). While significant investment resulted in a very large capital stock, its efficiency remains lower than in other SSA countries. The country’s score Although Equatorial for public investment efficiency remained below the SSA average between 2008 and 2018 (Figure 37c) (see Box A2.1 in Annex 2 for the detailed Guinea ranks methodology). The peak in 2012-2013 can be explained by the public high in terms of investment program adopted by the government and the first phase of capital stock per implementation of the NDP2020. Although Equatorial Guinea ranks high in capita, its 2018 terms of capital stock per capita, its 2018 public investment efficiency score public investment of 63.8 is weak compared to peer countries (Figure 37d). The low public efficiency score investment efficiency indicates that the same outputs (Africa Infrastructure of 63.8 is weak Development Index including, transport, electricity, ICT and water and sanitation) could have been achieved with lower levels of investment. In compared to peer particular, the country ranks lower compared to peers on the infrastructure countries. development index in terms of electricity and ICT. The low efficiency of public investment spending can be explained by weak public investment management. Most of the provisions of the decree (82/2.000) establishing and regulating a public investment management system in Equatorial Guinea are not implemented. There is a need to update the legal framework including by providing a clear definition of the roles of all the agencies in different ministries as well as their coordination, and specify the objectives of the public investment system. Moreover, it is important to improve the effectiveness of the Public Investment Program (PIP). While most CEMAC countries have a set of criteria for the selection and prioritization of their PIPs, Equatorial Guinea seem to lack such criteria. The PIP contains projects that are not mature enough and lack credibility and clear destination of financial envelope (IMF, 2023). Budgeting for current and capital expenditures is carried out separately and not completely linked. There is no functional and operational information system. 66 In addition, improved fiscal transparency is found to be correlated with better efficiency of public investment (Akitoby et al., 2020). Climate change is an added challenge for Equatorial Guinea, but efficient public investment and asset management could help build resilience against it. Equatorial Guinea ranks 86th (out of 185) on the 2021 Notre Dame Country (ND-GAIN) Index indicating a country’s vulnerability to climate change but is among the least 66 The information system for public investment programming (SIPROSE) which is the tool for operationalizing the National Programming System has not been operational for several years and the SIPROSE public investment database is no longer accessible for historical data. 94 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth prepared to improve resilience (181st out of 192) (see Box A2.2 in Annex 2).67 Responding to climate change will require considerable financing and Equatorial Guinea’s ability to fund its revised Nationally Determined Contributions (NDCs) is uncertain with the cost of the adaptation and mitigation costs outlined in the Equatorial Guinea’s updated NDCs estimated at US$4.7 billion. Given constraints on fiscal space, it is important that climate-responsive investment and the implementation of the NDCs are supported by strong enabling PFM institutions (Box 7). Strong institutions provide assurances that every dollar is spent in the most efficient possible way, and that waste and corruption are avoided (IMF, 2021).68 FIGURE 37 With sustained investments during the first phase of the NDP2020, Equatorial Guinea’s public capital stock as a share of GDP is higher compared to peers; however, efficiency remains low a. Public investment and capital stock, PPP 2017 international b. Public capital stock (% of GDP, PPP 2017 international dollars, 2000-2019 dollars), 2019, in Equatorial Guinea and peers 250 25 Equatorial Guinea Oman 200 20 United Arab Emirates in percent of GDP in percent of GDP 150 15 Malaysia Kuwait 100 10 Gabon Azerbaijan 50 5 Bahrain 0 0 Cameroon 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Chad Public capital stock (lhs) Public investment (rhs) 0 50 100 150 200 250 c. Public investment ef ciency in Equatorial Guinea and SSA, d. Public investment ef ciency in Equatorial Guinea and peer 2008-2018 countries, 2018 120 100 95 100 90 WAEMU 80 Ef ciency Scores Ef ciency Scores CEMAC 85 SSA 60 Gabon 80 Congo 40 75 70 20 Equatorial 65 Guinea 0 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 5 10 15 20 25 30 35 40 45 Equatorial Guinea Public capital stock per capita in thousands of SSA average (excluding EQG) constant 2017 international dollars Source: IMF Investment and Capital Stock Dataset, 2021 and World Bank staff calculations. 67 Box A2.2 provides more details on the climate context and governance in Equatorial Guinea. 68 Integrating climate aspects into Public Investment Management (PIM) institutions will enable the development of quality climate-aware investment and open the door for developing countries to unlock financing and the various climate funds focusing on the green transition. Moreover, as many developing countries, including small island states face significant challenges in accessing climate funds due to weak public financial management institutions, strengthening PFM and PIM practices may help unlock access to climate funds. See “IMF (2021). Strengthening infrastructure governance for climate-responsive public investment. IMF Policy Paper”. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 95 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth BOX 7 Integrating climate change into public financial management in Equatorial Guinea Climate change needs to be mainstreamed in fiscal planning and the budget process. Climate risks have not been incorporated in macroeconomic forecasting which makes it difficult to assess the impact of climate on economic outcomes. Fiscal policy instruments such as fuel subsidies have a negative impact on climate change and can undermine the country’s achievement of its NDC targets. The fiscal cost of fuel subsides represented 1.3 percent of GDP in 2022 in Equatorial Guinea. Fuel subsidies introduce market and environmental distortions that prevent an efficient use of energy and the adoption of low emitting development (World Bank, 2023). There are no legal requirements for mainstreaming climate risk in public finance management (PFM) and public investment management (PIM). Equatorial Guinea’s procurement regulations provide elements for sustainable green procurement, but in practice its application is limited to environmental impact assessment and externally-funded projects. The law emphasizes the obligation to conduct environmental impact studies for all public investment projects, however, the NDC proposal to implement this regulation is not yet operational. Furthermore, the law is not explicit on climate change considerations in the PIM framework and does not require climate-related analysis as part of budgeting, procurement, or accountability mechanisms. No climate indicator is included in the project selection and allocation criteria. The 2000 PIP framework and the 2013 public finance law lack climate change disaster and risk considerations in allocating and managing public resources and assets. Improving climate governance will determine the capacity to implement NDCs, attract the private sector and better respond to the challenges posed by climate change. Clarifying mandates and improving coordination among public institutions and other stakeholders, guided by a long-term vision, an enhanced strategy, increased budgets, and a climate-resilient investment management system promoting low-carbon approaches, will better equip Equatorial Guinea against climate change. The advantages of prioritizing climate resilience outweigh the costs of investment, as it helps avoid the consequences of inaction. Factoring climate change into public investment and asset management will help safeguard investments, improve reliability of service delivery, and protect financial outlays. Building climate resilience in new investments begins at the planning and design stage with climate horizons and resilience aspects included in policies, sector strategies, asset management and land-use plans. Critical entry points exist at project identification and appraisal. The systematic screening of projects should aim to detect any potential major climate impact or vulnerability to climate risk. Existing infrastructure assets will have to be managed differently in the face of climate change. Adaptation measures might need to be undertaken, including traditional infrastructure (e.g., building sea walls) as well as natural infrastructure (e.g., wetlands and other nature-based solutions). Non-structural measures can be also considered, such as changing the timing of maintenance, or enhancing the monitoring of assets. Capacity to screen projects for climate change and a comprehensive information system including data about exposure to hazards and climate impact on investments and assets are important prerequisites. A new PFM law incorporating CEMAC directives and climate change considerations is needed. 96 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 2.3.4 Improving fiscal transparency Enhancing fiscal transparency and accountability is important to establish credibility in the management of resource revenues Fiscal transparency is correlated with better socio-economic and fiscal policy outcomes, and improved governance. Fiscal transparency – the comprehensiveness, clarity, reliability, timeliness, and relevance of public reporting on the past, present, and future state of public finances – is critical for effective fiscal management and accountability (IMF, 2018). In general, access to reliable and timely data including fiscal data – which can generate better policies and reforms and allow citizens to hold governments accountable for their actions – is positively associated with economic growth (Islam and Lederman, 2020). Higher fiscal transparency may incentivize the society to monitor the accountability of the government which would positively impact government spending efficiency (Montes et al., 2018). Fiscal transparency can help improve budget credibility and reliability as it is found to increase the budget execution rate in the health and education sectors (Sarr, 2015). It can lead to improved tax compliance by strengthening the perceived relationship between paying taxes and better public goods (Akitoby et al., 2020, Kelmanson et al., 2019). Fiscal transparency can also improve the efficiency of the domestic financial markets, reduce uncertainty and borrowing costs. For example, Kemoe and Zhan (2018) show that fiscal transparency lowers borrowing costs for emerging market countries and increases foreign investors’ demand for their sovereign debt. Improved budget transparency can reduce rent-seeking behavior, decrease rent capture, and increase public output and productivity (Dabla-Norris and Paul, 2006). The publication of timely audit reports is likely to reduce corruption and enhance electoral accountability, especially when the dissemination of these reports is supported by local media (Ferreira and Guerrero, 2022). The Open Budget Survey data show that fiscal transparency is limited in Equatorial Guinea. The Open Budget Survey (OBS) covers aspects such as the public availability of budget information, opportunities for the public to participate in the budget process, and the role and effectiveness of formal oversight institutions. These aspects of fiscal transparency are critical for public accountability. Equatorial Guinea’s OBS budget transparency score is well below that of its peers, UMIC average, SSA average and the world average (Figure 38). The Open Budget Index (OBI) decreased from 4 in 2015 (and 5 in 2019) to 0 in 2021. In 2021, the OBS score ranges from 0 in Comoros, Equatorial Guinea, Venezuela and Yemen to 87 in Georgia. Budget transparency in Equatorial Guinea must be improved. The enacted budget for 2015 was available to public at the time of the OBS data collection. Currently, the latest year for which the data on budget execution is available is 2017 and was published only in March 2020 on the website of the Ministry of Finance, Planning, and Economic Development. In addition, the summary table of the financial operations of the Government on the website of the Ministry of Finance is only available from 2015 to 2020. In 2021, the pre-budget statement, executive’s budget proposal, and year-end report were produced but for internal use only. Public participation in the budget process (formulation of budget and monitoring of budget implementation) remains limited. 69 Moreover, according to the OBS the country scores 18 (out of 100) on budget oversight, underlying the limited role of the legislature and supreme audit institutions during the budget process. While the Budget Laws after 2022 are still not available on the Ministry of Finance website, some progress was made on the comprehensiveness of the 2024 Budget Law. In recent years, the government has annexed to the Budget Law some information on the salary scales and allowances for the executive; current expenditures by different ministries and administrations; institutional projects and programs in some sectors including the social sector, public administration, productive sectors such as hydrocarbons and forestry; and the PIP. However, the annex relating to investment expenditures did not present information on the duration, total cost, amount spent, or outstanding balances of the projects. In the 2024 Budget Law, the annex related to the PIP now includes 69 According to the Equatoguinean authorities, the civil society was part of the budget process until the onset of the pandemic. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 97 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth their total costs, expenses as of June 2023, resources as well as the remaining financing for 2025-2026.70 Important information is still missing: for instance, there is no information on the implementation of the selected projects. Equatorial Guinea has not yet implemented CEMAC directives on program budgeting and budget transparency.71 In the February 2024 presidential decree, the authorities have committed to the transposition and implementation of all CEMAC directives for the harmonization of Public Finance Management. While transparency in the extractive sector is key to strengthening the management of resource rents and increasing accountability, it remains weak in Equatorial Guinea. Equatorial Guinea ranks 85th (out of 89 countries) on the 2017 Resource Governance Index (RGI). The country’s poor performance can be attributed to poor management of resources with a score of 18 out of 100, as well as the lack of enforcement of the legal framework. Moreover, Equatorial Guinea is no longer a member of the Extractive Industries Transparency Initiative (EITI) which promotes the open and accountable management of oil, gas, and mining sectors. The country was delisted from the EITI in 2010 and their 2019 application was not accepted. In 2022, the authorities submitted a new application to the EITI, which is pending the completion of one key milestone – a conference on EITI membership with the participation of civil society. FIGURE 38 Budget transparency in Equatorial Guinea, peers, and world, 2021 Equatorial Guinea 0 Chad 6 SSA average 32 Cameroon 34 World average 45 Timor-Leste 52 UMIC average 53 Azerbaijan 57 0 10 20 30 40 50 60 70 80 90 100 Source: Open Budget Survey and World Bank staff calculations Note: On a scale of 0 to 100, a higher score indicates better transparency. Transparency score of 61 or above indicates that a country is likely publishing enough material to support informed public debate on the budget. 70 The authorities share the Budget Law with the World Bank. 71 CEMAC directives harmonize a framework for: i) performance-based budgeting (budgets-programs-BP), ii) budgeting in terms of commitment authorizations and payment appropriations (AE-CP), iii) strengthening the system for awarding and controlling public contracts, iv) cash management and v) accrual and asset- based accounting. 98 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth 2.3.5 Policy recommendations Targeted policy actions can enhance the efficiency of current spending. Expediting the creation of the TSA, closing government accounts with commercial banks, reducing fuel subsidies, rationalizing resources by developing a strategy to reduce the reliance of SOEs on subsidies, addressing the underperformance of SOEs and reducing transfers to public entities, would help enhance the allocative efficiency of spending. Expanding the Unique Social Registry (RUS, Registro Unico Social ) to become a dynamic identification system would help identify poor and vulnerable in the society and improve policy design and the efficiency of expenditure targeting. The quality and efficiency of spending can be enhanced by permanently increasing the budget allocated to the education, health, and social protection sectors while controlling current expenditure. Reforms are also needed to enhance public investment efficiency and strengthen public asset management. The cuts in capital expenditures in recent years, declining public investment efficiency, and insufficient attention to maintenance and management have driven a deterioration in the quality of public infrastructure. Policy action to reverse these trends include strengthening the public investment institutional framework through improvements in procedures, sector ministry execution capacity, accountability, monitoring, and evaluation for investment projects. To strengthen public investment management, policy actions include creating a unique project identifier (UPI) for all (new) public investment projects, applying the UPI to all transactions, updating the central database to monitor all projects throughout their lifecycle, and rationalizing the project portfolio by reviewing the status of all projects and applying the revised prioritization methodology to the entire portfolio. Strengthening asset management and maintenance would enhance the effectiveness of public investment. To make reliable estimates of maintenance requirements, government need to put in place a comprehensive register of their fixed assets, such as buildings, roads and power lines. Maintaining an asset register, backed by a condition report on each asset, is of vital importance for generating reliable estimates of maintenance costs to increase the life span and quality of infrastructure. The asset register would help in identifying routine maintenance requirements that should be part of the decision to move ahead with an investment. Finally, gradually integrating climate change considerations in Equatorial Guinea’s infrastructure governance could reduce life cycle costs and increase the service value of physical assets. Finally, efforts are needed to improve fiscal transparency, notably in extractive industries, and budget monitoring capacity. Policy options include adopting reforms to gain membership in the EITI, prohibiting the inception and approval of new investment projects during the year without a revision of the law of finance, publishing a SOE policy that includes the rational and objectives of the subsidies, agreements with SOEs, adding the medium-term macroeconomic framework and the proposed new investment projects as annexes in the law of finance, enhancing public expenditure monitoring, and strengthening statistical and monitoring capacity. Overall, ensuring high standards of integrity in the public sector and enhancing openness and transparency in government communication, including the provision of information on public finances to the people, are policy imperatives that also fight corruption and improve governance. Table 5 provides detailed policy recommendations. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 99 CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth TABLE 5 Policy recommendations to enhance spending efficiency and public investment management Focus Area Policy recommendations Importance Timeframe Responsible Agency Enhancing efficiency in public spending and public investment management Budget • Align public financial • Ministry of Finance, management directives with High SHORT TERM Planning, and Economic those of CEMAC. Development, Parliament • Implement the Integrated Expenditure Management High SHORT TERM • All ministries System (CONTFIN) in all ministries. Current • Expedite the creation of expenditures a treasury single account • Ministry of Finance, (TSA), close accounts in High SHORT TERM Planning, and Economic commercial banks, and Development transfer funds to the TSA held in BEAC. • Ministry of Finance, • Reduce fuel subsidies. High MEDIUM TERM Planning, and Economic Development • Develop a strategy to reduce the reliance of SOEs • Ministry of Finance, on subsidies based on a SHORT TO Medium MEDIUM TERM Planning, and Economic review of their performance, Development governance, and organization structure. • Address the underperformance of SOEs • Ministry of Finance, SHORT TO and reduce transfers to the Medium MEDIUM TERM Planning, and Economic gas company and other Development public entities. • Improve policy design and • Ministry of Finance, expenditure targeting by Planning, and Economic expanding the Registro Development Medium- MEDIUM TO Unico Social to help identify LONG TERM • Ministry for Gender High Equality, Social Affairs and target poor and vulnerable individuals and and Crafts households. • INEGE • Permanently increase the budget allocated to • Ministry of Finance, the education and health High SHORT TERM Planning, and Economic sectors while controlling Development overall current expenditure. Capital • Create a unique project • Ministry of Finance, expenditures identifier (UPI) for all (new) High SHORT TERM Planning, and Economic public investment projects, Development apply it to all transactions. • Update the central database • Ministry of Finance, to monitor all projects Medium SHORT TERM Planning, and Economic throughout their life cycle. Development • Rationalize the public investment project • Ministry of Finance, SHORT TO portfolio by reviewing all High MEDIUM TERM Planning, and Economic projects’ status and apply a Development prioritization method. 100 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 2 Implementing an Effective Fiscal Policy for Sustained Economic Growth • Formalize the macroeconomic framework • Ministry of Finance, Low- committee’s role in the SHORT TERM Planning, and Economic Medium Development budget-preparation process. • Put in place a comprehensive register • Ministry of Finance, of fixed assets, such as SHORT TO High MEDIUM TERM Planning, and Economic buildings, roads, power Development lines, including a condition report on each asset. • Include a first stage screening for climate risk integrated into early stages • Ministry of Finance, of project development SHORT TO High MEDIUM TERM Planning, and Economic presenting potential Development adaptation needs, together with conformity with climate change national objectives. Improving fiscal transparency and statistics Budget • Establish a zero ceiling transparency on the inception and the • Ministry of Finance, and approval of new investment Low- SHORT TERM Planning, and Economic monitoring projects during the year Medium Development without a revision of the law of finance. • Design and publish a SOE policy that presents the • Ministry of Finance, rationale and objectives of SHORT TO Medium MEDIUM TERM Planning, and Economic the subsidies, performance Development agreements with SOEs, and SOE performance. • Annex the medium-term macroeconomic framework • Ministry of Finance, Medium- and the proposed new SHORT TERM Planning, and Economic High Development detailed investment projects to the law of finance. • Improve public expenditure • Ministry of Finance, monitoring and tracking SHORT TO High MEDIUM TERM Planning, and Economic by strengthening public Development financial management. • Ministry of Finance, • Strengthen statistical and SHORT TO High MEDIUM TERM Planning, and Economic monitoring capacity. Development • Develop functional • Ministry of Finance, SHORT TO classification of budget for High MEDIUM TERM Planning, and Economic all years going forward. Development • Publish on the website of the Ministry of Finance the • Ministry of Finance, finance laws and detailed High MEDIUM TERM Planning, and Economic budget execution data in a Development timely manner. • Pursue Extractive Industries SHORT TO • Ministry of Hydrocarbons Transparency Initiative High MEDIUM TERM and Mining Development (EITI) membership. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 101 102 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth © katleho Seisa/istockphoto.com CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth Investing on social sectors like education, health, and social protection is critical for building human capital which is one of the main contributors to long-term economic growth. However, Equatorial Guinea lags most peers in human development outcomes and social spending is low at 1.6 percent of GDP. This chapter analyzes how Equatorial Guinea can improve education, health, and social protection outcomes. Based on available data, for each sector, the chapter discusses the current situation and outcomes, identifies potential drivers of those outcomes, and proposes a series of recommendations to boost human capital. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 103 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.1 Human capital development is key for long-term economic growth Human capital is the accumulated knowledge, skills, and health that people accumulate over their lives. Aside from being intrinsically valuable, human capital is crucial for individuals to flourish and realize their potential as productive members of society. Across economies, higher human capital levels are correlated with higher incomes for both individuals and countries, stronger societal cohesion and stability. It is a key driver of sustainable growth and poverty reduction. The amount of human capital accumulated has implications for an individual’s productivity. Countries with good education and health outcomes are likely to have wealthier economies (Hanushek and Woessman, 2008; Barro, 2013; Qadri and Waheed, 2013; Ogundari and Awokuse, 2018). The Human Capital Index (HCI) measures the human capital that a child born today can expect to attain by their 18th birthday and captures the impact of current health, nutrition, and education outcomes in determining the productivity of the near future workforce. Countries with higher HCI values are more likely to have higher per capita incomes (Figure 39). Although correlation does not necessarily mean causation and higher income could be the cause of higher human capital (through better access to education services and healthcare), evidence of bi-directional causality between human capital and economic growth for Africa exists (Anoruo and Elike, 2015; Matashu and Skhephe, 2022). In Western and Central Africa, expanding access to basic quality education for all could increase its HCI to 0.80 (from 0.38, on a scale of 0 to 1) and boost GDP per capita by an estimated 2.2 times, equivalent to growing at an average rate of 1.6 percentage points a year over 50 years (World Bank, 2022). FIGURE 39 Human capital and human development outcomes are positively correlated with income per capita a. Cross-country correlation between Human Capital Index and b. Cross-country correlation between Human Development per capita income, 2020 Index and GNI per capita, 2022 1.0 1.0 Human Development Index (0:low, 1:high) 0.9 Human Capital Index (0:low, 1:high) 0.9 0.8 0.8 0.7 0.7 Equatorial 0.6 Guinea 0.6 0.5 0.5 0.4 0.3 0.4 0.2 0.3 6 7 7 8 8 9 9 10 10 11 11 12 12 2.5 3.0 3.5 4.0 4.5 5.0 log of GDP per capita, 2017 PPP in US$ log of GNI per capita, 2017 PPP in US$ Source: World Bank and UNDP A well-educated and healthy workforce is at the core of human capital development and productivity growth. Health enables a human being to thrive, and is essential for productivity. Similarly, an educated workforce provides the skills for the labor market and drives creativity, technological change, and job creation. Figure 40 and Figure A3.1 (in Annex 3) show the positive relationship between health outcomes, schooling outcomes (quantity and quality), and per capita income across countries. Countries with better health outcomes such as a higher fraction of children under 5 who are not stunted, higher probability of child survival to age 5 and higher survival rate in ages 15-60 are likely to have higher per capita incomes (Figure A3.1). 104 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth FIGURE 40 Higher quantity and quality of schooling are associated with improved per capita income Cross-country correlation between schooling quantity, quality and per capita income, 2020 16 600 Expected years of schooling, 2020 Harmonized test score, 2020 12 500 8 400 4 300 6 8 10 12 6 8 10 12 Log per capita income, 2020 Log per capita income, 2020 Source: World Bank, 2020 Education is one of the most critical components of human capital. For those employed in a wage job, each additional year of schooling is associated with higher earnings, ranging, in the Sub-Saharan African context, from 7 percent in Chad to 15 percent in Burkina Faso and Niger (World Bank, 2022). More broadly, investing in education would help improve living standards, especially among the poor. Raising the primary gross enrollment ratio from 50 percent to 100 percent would increase the share of income going to households in the poorest decile by 8 percent (Abdullah et al., 2015). The impact is even greater for countries furthest from the global technological frontier, such as Equatorial Guinea. While schooling is key to bring economic benefits, it must come with learning. Learning – the process of acquiring knowledge or skills – is different from schooling. Even though schooling usually brings some level of learning (World Bank, 2018), school systems across the world differ widely in terms of how much learning they produce. Learning occurs along the education cycle (Urdinola, 2023), starting in the early years with foundational skills and continuing with higher-order and specialized skills. In many countries, individuals with higher measured skills have been consistently shown to earn more than their lower-skilled peers who have the same amount of schooling.72 Investing in foundational learning and secondary education is critical for economic development. For children to reach their full potential, it is important for them to read well enough to be “independent readers” who “read to learn.” Reading is the gateway to learning in almost every area. Economically, literacy levels at age seven are predictive of income levels at age 40, even when controlling for many other socioeconomic variables (Association for Psychological Science, 2013). Being able to read and write well is related to access to better jobs, higher household incomes, and better rates of economic well-being. Secondary education is also crucial for economic prosperity. An additional year of secondary schooling brings 12-14 percent increases in earnings annually, and even more for women (Montenegro and Patrinos, 2014). The benefits of educating women are far-reaching. Education enhances child survival and health outcomes and reduces child marriage and early pregnancies. In Nigeria, for instance, each additional year of female schooling reduces fertility by at least 0.26 births per woman (Lam et al, 2016). Educated women are more likely to use contraception, play a larger role in family fertility decisions, and display greater awareness of the trade-offs in having children (Becker et al, 2013). Better-educated mothers raise healthier and better-educated children. Educated women are more likely to work in paid jobs outside the home, remain longer in such jobs, and earn more (Osili and Long, 2008). 72 For example, see Hanushek and Woessmann (2015), Valerio et at (2016), Moll (1998), Glewwe et al (1991). Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 105 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth Moreover, enhanced human capital is important for economic diversification. Investing in high-quality education can generate the intellectual assets necessary to launch new sectors. As economies progress, the need for highly educated professionals, such as engineers, managers, and scientists, tends to increase. Nations equipped with a competent workforce are more likely to attract foreign direct investment in different sectors. This is particularly important for Equatorial Guinea given its low level of economic diversification. To achieve inclusive growth, human capital development must be fostered and protected through adequate social protection. Social protection refers to the policies and programs that help individuals and societies to manage risk and volatility, protect them from poverty and inequality, and help them to access economic opportunity (World Bank, 2022).73 Social protection programs help poor families access nutrition, health, and education building their human capital. Such programs contribute to creating equality of opportunity, helping disadvantaged individuals lead productive lives. Furthermore, safety nets help families cope with adverse events such as climate-related disasters, conflict, and income shocks, thereby protecting their human capital.  Education, health, and social protection are mutually reinforcing, complementary investments. Education is key to an individual’s practicing a healthy lifestyle and understanding effective health practices. Conversely, being healthy facilitates learning ability and cognitive skills. Impact evaluations demonstrate that social protection accelerates health and education outcomes, building human capital, maximizing its productive use, and protecting it throughout the lifecycle.74 Stunted children, for instance, are likely to have lower capacity to learn, worse academic performance and reduced productivity in adulthood. Figure 41 shows the positive correlation between health (fraction of children under 5 not stunted) and education (learning-adjusted years of schooling) outcomes across countries. FIGURE 41 Cross-country correlation between schooling and health outcomes, 2020 12 10 Learning adjusted years of schooling 8 6 4 2 0.4 0.6 0.8 1.0 Fraction of children under 5 not stunted Source: World Bank 73 World Bank Group. 2022. Charting a Course Towards Universal Social Protection: Resilience, Equity, and Opportunity for All. © World Bank Group, Washington, DC. http://hdl.handle.net/10986/38031 74 Ibid. 106 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth © Imago/alamy.com Sustained long-term economic growth is feasible by diversifying assets, in particular, by increasing investment in human capital (see Chapter 1). In a “virtuous cycle”, greater human development increases economic growth, while greater economic growth, in turn, finances higher human development. Cross-country analysis shows countries investing in human capital early in the cycle enjoy the benefits of the virtuous cycle. Countries that initially favor economic growth without human capital investment lapse into a vicious cycle (slowed economic growth following low human capital levels).75 Thus, higher levels of human capital investments increase the country’s long-term growth rate. Equatorial Guinea has substantial room to increase its low level of human capital. 75 See Ranis, Stewart and Ramirez, 2000. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 107 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.2 More and better education to boost human capital 3.2.1 Context and overview of the education system in Equatorial Guinea The Equatoguinean authorities recognize the importance of education as evidenced in the national sustainable development strategy 2035 The education system in Equatorial Guinea is comprised of four main levels: preschool, primary, secondary, and higher education, with preschool and primary considered mandatory. Complementary education modalities include permanent training and adult literacy education, long distance education, and special needs education. The general management of the entire education system is assigned to the Ministry of education, science, university and vocational education (Ministerio de Educacion, Ciencia, Enseñanza Universitaria y Profesional in Spanish).76 Its principal functions include proposing education policies and programs; approving curricular programs; creating and managing public education centers and approving and regulating private centers; coordinating and stimulating different social and economic stakeholder efforts; and issuing and accrediting diplomas and certifications. The Ministry has a specific unit related to technology education, but it lacks programs aimed to increase digital skills.  According to the General Education Law (2007) (Ley General de Educación in Spanish), the Ministry is responsible for determining the guidelines for education policy across education levels. The strategic vision for education was originally outlined in the Programa Mayor Educación Para Todos 2003-2020, approved by presidential decree in 2003. Equatorial Guinea became the first country in Central Africa to develop a national plan for education for all. The main goals included universal enrolment in preschool and primary with a 98 percent gross enrollment rate (GER) in secondary; improvement in the quality of education by ensuring adequate teacher preparation, with a focus on primary; elimination of gender disparities by reducing dropout rates among girls in primary and secondary and improving higher education completion rates among young women; adaptation of professional, technical, and higher education to the needs of the labor market; expansion of professional training to all provincial capitals; and increasing literacy rates above 75 percent among adults. However, the plan lacked a clear implementation strategy, a monitoring and evaluation framework, a description of roles and responsibilities or accountability for achieving results. The importance of education is emphasized in the government’s National Sustainable Development Strategy (AGENDA 2035). AGENDA 2035 provides an overview of system-wide priorities and needs in education. Another important initiative is the Program for Education Development in Equatorial Guinea (Programa de Desarrollo Educativo de Guinea Ecuatorial in Spanish) (PRODEGE), developed by the Ministry but managed by Family Health International (FHI) 360 (a non-profit organization) as a public-private partnership between the national government and the Hess Corporation. Its objective was to improve the quality of education for both public and private schools. The program focused on training two-thirds of primary teachers, establishing model primary schools, and improving information systems. The program ended in 2019 but has been critical for the development of the education sector and some of its activities are still in place. 76 This Ministry was renamed Ministry of Education, Science, Vocational Education and Sports as per the August 19, 2024 decree (84/2024). 108 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth Improving data availability in education is critical to allow efficient policy design Education data availability in Equatorial Guinea is weak. In 2022, the World Bank launched a regional education strategy for Western and Central Africa, in order to customize recommendations to the realities of different countries. As part of this strategy, a country classification was developed based on indicators of quality and access to education. Equatorial Guinea was the only country that could not be classified both for basic education and post-basic education due to the lack of available data. A simple analysis of commonly used indicators in the education sector shows that Equatorial Guinea lags its aspirational peers and regional comparators in terms of availability of data (Figure 42). The lack of reliable and comprehensive data in Equatorial Guinea’s education sector poses challenges to the design and implementation Accurate data is of public policies. Accurate data is crucial for effectively addressing the needs and gaps in the education system, identifying areas for crucial for effectively improvement, and making informed policy decisions. Without robust addressing the needs data, it becomes difficult to assess the impact of current policies, measure and gaps in the progress, and allocate resources efficiently. Moreover, the absence of data education system, extends beyond the education sector, affecting the overall development identifying areas for planning and decision-making processes in Equatorial Guinea. Addressing improvement, and this data deficiency is vital for the country to develop evidence-based policies that can drive positive change and ensure equitable and quality making informed education for all. The recently completed II national household survey policy decisions. report sheds more light on the education sector. FIGURE 42 Comparable education data in Equatorial Guinea is scarce Sierra Congo, Congo, Equatorial Bahrain Timor-Leste Azerbaijan Ghana Qatar Oman Cameroon Kuwait Nigeria Gabon Leone Rep. Dem. Rep. Guinea % Adolescents OOS 9 11 12 8 11 10 6 6 5 1 0 0 1 0 % Adolescents OOS (f) 9 11 12 8 10 4 6 6 5 1 0 0 1 0 % Adolescents OOS (m) 9 11 12 8 10 4 6 6 5 1 0 0 1 0 OOSC % (f) 8 11 9 5 7 1 5 1 2 4 1 0 1 4 OOSC % (m) 8 11 9 5 7 1 5 1 2 4 1 0 1 4 Fertility rate 12 12 12 12 12 12 12 12 12 12 12 12 12 12 Gov. exp. on education (% GDP) 11 11 11 9 8 7 11 11 12 10 4 8 11 0 Gov. exp. on education (% of gov. exp.) 13 12 13 9 9 8 13 11 12 13 12 8 12 0 Gov. exp. per student, primary (% GDP per capita) 3 4 0 4 0 2 3 2 6 1 0 2 1 0 Progression to secondary school (%) 7 8 8 6 6 7 4 5 5 2 0 2 0 2 Progression to secondary school (f) (%) 7 8 8 6 6 7 4 5 5 1 0 2 0 2 Progression to secondary school (m) (%) 7 8 8 6 6 7 4 5 5 1 0 2 0 2 School enrollment, primary (% gross) 9 11 12 10 12 11 9 12 10 7 10 8 2 4 School enrollment, secondary (% gross) 10 11 4 10 1 10 12 6 6 2 8 6 1 0 School enrollment, secondary (% net) 9 9 1 7 1 7 5 6 4 0 0 0 0 0 School enrollment, secondary (f) (% net) 9 9 1 7 1 7 5 6 4 0 0 0 0 0 School enrollment, secondary (m) (% net) 9 9 1 7 1 7 5 6 4 0 0 0 0 0 School enrollment, secondary, private 10 10 4 10 12 10 6 5 6 0 8 4 0 0 (% of total secondary) School enrollment, tertiary (% gross) 11 1 12 10 12 11 9 7 0 5 4 5 1 0 School enrollment, tertiary (f) (% gross) 11 1 12 10 12 11 9 7 0 5 4 5 1 0 School enrollment, tertiary (m) (% gross) 11 1 12 10 12 11 9 7 0 5 4 5 1 0 Women first married by age 18 0 2 1 2 1 1 2 0 2 2 2 2 1 1 (% of women ages 20-24) Total Observations 192 182 174 169 157 156 150 133 112 77 70 71 48 31 Source: World Bank staff, based World Development Indicators (data are of 2010-2023 and were last accessed in June 2024) Note: The chart shows the number of observations available on an indicator. The color graduations go dark red (no observations) to dark green (highest number of observations). OOS stands for out of school, and OOSC (f/m) stands for out of school children (female/male). Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 109 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.2.2 Education outcomes Available data show limited access to quality education and learning, low outcomes and a mismatch between supply and demand of skills in the country The age dependency ratio is relatively high at 71 percent. For every 10 working-age people, there are 7 people under the age of 15 or older than 64, though this is lower than the average for Sub-Saharan Africa (82). Thirty- eight percent of the population is below the age of 14 while 54 percent is below the age of 24 (Figure 43). The government needs to ensure that this large share of young people who will be entering the labor market can be turned into a demographic dividend. A dividend is not given solely by population dynamics, it needs to be stimulated with specific policies that can ensure that the youth acquire the right skills to be productive and can utilize those skills in the labor market. Thus, focusing on education and skills is critical to catalyze the potential of this generation. FIGURE 43 Equatorial Guinea’s population is mostly young Pyramid of population of Equatorial Guinea 100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 100 80 60 40 20 0 20 40 60 80 100 Male Female Source: World Bank staff based on International Institute for Applied Systems Analysis (IIASA) data for 2022. Access to education has expanded significantly, but there is still ample room for improvement. 77 The most recent data from the second national household survey show that the primary gross enrollment rate (GER) stood at 107.8 percent in 2021-22 (110.3 percent for men versus 105.1 percent for women) while the net enrollment rate (NER) was 82.8 percent in 2021-2022. While the enrollment rate in primary school is relatively high, the NER is below the average rates of structural peers and upper middle-income countries, likely because of grade repetition and over-age enrollment. Access to secondary education in Equatorial Guinea remains lower than that of upper middle-income countries. Overall, mean years of schooling in the country increased to from 5.9 in 2019 to about 8.3 in 2022 (Figure 44). Data from 2017 show that only 38.9 percent of students in primary school attended public schools, whereas 61.1 percent attended private schools, including religious private schools, which are usually subsidized. This share was higher in secondary schools with 64.3 percent of students attending private institutions. While the indicators might have changed, the trend is likely to remain similar. 77 The second national household survey shows that the literacy rate for Equatoguineans aged 15 and older is high at 90.1 percent, with noticeable gender disparities: men have a higher literacy rate (95.2 percent) compared to women (85.6 percent). 110 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth FIGURE 44 Despite recent progress, Equatorial Guinea’s educational attainment remains low a. Mean years of schooling and GNI per capita, 2019 b. Mean years of schooling and GNI per capita, 2022 15 15 12 12 Mean years of schooling Mean years of schooling Bahrain Azerbaijan Malaysia Malaysia Azerbaijan Qatar Oman Qatar Gabon Bahrain 9 9 Gabon Congo, Rep. Equatorial Guinea Kuwait Kuwait Congo, Rep. 6 Equatorial Guinea 6 Timor-Leste Timor-Leste 3 3 0 0 2.5 3.0 3.5 4.0 4.5 5.0 2.5 3.0 3.5 4.0 4.5 5.0 log of GNI per capita, 2017 PPP in US$ log of GNI per capita, 2017 PPP in US$ Source: UNDP Note: According to the second national household survey, mean years of schooling in Equatorial Guinea are estimated to be between 7.75 and 8.6, depending on whether preschool is considered as the first year of education. High levels of system inefficiency, particularly due to high repetition rates (above 16 percent in early grades) and high attrition rates, has a negative impact on results. Additionally, a lack of equity, particularly in terms of gender and socioeconomic levels, is evident. Overall, there is almost parity in secondary schools, where 50.1 percent of those enrolled are males and 49.9 percent are females. However, dropout rates follow different patterns depending on the age group. More boys drop out from school in earlier years, but by age 16, girls begin to drop out more, leading to a 10 percent enrolment gap between boys and girls. Legal restrictions banning pregnant girls from attending school and evidence of high levels of early pregnancy may be part of the reason for this increase in female school dropout (World Bank, 2017). The most commonly cited reason for not attending school is the lack of economic resources. This is followed by early pregnancies or early childbearing. It is likely that early entry into the informal labor market is a common reason for males. The COVID-19 pandemic has intensified pre-existing challenges in the education sector (see Box 8). Various forms of inequality are evident in different regions, particularly in rural areas on the mainland, as well as among marginalized groups such as people with disabilities. In rural areas, it is common to find schools that offer education only up to grades 3 or 4, with limited or no opportunities for further studies. Additionally, the majority of schools lack proper facilities or resources to accommodate children with disabilities. Between 2008 and 2011, the PRODEGE program administered a standardized test to assess student skills in language and mathematics at the primary level, shows that the percentage of students demonstrating proficiency across subjects is low in Equatorial Guinea. The 2011 assessment revealed very low performance, with 60 percent of students classified as having “low achievement” in reading and a small number capable of writing more than five words by the end of grade 1. In mathematics, less than 10 percent of students got a “high achievement” level. The national end-of-secondary education exam, known as Selectividad, also demonstrated poor student mastery of the curriculum (INEGE, 2021b). Although, the pass rate for Selectividad has increased from 15.3 percent in 2015 to 25.8 percent in 2021 (Figure 45), the exam primarily serves as a high-stakes entrance exam for higher education and has limited utility in monitoring the overall quality of the education system or measuring learning outcomes over time. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 111 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth FIGURE 45 The percentage of students passing high examinations at the end of secondary slowly increased to 25.8 percent in 2021 Students passing high stake examinations at the end of secondary in Equatorial Guinea, in percent, 2015-2021 30 25.7 25.8 25 20.8 20 18.9 18.3 15.5 15.5 15 10 5 0 2015 2016 2017 2018 2019 2020 2021 Source: World Bank staff based on Equatorial Guinea’s Statistical Yearbook, 2022. In 2021, a significant step was taken towards measuring learning more systematically, with UNICEF supporting a large-scale learning assessment for both public and private schools. It is estimated that 14,032 primary students (7,136 from Grade 3 and 6,896 from Grade 6, 52 percent girls and 48 percent boys) were evaluated in Spanish and Mathematics. Grade 6 students were additionally assessed in science and social science. Preliminary results indicate that 10,487 students (75 percent) passed the assessments. The disparities between public and private schools are minor, with a passing rate of 72.5 percent in public schools and 76 percent in private schools (UNICEF, 2021). However, as the detailed results are not yet available, it remains unclear how the passing threshold aligns with international standards like the Global Proficiency Framework, making comparisons challenging. The release of this information will be crucial in understanding the learning levels in Equatorial Guinea. Equatorial Guinea faces a mismatch between the supply and demand of skills within its labor market. It is common for private sector companies to face difficulties finding workers with the appropriate skills, and in many cases they either offshore their operations or recruit foreign workers. Economic diversification would require even more diverse skill sets for emerging industries and sectors. However, the weakness of the education sector and in particular the post-basic education sector would prevent Equatorial Guinea to meet that demand. Thus, Equatorial Guinea needs strong reforms in the education system for a successful economic diversification plan. The enrollment in higher education remains very low. The UNESCO Institute for Statistics (UIS) does not report recent data for Equatorial Guinea, but the latest data point available for the gross enrollment rate, for the year 2000, was one of the lowest in the world (2 percent) (UIS, 2022). Enrollment has grown since then but is still very limited. The higher education system in the country is still relatively new (compared to peers) and mainly consists of the offerings at the National University of Equatorial Guinea (Universidad Nacional de Guinea Ecuatorial in Spanish)(UNGE) which was created in 1995. There is also a much smaller program at the Afro-American University of Central Africa (Universidad Afroamericana de África Central in Spanish). In total, there are 8,151 students enrolled in higher education, of which 35 percent are enrolled in education, humanities, and religious sciences, 19 percent in economics and administration, and 15 percent in engineering, architecture, and fishing and agricultural technology. The number of enrolled students is slightly higher than in 2017-2018, after a drop between 2018 and 2020. The gender gap is more noticeable at the higher education level, where 60.2 percent of the enrolled students are male and 39.8 percent are female. It is even more pronounced for fields related to Science, Technology, Engineering, and Mathematics (STEM): 77.3 percent of enrolled students 112 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth BOX 8 COVID-19 and education in Equatorial Guinea © monkeybusinessimages/istockphoto.com The education sector in Equatorial Guinea faced significant challenges during the COVID-19 pandemic, intensifying pre-existing problems. The country experienced 27 weeks with schools fully closed and 7 weeks with partial openings. Based on the results from a high-frequency phone survey (HFPS) of over 1,000 interviews carried out by the World Bank, INEGE, and the phone company GETESA (Guinea Ecuatorial de Telecomunicaciones) in November and December 2020, closure of education centers and labor market impacts were the most important challenges resulting from the pandemic. Due to the lack of systematic measurement, the exact extent of these losses cannot be quantified. As in other countries, it is expected that the pandemic widened the education gap, disproportionately affecting rural areas that often lack internet connectivity. The government’s main initiative for distance learning was the “Schools in my house” program, launched in collaboration with UNICEF. This program utilized television, radio, and an online channel to deliver educational content. It reached an estimated 135,849 pre-primary and primary students through Television (TV) and radio programs. Numerous TV and radio sessions were produced and broadcast nationwide, including in remote areas with limited access to electricity (UNICEF, 2021). Although an online channel (escuelaencasa.gq) was created to store the content, it is currently inactive, and it remains unclear if it was widely utilized due to the low broadband internet penetration in households. Findings from the HFPS show that 38 percent of students from the continental region and 28 percent of students from the insular region participated in the educational programs launched in the local radio and television. The restricted access to technology limits the potential impact of hybrid learning models. Only around 40 percent of households surveyed in the HFPS have access to the internet. According to the recent household survey, only 10.9 percent of households have a computer. Access to cellphones is more prevalent (86.4 percent of households), although no information is available regarding the existence of smartphones and the number of devices per household. Source: UNICEF and World Bank Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 113 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth in engineering, architecture, and technologies are men. At the university level, there were a total of 1,026 faculty members in 2021-2022, including 67 PhDs, 170 Masters, 738 BA and Engineer degree holders, and 51 Technicians (INEGE, 2023). Vocational training also faces many challenges. The Technical and Vocational Education and Training (TVET) sector in Equatorial Guinea is still in its early stages of development. As of 2020-2021, the country had a total of 65 TVET centers, with 34 located in the continental region and 31 in the insular region. The districts of Bata and Malabo have the highest concentration of centers, with 28 and 30 respectively (INEGE, 2023). Among these centers, 28 are classified as higher grade, 26 as medium grade, and 11 solely for occupational training (INEGE, 2022). For the latter category, the number of centers has gone down over the last few years. Most of the TVET centers are privately operated. A national certification commission is responsible for recognizing qualifications issued by both public and private centers accredited for formal training. Recently, the government has received support from the African Development Bank to establish several polytechnics throughout the country (INEGE, 2021). While many training centers aim to provide skills aligned with the current economy, they fall short of focusing on skills needed to promote economic diversification. For instance, the National Technological Institute of Mines and Hydrocarbons of Equatorial Guinea offers numerous technical programs that align with the hydrocarbon-intensive nature of the economy. In contrast, access to digital skills training is limited and fragmented, lacking a clear strategy to develop the skills required for the 21st century (Chapter 5). Other training programs exist but are not as widespread as in other African countries, and they suffer from ineffective inter-ministerial collaboration and poorly negotiated initiatives. The limited availability and quality of educational resources contribute to the low educational outcomes in Equatorial Guinea. For instance, learning materials, including textbooks, are frequently inadequate. In many primary grades, the student-to-textbook ratio exceeds 3, in some cases even higher (World Bank, 2017). According to the second national household survey, the lack of books and teaching materials is the main issue faced by students in their respective schools with 21.2 percent of the surveyed population said this is a key issue. However, the pupil-to-teacher ratio, which indicates how resources for education are allocated, is relatively low at 21.6 in public primary schools and 27.9 in private primary schools, although with large differences across regions. Meanwhile, there are 20 students per teacher in public secondary schools and 19 in private schools (INEGE, 2023). However, more recent data from the household survey show that the high number of students per classroom is the second main problem in the education system. 15.5 percent of the surveyed population identified this as the main issue students face. While the availability of teachers seems good, there is no information about attendance rates, time-on-task, and teachers’ performance. The World Bank’s 2017 Education Diagnostic identified absenteeism and low teacher salaries as critical challenges. According to the household survey, 7 percent of the population mentioned the absence of teachers as the main issue in the education system. FIGURE 46 The percentage of qualified teachers is relatively low, especially for early years of education Percentage of quali ed teachers 80 69 70 60 54 50 40 30 20 10 5 0 Preschool Primary Secondary Source: World Bank staff based on Equatorial Guinea’s Statistical Yearbook, 2022 114 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth There have been improvements in teacher training, but the percentage of qualified teachers remains low. Only 5 percent of teachers are qualified in preschool, 54 percent in primary school, and 69 percent in secondary school (INEGE, 2022) (Figure 46). Additionally, there is a lack of mechanisms to hire or promote teachers based on their performance. Classroom dynamics often feature teacher-centered approaches, emphasizing dictation and copying, while problem-solving and student-led dialogue are limited. The shortage of teachers is particularly pronounced in specialized subjects. Public education financing in Equatorial Guinea is insufficient. Commonly cited international benchmarks of education financing include Equatorial Guinea those agreed in 2015 as part of the Education 2030 Incheon Declaration, which urges countries to allocate at least 4-6 percent of GDP and/or at least assigned only 0.9 15-20 percent of public expenditure to education. While the benchmarks percent of its GDP to are an indication of the adequacy of public spending on education and education in 2022, do not provide a full picture of private financing, the values in Equatorial compared with 2.6 Guinea are very low compared to peers. Equatorial Guinea assigned only percent of GDP 0.9 percent of its GDP to education in 2022, compared with 2.6 percent of in CEMAC and 4.1 GDP in CEMAC and 4.1 percent of GDP in SSA, on average (Figure 47). The government is continuing its fiscal consolidation efforts in 2024 by cutting percent of GDP in expenditures amid declining hydrocarbon production, though spending SSA, on average. on social sectors has not, so far, been affected. Assessing the equity of public resources allocated to education is challenging, given the limited comprehensiveness of budget data. The quality of the budget does not allow for clear functional differentiation of expenditures since 55 percent of the education budget goes to “non-classified education expenditures” in the 2023 finance law. Among the categories that are specified in the finance law, less than 5 percent is assigned to primary and pre-primary education, whereas 54 percent is assigned to higher education.78 This raises concerns about the potential inequity of the budget, especially given the unfinished agenda for basic education. FIGURE 47 Government spending in education in Equatorial Guinea remains very low by regional standards a. Spending on Education and Vocational Training, in percent of b. Spending on Education and Vocational Training, in percent of GDP, Equatorial Guinea, 2019-2022 GDP, 2022 1.2 5 1.0 4 0.8 3 0.6 2 0.4 1 0.2 0 0 2019 2020 2021 2022 Equatorial Guinea Average CEMAC Average SSA Source: Equatoguinean authorities; World Bank; WHO; and IMF article IV. 78 These percentages are 2 and 24 percent of the total education budget respectively if the non-categorized expenditures are included. However, part of the non-categorized expenditures might be devoted to primary or higher education. The IMF has recently provided technical assistance to help create a functional classification for the 2024 budget. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 115 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.2.3 Policy recommendations This section presents policy recommendations to expand quality education focusing on (i) improving foundational learning outcomes, (ii) expanding access to secondary education with a focus on gender gaps, (iii) investing in skills for economic diversification, and (iv) strengthening systems and implementation capacity. Table 6 includes the detailed policy recommendations. A focus on improving foundational learning outcomes  Prioritizing basic literacy, numeracy, and transferable skills is of utmost importance. Foundational skills serve as the cornerstone for developing other competencies, including digital skills. Emphasizing foundational learning for all entails increasing enrollment rates and implementing targeted programs to enhance learning outcomes. Effective strategies rooted in the science of learning, structured pedagogy, teacher coaching, and the use of classroom observation tools can prove valuable and cost-effective (Global Education Evidence Advisory Panel- GEEAP, 2023). Improving foundational skills will subsequently generate greater interest among the population to acquire more advanced skills. Additionally, Equatorial Guinea should invest in socioemotional skills, as they are increasingly demanded by the private sector. These skills, sometimes referred to as noncognitive skills or soft skills, encompass various dimensions such as social, emotional, personal, behavioral, and attitudinal traits. They encompass self-awareness, self-regulation, empathy, and social skills. Socioemotional skills are crucial for personal and social development, influencing how individuals interact with others and navigate the world (World Bank, 2014). There is ample evidence from other countries that can be adjusted to improve foundational learning in Equatorial Guinea in a cost-effective manner (GEEAP, 2023). For instance, providing information to parents and children on the income-earning benefits of education (where these are not known or not prominent in people’s minds), on sources of funding available, and on the quality of local schools has increased attendance and learning at low cost (Nguyen, 2013). Supporting teachers with structured pedagogy, a coherent package of investments that include lesson plans, learning materials, skills-based ongoing teacher training, and teacher mentoring that are carefully coordinated to reinforce each other, can increase learning at relatively low cost. Rigorous evidence from countries such as Kenya (Fleisch et al., 2016), Liberia (Menendez et al., 2021), The Gambia (Eble et al., 2021), and South Africa (Meiring, 2021) shows that the implementation of these programs is possible. In the case of Equatorial Guinea, improving basic education also implies radically expanding access to further education after lower primary school, when outcomes tend to be lower. Expand access to secondary education with a focus on gender gaps  Secondary education plays a critical role. Once young children progress into secondary education, Equatorial Guinea needs to ensure they can continue receiving the education that will prepare them for the labor market. At this stage, it is also important to address the multiple barriers that create gender bias and limit access to education for adolescent girls, including monetary barriers and social norms. To increase access to secondary education, a combination of multi-sectoral interventions is needed. Scholarships, cash transfers, and in-kind support, such as free uniforms and meals at school, can all help lower the direct cost of education (Blimpo et al., 2019). Shifting sociocultural norms that discourage school enrollment, for different reasons for boys and girls (including those that encourage early labor market participation and 116 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth early pregnancies), is an essential medium-term measure for widening learning opportunities. Increasing the availability of schools and optimizing their location is still critical (Ingwersen et al., 2019). Ensuring safe and inclusive learning outcomes must also be a priority (World Bank, 2022). Invest in skills for economic diversification Equatorial Guinea needs to increase significantly access to skills acquisition for youth in order to develop a workforce with the appropriate skills for the jobs that economic diversification will require. Critical actions involve expanding the range of possibilities for acquiring skills and lowering the expenses associated with training. Remedial programs and boot camps are effective approaches to facilitate access to market-oriented training for a broader population, particularly those from disadvantaged backgrounds. These interventions play a crucial role in bridging learning and skills gaps that might otherwise prevent potential participants from qualifying. Furthermore, it is important to enhance the availability of affordable and high-quality opportunities to acquire market-relevant skills and allocate financial assistance to students based on both merit and financial need. Similarly, expanding access to higher education will require actions on the demand and supply sides. On the demand side, it would be important to diversify student financing options to support marginalized and vulnerable youth. On the supply side, increasing the availability of places in the higher education system is critical. Finally, to ensure the quality and relevance of post-basic education and guarantee a link with the economic transformation of the country, Equatorial Guinea needs to foster a closer involvement of the private sector in the skills acquisition arena, for example, through closer links between training service providers and employers (World Bank, 2022). Increasing access to digital skills will be critical to ensure that the youth can engage in the labor market of the 21st century. Strengthen systems and implementation capacity  To deliver educational results that can create the conditions for sustained and inclusive economic growth, Equatorial Guinea needs to strengthen its systems to reach beneficiaries in a cost-effective way. Even well-designed interventions that are evidence-backed will fail if the systems are not prepared to execute them properly. Three priorities can be highlighted: a) increasing education financing and making it more efficient; b) enhancing the implementation capacity of government agencies; and c) improving data systems for better education. First, increasing and improving investment in the education sector is critical. Strategies for mobilizing additional resources could involve expanding the tax base, specifically allocating national budget funds towards achieving educational goals through well-defined medium-term budget plans and encouraging increased contributions from the private sector. It is crucial to ensure that these resources are effectively utilized, which requires strengthening public financial management in two key areas: medium-term expenditure planning and budgeting, as well as maintaining budget discipline during execution (see Chapter 2). Additionally, the allocation of resources should prioritize equity considerations to ensure fair distribution and accessibility. Second, implementation and monitoring capacity needs to be elevated. This involves designing an education system that is aligned with learning rather than other goals. At the government level, it is important to create mechanisms to ensure coordination across government agencies. Improving capacity also includes increasing the ability of civil servants to manage the education sector, and the leadership and managerial capacity of school managers and other education leaders to oversee operations, assess needs, plan new programs, and manage budgets. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 117 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth Finally, it is essential for Equatorial Guinea to improve its systems to collect, analyze, and utilize data for decision making. This includes the development of an education management information system and the collection of learning data in a more systematic manner, building on recent efforts. Quick wins can be made by adding education-specific sections to current efforts, such as the household survey that has been recently conducted, and the annual statistical reports, which have a section on education that could be strengthened. TABLE 6 Policy recommendations: More and better education to boost human capital Focus area Potential actions Timeline Responsible Agency Improving • Expanding access through supply and MEDIUM TERM • Ministry of Education foundational demand-side interventions. learning • Provide information to parents and children on the income-earning benefits SHORT TERM • Ministry of Education of education. • Develop a structured pedagogy program and support teachers with MEDIUM TERM • Ministry of Education continuous coaching. Expand access • Conditional cash transfers or other SHORT TERM • Ministry of Education to secondary forms of monetary support. education • Increase availability of schools. MEDIUM TERM • Ministry of Education • Implement campaigns to change socio- SHORT TERM • Ministry of Education cultural norm and address gender gaps. Invest in skills • Remedial programs and boot camps. SHORT TERM • Ministry of Education for economic diversification • Expand availability and affordability of MEDIUM TERM • Ministry of Education trainings. • Increase access to digital skills. SHORT TERM • Ministry of Education • Invest in higher education through MEDIUM TERM • Ministry of Education supply and demand-side interventions. Strengthen • Ministry of Finance, systems and • Increase education financing and make MEDIUM TO Planning and Economic implementation it more efficient. LONG TERM Development capacity • Ministry of Education • Increase monitoring and implementation MEDIUM TO LONG TERM • Ministry of Education capacity. • Improve systems to collect, analyze, MEDIUM TERM • Ministry of Education and utilize data for decision making. 118 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.3 Protecting human capital by investing in health 3.3.1 Overview of the health system and sector Health sector policies and institutional frameworks in Equatorial Guinea are aligned with global targets, but severe challenges remain In 2015, Equatorial Guinea adopted two agendas: the United Nations Sustainable Development Goals Agenda 2030 and the African Union’s Agenda 2063. The objectives, targets and operationalization of these global agendas were integrated into the “Plan Nacional de Desarrollo Económico y Social Guinea Ecuatorial Horizonte 2020 ” (National Economic and Social Development Plan Horizons 2020). In 2019, the Government organized the Third National Economic Conference, which adopted the Equatorial Guinea Sustainable Development Strategy 2035 (AGENDA 2035) based on the progress and implementation review of its development plans. This evaluation, conducted by the United Nations, revealed significant delays and little implementation of the health sector objectives. Overall, some of the problems and challenges facing the country are (i) lack of program funding, (ii) need for a coordinated, integrated, and stable planning to address health and nutrition priorities, (iii) poor awareness and health literacy of the Equatoguinean population that hinders demand for health services, and (iv) challenges to work across sectors to achieve gender equality and address other social determinants of health. Currently, the priorities and pipeline of health programs are included in the National Health Development Plan 2021-2025 ( Plan Nacional de Desarrollo Sanitario -PNDS 2021-2025). The development of this plan enshrined the long-term vision the government has established in its AGENDA 2035, taking into account an internal assessment of the shortcomings in the health system and the persistently poor health outcomes. Based on these challenges and weaknesses, the Ministry of Health and Welfare (MoHW) (“Ministerio de Sanidad y Bienestar Social ”) seeks to address four priority areas through ten sub-programs (Table 7). The implementation of the PNDS 2021-2025 entailed the creation of a Steering Committee spearheaded by the Office of the President of the Republic and the MoHW and includes multisectoral interventions from line Ministries such as education, social protection, agriculture, and infrastructure. The steering committee coordinates a technical and coordination committee which ensures that sub-program implementation is achieved, and the involvement of partners is enhanced. However, challenges remain in the implementation of the plan due to financing constraints and the lack of data collection systems for decision making. Under this institutional framework, the PNDS 2021-2025 aims to achieve the following objectives: (i) reduction of maternal, neonatal, and under-five mortality; (ii) reduction of adolescent fertility, and the risks associated with teenage pregnancies and illegal abortions; (iii) reduction of HIV prevalence and increased coverage of people with antiretroviral treatment; (iv) reduction of the burden of malaria and increased use of malaria-preventive measures; (v) increased routine immunization coverage; (vi) increased central and regional capacities to prevent, detect, and respond to public health hazards; and (vii) improved health system infrastructure, human resources, and health financing. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 119 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth TABLE 7 Strategic priorities and programs under the PNDS 2021-2025 Priority Axis Strategic Programs 1. Equitable and increased • Improved coverage and demand of quality essential health services. access of the population to quality health services • Increased quality in maternal and child health essential health services. • Improved and increased utilization of sexual and reproductive health services, especially amongst the adolescent population. 2. Health security, • Increased International Health Regulation (IHR) capacities to prevent, pandemic and emergency detect, and respond to public health events and natural and chemical preparedness, and health disasters. system resilience 3. Health promotion and • Reduction of the burden of disease of communicable and non- prevention communicable diseases, with an emphasis on malaria and NTDs. • Improve social determinants of health through multisectoral action. 4. Strengthened leadership • Reinforce stewardship and accountability mechanisms for the health and institutional sector. capacities of the health sector • Improve public financial management in the health sector. • Improved Monitoring and Evaluation and data and information management. • Initiate a public health research agenda. Access and coverage of essential health services is limited in Equatorial Guinea The health sector is governed by the MoHW, which manages a network of service providers. The administrative structure of the MoHW includes three hierarchical levels. The central or strategic level, headed by the MoHW itself, oversees the national health policy and defines the guidelines for its application. The intermediate or technical support level, which includes the regional delegation of Bata and the seven provincial health delegations, is responsible for coordinating the execution of health programs and projects. The peripheral or programmatic level includes frontline service providers such as district hospitals, health centers, and health posts. Despite the lack of recent data on service delivery indicators to properly assess performance, widespread weaknesses in governance and stewardship at all levels have been reported, namely: (i) deficient legal frameworks and accountability mechanisms; (ii) fragmented programmatic and implementation frameworks; (iii) lack of coordination among sectors and development partners; (iv) poor decentralization of management and implementation of programs; and (v) low accountability to ensure compliance with health sector reforms. The healthcare service delivery model is also organized into three levels. The primary level encompasses 161 public health posts and 46 public health centers, which are the system’s initial contact point with the population, and provide the majority of essential health services, including preventive care.79 The secondary level is composed of 11 district hospitals and five provincial hospitals, 80 which offer basic healthcare and first referral, including basic hospitalization. The tertiary level includes two regional hospitals, the National Institute of Social 79 The recent household survey shows that the initial point of care for most of the population seeking health services is the public hospitals, whether district or provincial, which are visited by 46.8 percent of the population experiencing health issues. This is followed by pharmacies, which serve 22.7 percent, and private clinics, where 14.9 percent of healthcare seekers are treated. The preference for public hospitals is higher in rural areas (52.6 percent) compared to urban areas (43.6 percent). 80 Provincial Hospitals: Annobon, Ebibeyin, Evinayong, Luba, and Mongomo. District Hospitals: Akonibe, Akurenam, Anisoc, Baney, Kogo, Mbini, Mikomeseng, Niefang, Nsok Nsomo, Nsoc, and Riaba. Source: Statistical Yearbook of Equatorial Guinea, INEGE 2017. 120 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth Security (INSESO) polyclinics, and two modern international medical centers in Malabo and Bata for INSESO workers and beneficiaries. Tertiary facilities offer advanced and more complex healthcare services, including specialized hospitalization. In total, there are an estimated 21 functioning hospitals. 81 Each district, province, and region has a health facility under its jurisdiction. As of 2022, there are 46 functional health facilities. the private health sector is composed of various private clinics and practices, most of which operate at the secondary level. The two private hospitals in Malabo (La Paz) and Bata (Guadalupe) receive transfers from the public budget. Overall, the system is not prepared to endure exogenous shocks such as outbreaks and disasters, which pose a very high risk of severe disruptions of essential health services, such as the ones encountered during the recent COVID-19 pandemic. According to the MoHW, in 2018 the health sector’s human resources consisted of 2,431 health professionals including 270 physicians. Most healthcare staff have only a secondary school diploma, indicating substantial scope to build the human capital of the sector. The aggregate of human resources for health in the country translates into 4 health workers per 10,000 people, which is considerably lower than the coverage observed in upper-middle income settings including those in the region such as Gabon (6.46 per 10,000) and very far behind the target of 44.5 health workers per 10,000 people of the World Health Organization’s (WHO). 82 Furthermore, there are severe geographic inequalities between the continental and insular regions of the country, mainly related to low coverage of the health infrastructure and the lack of a community-based program that would serve communities where they are. For instance, the insular region of the country concentrates 70 percent of health professionals, which is a stark contrast to the demographic distribution, as the region insular, where the capital Malabo sits, accounted for only 27.7 percent of the country’s population in 2015. The Equatoguinean government is currently implementing a wide range of national health programs. These include programs for nutrition, reproductive health, anti-malaria, ERA/EDA-IMCI, 83 HIV/AIDS, malaria, and tuberculosis, expanded vaccination, essential drugs, mental health, anti-tobacco, oral health, health education and social mobilization, and the national health information system. Vulnerability to infectious disease outbreaks further threatens human capital development Health security and epidemic preparedness remains an unfinished agenda. In the past 10 years, Equatorial Guinea has been affected by multiple infectious disease outbreaks such as Marburg Fever, Lassa Fever, Yellow Fever, Cholera, and COVID-19.​According to the 2022 International Health Regulations States Parties Self- Assessment Annual Report (SPAR), the country reached an average capacity of 43 percent to prevent, detect, ​ espite significant progress, this level of capacity is lower than the level and respond to public health threats. D of core capacities in middle-income countries in the region such as Angola with 58 percent and Congo with 47 percent, and even low-income countries such as Rwanda with 65 percent. 84 The main areas with lower capacity relate to domestic resource mobilization, availability and capacity of human resources to detect and respond to public health emergencies, cross-border surveillance at points of entry, and establishing a One Health platform to ensure multisectoral efforts across human, animal, and environmental health. In 2023, the government of Equatorial Guinea, with the support of WHO, finalized the update of their new National Action Plan for Health Security (NAPHS), which identifies the strategic lines for strengthening health security capacities. Given the limited resources allocated to the health sector, further prioritization of activities will be necessary for comprehensively improving the main gaps. 81 D.G. de Infraestructuras Sanitarias, 2022 82 Dussault G et al. Building the primary health care workforce of the 21st century - Background paper to the Global Conference on Primary Health Care: From Alma-Ata Towards Universal Health Coverage and the Sustainable Development Goals. Geneva: World Health Organization; 2018. 83 The ERA/EDA- IMCI Program addresses acute respiratory (ERA) and diarrheic diseases (EDA) through an integrated approach that focuses on the health and well-being of the child (IMCI). 84 World Health Organization. 2023. Equatorial Guinea. Strategic Partnership for Health Security and Emergency Preparedness (SPH) Portal. https://extranet.who. int/sph/country/equatorial-guinea?region Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 121 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.3.2 Equatorial Guinea’s health outcomes Low domestic health financing constitutes a systemic constraint to achieve better health outcomes Equatorial Guinea’s human capital development remains constrained by poor maternal and child health outcomes. Between 1990 and 2021, under-five mortality has been reduced from 179 per 1,000 live births to 77 and the neonatal mortality rate has fallen from 50 to 28.5 per 1,000 live births. Nevertheless, these rates remain much higher than in all peers, on average (Figure 48a). The maternal mortality ratio has also declined considerably but remains high at 212 per 100,000 live births 85 and the proportion of births attended by skilled health personnel is low (68 percent). 86 Progress in reducing stunting has been achieved, but 26.2 percent of children under-five are still affected.87 Whilst this is lower than the average for the Africa region (30.7 percent) it is also higher than what is observed in peer countries such as Gabon. Children’s subpar nutritional status is related to high levels of malnutrition observed amongst mothers, and anemia affects 44.5 percent of women of reproductive age. There is insufficient data to assess progress in the reduction of wasting, and the latest available data shows that 3.1 percent of children under-5 remain affected. Communicable diseases are still very prevalent, and the threat of disease outbreaks is a cause for concern. Malaria, acute respiratory infections, and diarrhea are the primary causes of death in children and account for the vast majority of medical consultations. 88 Malaria has been a major public health concern for Equatorial Guinea and intensive malaria control efforts in Bioko Island over the past 15 years have contributed to a reduction of the malaria incidence. Yet, local transmission remains and is spread evenly throughout age groups, and incidence rates indicate moderate malaria transmission (Nchama et al., 2021). This is evidenced by the results of the 2022- 2023 national household survey, in which 37.9 percent of the population reported being recently diagnosed with malaria, followed by typhoid fever (23.6 percent) and acute respiratory infections (13.0 percent). 7.3 percent of the surveyed population reported being diagnosed with a non-communicable disease including hypertension, rheumatic disease, diabetes, respiratory and/or pulmonary disease, and mental illnesses. Tuberculosis also remains one of the major causes of morbidity and mortality, with an estimated rate of 280 per 100,000 in 2020 and an estimated mortality of 96 per 100,000. 89 At 6.7 percent, the HIV prevalence among adults aged between 15 and 49 is higher than in the SSA region, on average, and disproportionately affects women. 90 In February 2023, Equatorial Guinea battled with its first outbreak of Marburg Virus Disease (MVD) and to date it has reported 40 cases (23 clinically suspected and 17 laboratory-confirmed) with 12 deaths so far (case fatality ratio of 75 percent) while four have recovered. The outcome of the remaining cases is still unknown. 91 Whilst the outbreak was declared to have ended in June 2023, flare-ups of the virus and spillovers from other epidemics in neighboring countries in the mainland region remain a threat to Equatorial Guinea’s weak health system. Equatorial Guinea’s health sector is characterized by low domestic expenditure and high out-of-pocket payments borne by users of the system. Equatorial Guinea invests considerably less in health than its regional and income peers (Figure 48b). In 2020, current health expenditure in per capita terms was US$ 256.6 (including both public and private), significantly lower than the average of US$ 376 per capita observed for upper middle-income countries (UMICs) in Sub-Saharan Africa. 92 Current health expenditure represents 3.8 85 World Health Organization 2024 data.who.int, Maternal mortality ratio (per 100 000 live births) [Indicator]. https://data.who.int/indicators/i/AC597B1 86 UNICEF, Equatorial Guinea profile https://data.unicef.org/country/gnq/ 87 Global Nutrition Report, https://globalnutritionreport.org/resources/nutrition-profiles/africa/middle-africa/equatorial-guinea/ 88 WHO, 2017.https://apps.who.int/iris/bitstream/handle/10665/137168/ccsbrief_gnq_en.pdf;jsessionid=F84D1DD315859E5C0829CA387CBB935F?sequence=1 89 WHO. Tuberculosis Profile: Equatorial Guinea. Available online: https://worldhealthorg.shinyapps.io/tb_profiles/?_inputs_&entity_type=%22country%22&lan= %22EN%22&iso2=%22GQ%22 90 Joint United Nations Programme on HIV/AIDS (UNAIDS). AIDSinfo Web. People Living with HIV in Equatorial Guinea. Epidemiological Estimates 2022. Available online: https://aidsinfo.unaids.org (accessed on 1 September 2022). 91 World Health Organization (8 May 2023). Disease Outbreak News; Marburg virus disease - Equatorial Guinea and the United Republic of Tanzania. Available at https://www.who.int/emergencies/disease-outbreak-news/item/2023-DON467 92 AFR UMIC includes: Botswana, Equatorial Guinea, Gabon, Mauritius, Namibia and South Africa. 122 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth percent of GDP, compared for instance to Botswana, where current health expenditure represents 6.2 percent of GDP. Government health expenditure has been marginally increasing over the past 10 years but remains among the lowest in the world at 0.7 percent of GDP and 5.4 percent of the government budget, well short of the Abuja Declaration target of 15 percent of the total Government health government budget. Compared to peers, domestic government contributions expenditure has in Equatorial Guinea are low and represent only 22.4 percent of current health been marginally expenditure, compared to 55.4 percent in neighboring Gabon or 52.7 percent increasing over the in UMICs in the sub-Saharan Africa region. In per capita terms, this means that past 10 years but government spending is estimated at US$ 53, less than half of the equivalent figure in neighboring Gabon (US$ 126). Unlike low-income settings that benefit remains among from development aid, external contributions to current health expenditure in the lowest in Equatorial Guinea represent only 1.4 percent, in line with what is expected the world at 0.7 for UMICs. The low national and external contributions result in households percent of GDP bearing most health expenditures, which is reflected in the extremely high and 5.4 percent of levels of out-of-pocket expenditure that is observed – 74.2 percent of current the government health expenditure (among the highest rates in the world). Such high levels budget, well short result in a severe lack of financial protection amongst households. According to the recent household survey, 29.6 percent of the population with health of the Abuja issues reported not seeking healthcare regularly due to a lack of financial Declaration target means to cover the expected out-of-pocket costs while 1.1 percent of the of 15 percent of the population reported that the costs of healthcare are too high. In practice, total government out-of-pocket payments can reach a ‘catastrophic’ level (exceeding a certain budget. threshold of total household spending) which may force households to forego consumption of other essential goods and services. At the same time, high out-of-pocket expenditures will contribute to pushing households below or further below the poverty lines. FIGURE 48 Health sector outcomes and spending on health are lower in Equatorial Guinea compared to peers a. Under-5 and neonatal mortality rates (per 1,000 live births) b. Domestic general health expenditure (in percent of GDP), in 1990 and 2021 2020 180 4 150 3 120 90 2 60 1 30 0 0 SSA Equatorial CEMAC Structural UMIC Aspirational Equatorial CEMAC Sub-Saharan UMIC Guinea peers peers Guinea Africa Mortality rate, under-5 (per 1,000 live births), 1990 Mortality rate, under-5 (per 1,000 live births), 2021 Mortality rate, neonatal (per 1,000 live births), 1990 Mortality rate, neonatal (per 1,000 live births), 2021 Source: WDI, World Bank Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 123 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.3.3 Policy recommendations Improved health outcomes are critical to building human capital. This will require the government to invest in health systems so that all people have access to quality and affordable health services. Four areas of recommendations are proposed (see Table 8): • Health Financing Reforms: It is recommended that Equatorial Guinea increases the domestic allocation of health from the government budget, in line with the Abuja Declaration in which Governments pledged to commit 15 percent of their national budgets to health. In addition, given the epidemiological changes observed in Equatorial Guinea (with a higher prevalence of non-communicable diseases and a decrease in the incidence and prevalence of communicable diseases) alternative health financing mechanisms could be explored. Both systemic recommendations would make an important contribution to reducing the high out-of-pocket payments experienced by the population. • Health Security and Public Health: Based on the newly updated NAPHS, the Government of Equatorial Guinea should undergo further prioritization exercises to identify specific gaps in the system and ensure the impact of limited domestic resources is maximized. Specific interventions to address the most severe gaps include: (i) Increase human resource availability and capacities for enhanced community surveillance, laboratory management, and response; (ii) Establish a One Health platform to ensure animal and environmental health capacities are enhanced; and (iii) Strengthen cross-border collaboration and surveillance at Points of Entry by engaging with regional initiatives and specialized health agencies. • Cross-sectoral human capital issues: Health outcomes and social determinants for health are directly and indirectly correlated with other human development sectors such as education. Specifically, unwanted pregnancies amongst adolescents are recognized as one of the key challenges to secondary school completion and learning outcomes amongst girls, as are malnutrition and vitamin deficiency. Analytical work to better understand the interrelation of maternal and child health and nutrition factors amongst adolescents and youth would be important to develop decisions and initiatives that can simultaneously contribute to human capital investments across sectors. • Availability of data: Increasing the availability of updated health data, through an updated Demographic Health Survey or a Multiple Indicator Cluster Survey, would facilitate up-to-date health sector assessments and recommendations. © Media Lens King/istockphoto.com 124 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth TABLE 8 Policy recommendations: Protecting human capital by investing in the health sector Focus area Policy recommendations Importance Timeframe Responsible Agency Health • Explore and enact Financing alternative health financing • Ministry of Health, Reforms mechanisms that can match Social Welfare the needs of Equatorial and Health Guinea’s epidemiological MEDIUM TO Infrastructure High LONG TERM transition (from • Ministry of communicable diseases to Finance, Planning, non-communicable diseases) and Economic and decrease out-of-pocket Development expenditures. • Ministry of Health, Social Welfare and Health • Increase the prioritization of Infrastructure MEDIUM TO health within national budget High LONG TERM contributions. • Ministry of Finance, Planning, and Economic Development Health • Establish a One Health Security and platform to ensure joint • Ministry of Health, Public Health human, animal, and Medium- MEDIUM TERM Social Welfare environmental health High and Health preparedness capacities are Infrastructure enhanced. • Ministry of Health, • Assess and adjust the Social Welfare Ministry’s staff registries and and Health make budgetary allocations Infrastructure MEDIUM TO for human resources to High LONG TERM ensure availability to • Ministry of prevent, detect, and respond Finance, Planning, to public health threats. and Economic Development Cross-sectoral • Conduct analytical work human capital to better understand issues reproductive, maternal, neonatal, child, adolescent • Ministry of Health, health and nutrition Social Welfare High SHORT TERM (RMNCAHN) issues that and Health are cross-cutting to human Infrastructure capital outcomes, for instance adolescent fertility or nutrition. Availability of • Increase the availability of • Ministry of Health, data updated health data, through Social Welfare an updated Demographic and Health High SHORT TERM and Health Survey (DHS) or Infrastructure Multiple Indicator Cluster Surveys (MICS). • INEGE Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 125 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.4 Social protection as a key element for human capital accumulation Social protection is critical for achieving human capital accumulation, ensuring its productive use, and its effective protection Recent, unprecedented shocks have underscored the importance of adaptive social protection systems to ensure human capital is created, protected, and utilized.93 Shocks such as climate disasters, economic crises and health emergencies have reversed hard won gains in human capital globally. As COVID-19 struck, many countries around the world deployed their social protection systems to help mitigate the economic, social and human capital impacts of the pandemic. This followed years of effort in many low- and middle-income countries to build social protection programs, leveraging innovations in technology to expand them far more rapidly and widely than had previously been thought possible. Investment in social protection systems has increased in tandem with evidence of significant impacts across outcomes and country contexts. The first and most direct effect of social protection programs is providing households with more income. The evidence that social protection does indeed reduce current and future poverty is well-established. 94 But beyond this, social protection programs also produce a range of longer- term outcomes, related to building human capital, maximizing its productive use, and protecting it throughout the lifecycle (see Figure 49). In addition to returns to individuals and households, there are also many benefits that accrue at the community and national level, including contributing to economic growth and reducing inequality. FIGURE 49 Social protection is critical for achieving human capital accumulation, ensuring its productive use, and its effective protection Human Capital Accumulation Early Childhood Childhood, Adolescence Working Life Old Age (HCA) Shocks in old age can undermine health and welfare SP helps Child born ensure effective out of poverty protection of HC SP helps close gaps in inequality of opportunity Shocks in working SP helps life can undermine SP helps maximize speed Child born of human capital minimize impact livelihoods and of external shocks long-term welfare in poverty accumulation Pregnancy Birth 0-5 years old 6-18 years old 19-65 years old 66 and older Accumulation of Human Capital (HC) Use and protection of HC Protection of HC Source: World Bank, 2022 (Charting a course toward universal social protection) 93 Box 9 provides an explanation of social protection and its instruments. 94 World Bank Group. 2022. Charting a Course Towards Universal Social Protection: Resilience, Equity, and Opportunity for All 126 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth BOX 9 What is social protection? © Jan Ziegler/istockphoto.com Social protection refers to the policies and programs that help individuals and societies to manage risk and volatility, protect them from poverty and inequality, and help them to access economic opportunities. Social protection instruments include: • Non-contributory social assistance such as cash transfers, school feeding and social pensions; • Contributory social insurance such as pensions, unemployment insurance and parental leave; • Active labor market programs and policies including wage subsidies, employer-driven training programs, informal training, labor intermediation, behavioral and knowledge interventions, and complementary services to stimulate service utilization; and • Economic inclusion programs which typically integrate several complementary components, most commonly cash transfers combined with skills training, coaching, links to markets, and access to financial services. A wide range of care services is offered within social protection, including child, disability and elder care. Adaptive social protection refers to schemes that help build the resilience of poor and vulnerable households by investing in their capacity to prepare for, cope with, and adapt to shocks: protecting their wellbeing and ensuring that they do not fall into poverty or become trapped in poverty. Source: World Bank Group (2022) and Bowen et al. (2020) Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 127 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.4.1 Social protection in Equatorial Guinea While social security coverage and government spending on social assistance are limited in Equatorial Guinea, the draft social protection law envisions a comprehensive future system Equatorial Guinea’s policy framework recognizes the need for a robust social protection system. The country’s National Sustainable Development Plan – known as Agenda Guinea Equatorial 2035 – has four strategic axes: poverty eradication, social inclusion and sustainable peace, productivity and industrialization, and environmental sustainability and territorial development. It includes social protection among the key areas for reform, calling for a progressive increase of social protection coverage, starting with the most vulnerable. A new Social Protection Law envisioning universal coverage was drafted and proposed to parliament in 2021 but remains to be approved. The draft law lays out a comprehensive vision for a social protection system to tackle poverty, vulnerability, exclusion, and discrimination. It also calls for the establishment of a new Institute of Social Protection, responsible for A new Social coordinating the implementation of social protection policies and programs, Protection as well as collaboration and coordination with other ministries and entities. Although the law has been discussed and cleared in various committees, it is Law lays out a not yet approved. As of mid-2024, the draft law did not contain any details on comprehensive priority programs to establish the building blocks of the future system. vision for a social protection system To date, the responsibility for social protection is fragmented in Equatorial to tackle poverty, Guinea. Program-level budget and coverage data is not consistently vulnerability, available. Budgets allocated to social programs have varied over time, with no consistent pattern. Several institutions are involved in social protection exclusion, and without a clear coordination mechanism, including the Ministry of Health discrimination. and Social Welfare; the Ministry of Labor, Employment and Social Security Promotion; the Ministry of Social Affairs and Gender Equality; and the National Social Security Institute. The IMF has recently provided technical assistance to create a functional classification of expenses for the 2024 Budget. Establishing an adaptive safety nets system would enable Equatorial Guinea to boost human capital outcomes and manage shocks Equatorial Guinea is one of the few countries that does not have a national social assistance program in place and its spending on social assistance is among the lowest globally at 0.1 percent of GDP (Figure 50). Globally, spending on social assistance has increased significantly over the last decades, now averaging 1.8 percent of GDP for upper middle-income countries and 1.3 percent of GDP for lower middle-income countries. 95 Low-income countries spend on average 0.7 percent of GDP on social assistance. Equatorial Guinea is an outlier globally for not having a national social assistance program in place that covers a significant share of the population. Internationally, the trend has been to consolidate disparate, small-scale programs into one large- scale national program that reaches a significant share of the population. For example, Senegal’s cash transfer program was expanded significantly and now covers 15 percent of the population. 95 The Atlas of Social Protection Indicators of Resilience and Equity (ASPIRE) 128 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth FIGURE 50 Spending on social assistance spending as a share of GDP is very low in Equatorial Guinea Social assistance spending (in percent of GDP) in Equatorial Guinea and selected countries and regions, latest year available 3.0 2.5 2.0 1.5 1.0 0.5 0 Botswana Central Morocco Mozambique SSA Senegal CEMAC Angola Congo, Rep. Equatorial African Rep. average average Guinea Source: The Atlas of Social Protection Indicators of Resilience and Equity (ASPIRE) and IMF  In recent years, Equatorial Guinea has tested different approaches to social assistance programs which could inform the implementation of its draft social protection law. For example, to protect vulnerable groups during the pandemic, the Ministry of Social Affairs and Gender Equality (known by the Spanish acronym MINASIG) adopted the Public Social Guarantees (PSG) Program. The PSG received technical assistance from UNICEF for its implementation. The program provided in-kind benefits including a food basket, a basic personal hygiene kit, and regular counselling and health services for six months. It aimed to reach more than 36,386 direct beneficiaries across the country. The targeted groups included the elderly, orphans, unemployed adults, chronically ill, and persons with disabilities. In the aftermath of the Bata explosions in 2021, the government launched the country’s first cash transfer program utilizing a digital payment mechanism. A series of explosions in a military camp in Bata killed 100 people, injured 615 and destroyed 300 houses in March 2021. In response, with technical assistance from UNICEF, MINASIG piloted a cash transfer to support 100 affected households. For a period of three months, affected families received US$ 275 per month, covering approximately 70 percent of their basic needs. The payments were facilitated by a unique code sent to beneficiaries’ mobile phones and accompanied by social services provided by community leaders, health workers, and non-governmental organizations. Although the pilot was not formally evaluated, it was broadly considered successful by a range of stakeholders. Expanding and building ‘adaptive’ safety nets is crucial to tackle poverty and accelerate human capital outcomes in Equatorial Guinea. As demonstrated in recent years, social assistance plays an increasingly crucial role in tackling poverty and ensuring the economic resilience of poor and vulnerable households in the face of shocks. Social protection delivery systems also enable governments to offset potential adverse effects of reforms for specific groups such as fuel subsidy reform. Cash transfers coupled with complementary measures such as social services, training, savings facilitation, and economic inclusion can prepare households to withstand shocks by protecting consumption, building human capital, diversifying livelihoods, and strengthening coping mechanisms. Once a robust social assistance scheme is in place, it can be made ‘adaptive’ meaning it can be scaled up or down based on specific shocks and needs. The key to this is developing adaptive delivery systems, as discussed below. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 129 © Imago/alamy.com 130 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth Social insurance coverage in Equatorial Guinea is small but growing, and provides an important building block for a future social protection system The Social Security Institute (INSESO) attached to the Ministry of Labor and Social Security, is the entity in charge of the Social Security System.96 The INSESO has administrative and financial autonomy and is responsible for the administration, organization, and development of the social security scheme in Equatorial Guinea. Social security is contributory, based on monthly earnings, and only covers workers in the formal sector and their families. The social security system is governed by the Social Security Law, approved by Decree 104 of 1984 and amended by Decree 100 of 1990. Social security coverage is low at 17 percent of workers since most of the workforce in Equatorial Guinea remains informal. In 2021, 118,259 people were affiliated with the social security system, of which only 26.6 percent were women (Figure 51a). However, coverage especially for women has increased in recent years. Between 2017 and 2021, the number of people affiliated with social security grew by 17.3 percent. The majority of workers covered by social security are in the private sector (72 percent), and around 20 percent work for the public sector (Figure 51b). More recent data from the second national household survey show that 17.2 percent of workers have access to social security with men having a higher rate of social security coverage (20.7 percent) than women (13.3 percent) (INEGE, 2024). Urban areas have better coverage (22.1 percent) compared to rural areas (8.5 percent), indicating that jobs in cities tend to be more formalized. Many countries in Africa are working to extend social insurance coverage beyond the formal sector by providing voluntary schemes and related incentives. FIGURE 51 Social security coverage in Equatorial Guinea has increased in recent year but remains low with men and workers in the private sector being the most covered a. Evolution of social security af liates, 2017-2021 b. Percentage of af liates by sector, 2021 140000 120000 8% 20% 100000 80000 60000 40000 72% 20000 0 2017 2018 2019 2020 2021 Men Women Public Private Others Source: Statistical Yearbook of Equatorial Guinea, 2022. 96 The ministry was renamed as the Ministry of Civil Service and Administrative Reform and Social Security as per the August 19, 2024 decree (84/2024). Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 131 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth Equatorial Guinea has the opportunity to leapfrog and establish adaptive delivery systems from the outset Equatorial Guinea’s draft social protection law highlights the role of its social registry for the implementation of the future social protection system. The registry is known in Spanish as the Registro Unico Social (RUS). As a digital public platform, the RUS consists of a web portal, a web application, and a mobile application. Consistent with social registries in other countries, 97 the RUS serves to identify, characterize, register, and prioritize individuals and families in conditions of vulnerability or poverty, to enroll them into social programs. The web portal is designed to be accessible by citizens to obtain general information and register. The web application is the main RUS administration tool while the mobile application is designed as a field tool to conduct data collection. 98 Although there is a URL page for the web portal, it is not currently accessible. The RUS may serve as the starting point for a future social registry although it currently only covers a very small share of the population. The RUS was developed in 2020 with technical assistance from UNICEF and is currently housed at MINASIG. Currently, it contains approximately 11,500 data records To serve as an which is low as a share of the total population. The RUS was deployed for the effective, adaptive implementation of the PSG to produce an initial list of eligible households which identification tool, was then verified at the local level by district heads and NGOs. Since then, the a registry would RUS has not been updated nor expanded significantly with a systematic effort to collect data on poor and vulnerable households. To serve as an effective, ideally include adaptive identification tool, a registry would ideally include data on all poor data on all poor and vulnerable households so that coverage of social protection programs can and vulnerable be expanded in response to specific shocks (for example, providing additional households so benefits to poor and vulnerable households in a particular geographic area in that coverage of the aftermath of a natural disaster). social protection The RUS is not yet used systematically to register the beneficiaries of social programs can programs. To date, the RUS is only used by MINASIG where it is housed, be expanded although other ministries also have programs that are targeted at the poor. in response to Also, not all MINASIG’s programs make use of the RUS. For example, assistance specific shocks. to families and individuals through food banks and scholarships do not seem to be captured in the RUS. The RUS is also not yet interconnected with any other government system, so remains underexploited. Interoperability of systems is necessary for social registries to communicate with other administrative systems and the data needs to be uniquely identified across systems to enable linkages. There is a vision for the RUS to be interoperable with other databases, in support of its mandate as a coordination tool for social programs. However, the current intake questionnaire does not include a common identification number to uniquely identify individuals or households. In other countries, social registries are linked to foundational ID platforms, civil registries, tax information systems, systems related to social security contributions, in order to ensure effective coverage and minimize inclusion and exclusion errors (Lindert et al., 2020). The cash transfer implemented in the aftermath of the Bata explosions provided a first test case with digital payments. Around the world, countries are investing heavily in digitizing government-to-person payments, including social protection benefits. Digital payments have become an important element of adaptive social 97 Social Registries are defined as information systems that support the processes of intake, registration, and the assessment of needs and conditions to determine potential eligibility for one or more programs (Lindert et al., 2020). 98 RUS Presentation by MINASIG, shared during World Bank Social Protection mission in Malabo, April 2023. 132 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth protection systems, as they can enable very rapid, efficient, and transparent payment of benefits at minimal cost, sometimes even in advance of shocks. While the cash transfer paid in the aftermath of the Bata explosions was delivered digitally using mobile payments, Equatorial Guinea has not continued to invest in digitizing social protection benefits. The social protection response to shocks is most effective when countries have an integrated and operational digital ecosystem with IDs, social registries, and payment systems. Having this digital capacity that enables countries to mount a rapid, system-wide response to crises will become increasingly important in the future given the prospect of increasing climate change and the need for adaptive social protection. Building on the lessons of the pandemic, it continues to be vital for countries to invest in digital infrastructure. In many countries, there is still much to do to put even the basic building blocks in place, and there is significant scope to expand the foundational systems that are critical for well-functioning social insurance, labor and economic inclusion, and social assistance and care interventions. Having common delivery system components across social protection domains will make it easier to develop integrated pathways for beneficiaries (Figure 52). Integration of databases enable program implementers to have an overview of an individual or household across all services and programs, which will give them a greater understanding of the different types of social protection support that they may need. FIGURE 52 Equatorial Guinea’s new social protection law provides an opportunity to establish a flagship cash transfer program as the core building block of the future Social Protection system Ensuring overall policy The draft Social Protection POLICY coherence across law provides a comprehensive LEVEL programs and levels of vison for the future system government There are no programs with Improving design of significant coverage. The PROGRAM existing programs and largest cash transfer pilot after LEVEL harmonizing across the Bata explosions covered portfolio programs only 100 households Building core delivery systems to ensure that There are emerging building DELIVERY programs can achieve blocks for a delivery system, such LEVEL their goals efficiently as the Registro Unico Social and effectively Source: World Bank Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 133 CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth 3.4.2 Policy recommendations Equatorial Guinea’s draft social protection law provides a comprehensive vision for a future social protection system that will accelerate poverty reduction and support human capital accumulation. Realizing the potential of social protection requires investment in a large-scale social assistance program and the corresponding delivery system that can grow to become the core building blocks of the future social protection system. Rapid scalability during times of shock requires dynamic delivery systems, including foundational ID systems, social registries, and digital payment systems. Scalability also requires financing that cost-effectively provides the right amount of funding at the right time—this can be achieved via a suitable mix of disaster risk financing instruments such as dedicated funds or insurance. The current moment is an opportunity for Equatorial Guinea to embark on a bolder agenda for social protection systems that strengthen economic resilience and response to shocks. Across the continent, the pandemic has demonstrated the critical need for shock preparedness. It has also shown the vast potential of social protection systems to use technology to provide fast emergency relief to affected households and workers at a large scale. With the exposure to shocks rising, the Equatoguinean government should consider further advancing on this path and fully embracing the potential held by adaptive social protection. Finally, making the most of the good times will enable more effective responses during rainy days. Financing for the sector, unfortunately, remains scarce. Only through predictable and adequate budgets for the sector, made available by countercyclical fiscal policies or by contingency funds accumulated during expansionary periods, countries will build protection programs than can rapidly respond to shocks and help their citizens weather crises. Current higher oil prices make this a good time to start. Proposed Actions: Building the foundational blocks for a Social Protection System Equatorial Guinea’s recent safety net experiences are opportunities to establish the building blocks for an inclusive and sustainable social protection system. The recent interim plan for 2020–22 and the government response to the recent crisis have shown a growing recognition of the urgent need for a well-functioning social protection system. With effective fiscal policies to improve technical and allocative efficiency of public spending, the government could start working on the building blocks for a Social Protection System that protects, promotes, and ensures effective utilization of human capital. The first step for the government should be to approve the Social Protection law and a corresponding implementation plan and budget. The Social Protection law establishes a long-term vision for social protection. The law should include language on (a) the establishment of a permanent social assistance program; (b) a long- term predictable budget for key social assistance programs; and (c) mobilizing regular government financing to ensure predictable payments of cash transfers to beneficiaries as per an established calendar. The second step should be to establish a permanent social assistance program. The government, in collaboration of international and national donors, could design, implement, and evaluate a comprehensive social assistance program. This program should be based on the lessons learned from the pandemic and Bata explosion response, as well as global and regional best practices. This program could build key components of a strong social protection delivery system, including a beneficiary registry and digital payments system as envisioned by the draft social protection law. Table 9 provides detailed policy recommendations. 134 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 3 Boosting Human Capital for Sustained and Inclusive Growth TABLE 9 Policy recommendations: Improving social protection Recommendations Urgency Timeframe Responsible Agency • Finalize the parliamentary approval of High SHORT TERM • Parliament the Social Protection Law. • Decide on the budget envelope • Ministry of Finance, for a priority national cash transfer High SHORT TERM Planning, and Economic program around which the future social Development protection system can be built. • Ministry of Finance, Planning, and Economic • Decide on the technical parameters for Development a priority national cash transfer program High SHORT TERM • Ministry of Social Affairs (specific sectoral objectives and target population). • Ministry of Health • Ministry of Education • Expand the Registro Unico Social to • Ministry of Finance, become a dynamic identification system Planning, and Economic that can be used to identify and target Medium MEDIUM TERM Development poor and vulnerable individuals and households. • Ministry of Social Affairs • Ministry of Finance, Planning, and Economic • Establish linkages to encourage uptake Development of key health and education services for Medium MEDIUM TERM • Ministry of Social Affairs cash transfer recipients to boost human capital outcomes. • Ministry of Health • Ministry of Education • Ministry of Finance, • Establish a digital payment system to Planning, and Economic enable efficient administration of cash Medium MEDIUM TERM Development transfers and crisis response. • Ministry of Social Affairs • Others Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 135 136 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth © Djeneba Doumbia/World Bank CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth A robust private sector plays a pivotal role in driving economic transformation, fostering job creation, and generating tax revenues to finance public goods. However, the business environment in Equatorial Guinea is not conducive to investment and private sector development. Notwithstanding some progress in business environment reforms, businesses in Equatorial Guinea still face many constraints throughout their lifecycle. Barriers to entry and discriminatory regulations hamper market dynamics essential for sustainable growth in Equatorial Guinea. Issues such as legal uncertainty, challenges in land titling, limited access to credit, and inadequate digitalization of public services constrain the potential for private sector-led growth. Further, a dearth of enabling regulations including pro-competition policy exacerbates these challenges. This chapter examines the main constraints to private sector development and proposes policy recommendations to address them. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 137 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth 4.1 Why an enabling business environment and competition matter for economic growth, diversification, and private investment Fostering a strong business environment, reducing entry barriers, and promoting healthy competition will help Equatorial Guinea achieve its goals of stimulating investment, and promoting economic diversification and private sector-led growth A favorable business environment can promote private sector-led and resilient economic growth. More business-friendly regulations are positively correlated with higher economic growth rates (Djankov et al., 2006). A sound regulatory and policy environment is key to the development of a vibrant and diverse private sector, favoring economic diversification and job creation. Effective and transparent regulations, open markets, and low costs of doing business encourage private sector development. Regulations are needed to address market failures and ensure that the right incentives are in place for firms to enter new markets, compete and expand. These regulations can encourage the start-up and growth of companies, as well as the closure of less productive companies, promoting greater efficiency in the allocation of resources in the economy. A cumbersome business environment is found to be correlated with a higher rate of firms’ permanent exit from the market during shocks, especially among more productive firms (Muzi et al. 2022). Moreover, a sound business environment can lessen the impact of shocks and increase the speed of recovery following crises. For example, countries with a better initial business environment have seen a faster recovery in GDP growth and employment during the recent COVID-19 crisis (World Bank, 2023). Well-functioning markets with clear market rules (i.e., open, transparent, and non-discriminatory) that address market failures are also a key driver of productivity and economic growth in market economies. Effective markets create incentives for firms to behave efficiently, innovate and be more productive, which boosts growth (Acemoglu et al., 2007; Aghion and Griffith, 2008). For instance, more intense competition (reflected by a 10 percent reduction in average markups) in the South African manufacturing industries could boost productivity growth by about 0.1 percent, increasing at the same time job and wage growth (Dauda, Nyman, and Cassim 2019). In well-functioning markets, firms have equal opportunities to thrive based solely on their own merits—or fail in the process otherwise, and government interventions enable competition and address market failures. Competition enhances consumer welfare, fosters job opportunities, levels the playing field, and secures equal economic opportunities for all (Kitzmuller and Licetti, 2013; Autor et al., 2013; Dauda, 2020). In doing so, these markets support the survival of firms that push production frontiers and ultimately, move economies and societies to the next level of development. A robust business environment and policies targeting effective markets are also important to boost productive investment. When coupled with an adequate macroeconomic framework, human capital development, infrastructure development among others, market-friendly and transparent regulations can generate more quality investments, producing the economic gains needed to reduce poverty. A favorable business environment can reduce cost of doing business and generate higher and more predictable returns on investments, thereby attracting more investment (Schou-Zibell and Madhur, 2010). Well-functioning markets – where entry is possible, prices reflect market conditions, and firms are rewarded based on their efforts to improve their products and production processes – are also essential to attract investors. The elimination of barriers to entry (such as statutory or de facto monopolies) and rules that protect incumbents or give 138 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth them economic advantages creates investment opportunities for new firms. Empirical evidence for OECD countries shows that pro competition reforms (including entry liberalization) have a substantial positive impact on investment (Alesina et al., 2005). Improving feasibility of entry and competition in key sectors, including network industries and sectors where competition is viable, can promote economic diversification by fostering innovation, productivity and efficiency. This can lead to private sector entry in new and existing sectors, driving diversification (see Figure 53). Increased competition in output industries can drive firms to invest in innovation and technology adoption, leading to domestic quality improvements and expanded product ranges and enabling export competitiveness (Aghion et al., 2021). As firms strive to outperform competitors, they explore new markets, invest in diversification, and offer a wider array of domestically produced goods. Improved competition in input sectors reduces input costs and encourages entry into newly profitable downstream sectors. Intensified competition lowers prices and enhances the quality of domestic goods, making them more competitive internationally and facilitating export diversification by expanding the range and variety of products. Several economies have taken successfully measures to enhance competition in key sectors and integrate principles of well-functioning markets across policy areas. In 2018, South Africa enhanced its competition law, granting expanded powers to the Competition Commission to conduct market inquiries to identify restrictions to competition in key sectors and set remedies; parliamentary deliberations are underway for a bill to establish an independent transport regulator and regulatory reforms targeting financial institutions are being introduced. Mauritania enacted significant reforms to fortify its legal and institutional frameworks, resulting in a notable increase in FDI. In general, Sub-Saharan Africa has seen widespread regulatory reforms. In 2005, only Burundi, Ghana, and Rwanda offered company incorporation in under 20 days. Today, 28 countries provide this expedited process. In Oman, the implementation of pro- competition reforms, such as foreign capital investment laws and changes to employment and visa regulations, has helped attract foreign direct investment, with a 19 percent increase during the first quarter of 2022 and a substantial rise in non-oil exports in 2021 (Campbell-James, 2022). FIGURE 53 Channels of impact between competition and economic diversification COMPETITION DOMESTIC POLICY TOOLS DIVERSIFICATION Domestic quality Market upgrading regulation and sectoral policies Incentives for Domestic product innovation and R&D diversification and allocative efficiency • Firm entry, selection Expansion of Competition and expansion Within more productive in output industry • Cost reduction output firms & industries allocation incentive sectors Policies on state aid / SOEs Across / competitive industry neutrality • Reduces input costs allocation Competition in • Allows for production intermediate process upgrading input sectors • Optimizes input allocation Via ex ante productivity Interaction between competition and trade Antitrust policies: • Improve transmission EXPORT of international price DIVERSIFICATION signals • Improve incentives to export by increasing gains from trade Source: World Bank Group Competition Policy Team Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 139 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth A welcoming environment and well-functioning markets are key to support the government’s AGENDA 2035 and its Economic Diversification Initiative. Recognizing the importance of a conducive business environment, a plan for improving the business climate was initiated in 2019 by creating an inter-ministerial national technical committee99 responsible for the development, implementation, and monitoring of an ambitious reform program which includes the development of a national roadmap for the improvement of the business climate and the enactment of the updated national development plan.100 AGENDA 2035 encourages reforms to support production and the development of private activity, including land restructuring and land reorganization, the financial system, competitiveness, and markets (see Chapter 1). Among various interventions to support sector development, the authorities plan to set up special economic zones to promote the development of industry; establish an innovation hub, an international logistics and a transportation center; promote energy diversification; improve banking and insurance services; and create sectors of excellence. The aim of AGENDA 2035 has been reinforced by Decree No. 009/2024,101 which outlines measures for economic, budgetary, and financial policy alignment, in line with the National Economic and Social Development Plan. The decree calls for the establishment of a legal framework for Public-Private Partnerships (PPP), management of creation, governance, financial reporting, and potential privatization or liquidation of SOEs, and the creation of Special Economic Zones (SEZs). The country’s Economic Diversification Initiative also recognizes the importance of the business environment and investment climate which are critical for its efficient implementation (see Box 10). The Equatoguinean authorities have started implementing a series of reform initiatives targeted at improving the investment climate and increasing competitiveness but more needs to be done. Recent reforms focused on simplifying processes and increasing transparency of information. In particular, they include the establishment of one-stop shops for business creation in the cities of Malabo and Bata; the creation of a page for investors on the Minister of Finance’s website where relevant AGENDA 2035 information for investing in Equatorial Guinea is publicly available (e.g., encourages procedures, costs, requirements to start a business, register a property, reforms to support obtain a building permit and the electricity tariffs);102 and the creation production and of a new state entity – Holdings Equatorial Guinea – to help guide the development diversification efforts, among others. While the impacts of these reforms of private activity, have not been assessed yet, there is evidence that business entry is viable. The 2020 census shows that 60 percent of firms are less than 5 including land years old.103 The authorities have also recently launched an electronic restructuring and visa system which would ease visa requests for visitors and tourists (see land reorganization, Chapter 5). While the government has implemented these important the financial system, measures in recent years to improve the business environment of the competitiveness, country, deeper reforms will be necessary to promote a sustained and and markets. more diversified growth and create high-quality jobs. The remainder of the chapter analyzes (i) the current business environment of Equatorial Guinea; (ii) key enabling factors to boost private sector development, promote entry and private investment; (iii) how government interventions could be shaped to promote the private sector; and (iv) a menu of policy recommendations. 99 Comité Técnico Nacional para la Mejora del Clima de Negocios y la Competitividad de la Economía de Guinea Ecuatorial. Established in 2019. 100 Sustainable Development National Strategy (Agenda 2035) adopted by Presidential Decree No. 69/2021. 101 Decreto Núm.009/2024, Decreto por el que se establecen medidas económicas, financieras y de reactivación económica, available at: https://www. guineaecuatorialpress.com/noticias/decreto_por_el_que_se_establecen_medidas_economicas_financieras_y_de_reactivacion_economica 102 https://minhacienda-gob.com/doing-bussines-en-eg/ 103 INEGE. 2023.Equatorial Guinea’s 2020 Business Census. 140 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth BOX 10 An enabling business environment with well- functioning markets is critical for the development of the priority sectors identified in the Equatorial Guinea Economic Diversification Initiative The Equatoguinean authorities have recently launched an Economic Diversification Initiative which identifies five priority sectors, namely (i) Blue economy (fisheries, preservation of oceans, marine tourism, other clusters linked to mineral and water resources), (ii) Green economy (agriculture, livestock and forestry, and environment), (iii) Digital economy (science, technology, innovation), (iv) Tourism sector, and (v) Yellow economy (energy). The Ministry of Planning organizes regular forums on economic diversification with focused discussions on each of the priority sectors. The first edition was held in November 2023 in Malabo. Forums were also held in both Malabo and Bata. An enabling business environment, including healthy competition, is key to attracting investments and developing the five priority sectors. Given the negative economic growth prospects in Equatorial Guinea and the priorities of diversification and improvement of the business climate as outlined in the AGENDA 2035, the Ministry of Planning is working, since 2023, to promote investment attractiveness in Equatorial Guinea to help finance the national development plan. Thus, the Economic Diversification Initiative also focuses on enabling policies to attract investment (see Chapter 4), build human capital (see Chapter 3), and improve governance (see Chapters 1, 2, and 4). Evidence shows that higher costs for business start-ups are associated with lower business entry and lower levels of employment and productivity. A cumbersome regulatory environment is associated with high levels of corruption and informality (Klapper and Love, 2011; Bruhn, 2012). Moreover, regulations have been found to inhibit employment growth in small firms more than in large firms (Bailey and Thomas, 2017). In Japan, compliance with rules and regulations account for more than 20 percent of total labor input. If these costs were halved, overall economic productivity would increase by about 8 percent (Morikawa, 2023). On the other hand, empirical evidence using cross-countries analysis shows a positive impact of business regulatory reforms on economic growth rates over the 2006-2010 period (Haidar, 2012). Creating a conducive business environment through regulatory reforms, access to finance, and sustainable practices is crucial for attracting investments and driving economic growth in key sectors. Regulatory reforms can create favorable conditions for reallocation of resources from less productive firms to more productive ones. These reforms can also reduce costs and lower risks for businesses and promote firms’ investment and productivity growth. Finally, they can promote entry of new domestic and foreign firms, especially innovative, tech-based, green, and high-productivity firms, and exit of low-productivity ones as part of a “creative destruction” process. Additionally, a stable macroeconomic environment reduces risks and uncertainties, lowers financing costs, and fosters a climate of confidence and predictability that is essential for attracting and sustaining investment. Moreover, sector-specific reforms are important. Regulations that enable entry, healthy competition and expansion are needed to unlock opportunities in sectors such as fisheries, agriculture, digital economy, tourism, and energy. A competitive and well-monitored system for fishing licenses, adjustments to price controls in agriculture, effective regulation of operators with significant market power in telecommunications, and more open skies are some examples of reforms to support the priority sectors. Furthermore, well- governed and high-performance SOEs operating in enabling sectors can crowd in private investment if they operate under a level playing field. Through competitive public procurement the government can also boost demand, for example for digital solutions. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 141 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth 4.2 The current business environment in Equatorial Guinea The Equatoguinean economy is characterized by large private firms in extractive industries, a large informal sector and significant SOEs Equatorial Guinea’s private sector is characterized by a small number of large companies in the extractive industries. The majority of the formal MSMEs operating in non-extractive industries, operate in the services sector, tourism and communications.104 Informality also constitutes a barrier to private sector development in the country as it can create unfair competition for formal firms. Informal firms do not contribute to the tax base and tend to be less productive. Consequently, economic growth in countries with a sizeable informal sector remains below potential (IMF, 2020). However, an exact picture of the performance and characteristics of the formal and informal private sector in the country is missing due to the lack of available and up-to-date firms-level data. Given the scarcity of quantitative data, the analysis of private sector constraints in Equatorial Guinea relies on available information from various public and private entities. Extensive consultations were conducted with key actors from both the public and private sectors, including but not limited to the National Technical Committee responsible for the development, implementation, and monitoring of an ambitious reform program, as well as the Commercial Registry; Equatorial Guinea Open for Business Foundation; and the Business Consortium. These interactions have provided valuable insights into the challenges and constraints faced by private sector in the country. Equatorial Guinea recently finalized its first economic census, which provides more accurate data on its current formal sector size, accounting for only 12.6 percent, and sectorial activities. Understanding the current situation of the private sector is fundamental for policymakers to better determine areas for growth, identify opportunities and challenges for different sectors of the economy, measure and track the performance of specific sector, and make informed decisions about resource allocation. State-Owned Enterprises (SOEs) hold a significant role in the Equatoguinean economy, with involvement in critical network sectors like electricity and telecommunications, and potentially competitive areas such as fisheries. Notably, 15 commercial SOEs, including CEIBA Intercontinental and Gecotel, GEPetrol and SONAGAS participate across a number of sectors. These SOEs face transparency concerns. Monitoring and governance of SOEs are inconsistent and limited, with corporate rules not uniformly enforced. This lack of oversight can lead to inefficiencies, misallocation of resources, and potential unfair advantages for SOEs over private enterprises. The regulatory environment is not sufficiently conducive to private sector development in Equatorial Guinea The country lags the CEMAC regional average in the Worldwide Governance Indicators (WGI) associated with a good business environment. Equatorial Guinea’s performance falls below the regional average in all six indicators except for political stability and absence of violence/terrorism (see Chapter 1). Notably, the sub-indicators of regulatory quality, voice and accountability and control of corruption exhibit significant weaknesses. Moreover, no significant improvements are shown over the period from 2016 to 2021, during which Equatorial Guinea has even seen slight deterioration in the stability and absence of violence/terrorism and in the regulatory quality indicators for which the percentile rank of the country decreased from 40.48 to 35.85 and from 4.81 to 3.85, respectively. 104 https://www.ventanillaunicaempresarialge.com/que-es-la-vue 142 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth There are important shortfalls with regard to policies that would underpin a market-based economy in Equatorial Guinea. The Bertelsmann Transformation Index (BTI) ranks Equatorial Guinea below peer countries on market organization and whether rules exist for stable, market-based competition. Equatorial Guinea ranks last against other CEMAC countries and structural and aspirational peers (see Figure 54). Equatorial Guinea ranks 126th out of 137 countries on the market organization score of the Bertelsmann Transformation Index (BTI),105 lagging behind other CEMAC countries and structural peers such as Gabon (94th), Cameroon (102nd), Republic of Congo (124th), Azerbaijan (107th), and Timor-Leste (87th). Moreover, Equatorial Guinea lags far behind aspirational peers such as Qatar (28th out of 137 countries). Equatorial Guinea scores particularly low relative to its peers on the competition policy sub-indicator,106 where the score gap with the gulf is wider relative to other CEMAC countries and structural peers. FIGURE 54 BTI aggregated market organization indices for Equatorial Guinea, other CEMAC countries and structural and aspirational comparators (2022) 40 Aspirational peers Structural peers and other CEMAC countries 35 30 25 20 15 10 5 0 United Arab Emirates Malaysia Qatar Kuwait Bahrain Oman Timor-Leste Gabon Cameroon Azerbaijan Chad Central African Republic Congo, Rep. Equatorial Guinea Market organization Competition policy Liberalization of foreign trade Banking system Source: Bertelsmann Transformation Index, BTI Note: Maximum score per category is 10 (best score).107 The absence of a market-based environment in Equatorial Guinea gives rise to notably elevated operational risks for businesses. Equatorial Guinea exhibits greater operational risks in comparison to other countries in the CEMAC region, as well as to its structural and aspirational peers (Figure 55).108 Equatorial Guinea’s performance on key indicators related to competition is particularly poor, where it falls behind other CEMAC countries, and structural and aspirational peers, scoring the score for highest risk (4). Operational risks stem from the existence 105 Market organization: The score reflects whether the fundamentals of market-based competition are developed and if free and fair competition is guaranteed by an institutional framework that ensures unrestricted participation in the market and a level playing field for all market participants. The highest score (10) indicates that market competition is consistently defined and implemented both macroeconomically and microeconomically. There are state-guaranteed rules for market competition with equal opportunities for all market participants. 106 Competition policy: The score reflects the extent to which safeguards exist to protect competition and the safeguards are enforced. The highest score (10) indicates that comprehensive competition laws to prevent monopolistic structures and conduct exist and are strictly enforced. 107 Liberalization of foreign trade: The score reflects the extent to which foreign trade has been liberalized, taking into consideration protectionist measures or limited market access resulting from non-tariff measures. The highest score (10) indicates that foreign trade is widely liberalized, with uniform, low tariffs and few non-tariff barriers. Banking system: The score reflects whether a solid banking system and a functioning capital market been established. The highest score (10) indicates that the banking system is solid and oriented toward international standards with functional banking supervision and minimum capital equity requirements. Capital markets are open to domestic and foreign capital with sufficient resilience to cope with sudden stops and capital flow reversals. 108 Based on EIU operational risk indicators, focusing on government effectiveness risk and regulatory risk. The indicators are evaluated based on information from local experts and publicly accessible resources. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 143 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth of vested interests and cronyism, unfair anticompetitive practices, discrimination against foreign companies and excessive trade protection. These factors collectively contribute to a heightened level of operational risk in the country and stymie investment. FIGURE 55 EIU indicators of operational risks for Equatorial Guinea, other CEMAC countries and structural and aspirational comparators (2022) 20 Lower risk (lower score) – higher risk (higher score) Aspirational peers Structural peers and other CEMAC countries 18 16 14 12 10 8 6 4 2 0 Malaysia Bahrain Qatar United Arab Emirates Kuwait Oman Azerbaijan Gabon Cameroon Central African Republic Chad Timor-Leste Congo (Brazzaville) Equatorial Guinea Vested Interests/Cronyism Unfair Competitive Practices Price Controls Discrimination Against Foreign Companies Excessive Protection Source: EIU Risk Tracker © Imago/alamy.com 144 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth 4.3 Enabling factors to foster private sector growth Legal certainty, land titling, digitalization, access to credit, and improved gender equality are enablers for investment and private sector development The business environment in Equatorial Guinea presents numerous constraints that impede private sector development. Some of the most prominent challenges include high levels of legal uncertainty, significant barriers to business entry, limited digitalization of public services, low internet usage, limited access to credit, gender inequality, and land titling issues. These constraints collectively hinder the growth and competitiveness of businesses operating in the country. Resolving these issues is crucial to foster a more conducive environment for private sector development in Equatorial Guinea. 4.3.1 Legal uncertainty is a significant constraint to economic development and business growth In Equatorial Guinea, unpredictability of the legal framework governing business activities is frequently mentioned by private sector actors as a significant constraint to private sector growth. Uncertainty raises risks for investors and disincentives to private investment, especially foreign investment. Without a robust rule of law, business owners and entrepreneurs find it difficult to know what to expect when making economic decisions. Legal uncertainty in the country arises due to a variety of factors, such as: i) outdated legislation; ii) lack of public information and accessibility of the applicable laws; iii) lack of public consultation when drafting relevant laws and regulations; iv) a weak judicial system; and v) lack of translation into Spanish and/or official validation of key legislation such as the Organization for the Harmonization of Business Law in Africa (OHADA) laws and the new Customs Code. Most of the applicable legislations in Equatorial Guinea are still outdated. Many laws and regulations from the Spanish colonial system era are still in force, given that the country has not replaced them or formally repealed them. The Civil Code,109 for example, includes several provisions that are contrary to the Fundamental Law of Equatorial Guinea.110 The Government is currently working on a draft to update the Civil Code, and has been updating several national laws (General Labor Law of 2021,111 Penal Code of 2022,112 Ports Law, and the Merchant Marine Law, among others). Despite the effort, there is still more to do in this domain. One of the constant concerns of the private sector is the lack of public information and accessibility of the country’s applicable laws and regulations. Currently, the applicable legal framework can be found mainly in the Official Gazette of Equatorial Guinea (BOE) headquarters and in the judicial library of the Ministry of Justice. In addition, some laws and regulations can also be found in governmental websites, such as the Ministry of Finance website113 and the BOE’s website.114 However, these websites are not updated frequently and do not contain online versions of all laws and regulations. Despite these efforts at digitalization and making the legal framework widely accessible to the public, most of the information on regulations is still only available in hard copies for a fee through the BOE’s office in Malabo. 109 Civil Code of July 24, 1889. 110 Equatorial Guinea’s Fundamental law of 1991, as amended to 2012. 111 General Labor Law No. 40/2021. 112 New Penal Code approved by Law 4/2022 of August 17. 113 https://minhacienda-gob.com/biblioteca-juridica/ 114 https://boe.gob.gq/#  Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 145 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth The absence of public consultation in the drafting of relevant laws and regulations undermines their effectiveness, fairness, and legitimacy.115 Currently, the Government does not make draft versions of relevant laws and regulations available for public consultation at any stage of the process. The consultative process is relevant when drafting laws and regulations for private sector development because it helps policymakers understand the needs and priorities of the private sector, ensuring that the proposed laws and regulations address the challenges and barriers faced by businesses; encourages investment by providing investors with certainty and predictability; supports entrepreneurship and innovation; and fosters partnerships between the public and private sectors. In addition, by engaging with the private sector, policymakers can identify areas where existing laws and regulations can be streamlined, simplified, or eliminated to reduce the burden on businesses. Evidence shows a positive relationship between the improvement of the regulatory environment through good regulatory tools, such as public consultation, and aggregate investment (and economic growth).116 A successful example of an efficient collaboration between the public and private sectors in the development of laws and regulations can be found in Malaysia where a Special Task Force to Facilitate Business (PEMUDAH) was created in 2007 with the aim to oversee regulatory reforms that facilitate business. PEMUDAH advocated for the introduction of public consultation as a core element of the National Policy on the Development and Implementation of Regulations. Through this collaboration, Malaysia managed to reengineer its business license framework, simplifying 767 business licenses at the federal level into 454 composite and 29 abolished licenses, with projected compliance cost savings around US$180 million.117 A weak judicial system creates uncertainty, reduces confidence in legal processes, and raises transaction costs, which in turn can impede overall economic development. Currently, the Judiciary of Equatorial Guinea is facing several challenges, including: i) the lack of a judicial career; ii) lack of periodic training of court staff and judges; iii) lack of The consultative specialization in commercial matters; iv) obsolete procedural laws; process is relevant and v) the lack of publication of court judgements, court performance when drafting laws measurement reports and all relevant laws and regulations in a dedicated and regulations website and on public boards of all court offices in the country. One of the for private sector priority issues that the Government of Equatorial Guinea must address in this area is the lack of a judicial career. The two factors for the existence of development a true judicial career are: a) an institutional mechanism for the selection, because it helps appointment, permanence and promotion of judges and court staff, and policymakers b) periodic institutional training of court staff and judges. In Equatorial understand the Guinea, the Judiciary lacks both. Judges are still appointed by the needs and priorities executive and may be removed at any time. Currently, the Government of of the private sector, Equatorial Guinea is taking some steps to overcome these challenges. For instance, there is a project to amend the Organic Law of the Judiciary and ensuring that the introduce a clear process to select, appoint and promote judges and court proposed laws and officials. Government is also planning to improve the data included in its regulations address annual reports related to performance measurement indicators. A strong the challenges and and effective judicial system is relevant for private sector development barriers faced by as it promotes the rule of law by providing an impartial and independent businesses. mechanism for resolving commercial disputes and enforcing the law. This is critical to give businesses the confidence to enter into agreements, invest and innovate, knowing that they can rely on the legal system to resolve and enforce those agreements if necessary. 115 Public consultation is part of the Good Regulatory Practices (GRP) or Regulatory Governance Practices that governments should use to ensure that regulatory outcomes are effective, transparent, inclusive, and sustained. 116 Eifert, Benjamin P. (2009). “Do Regulatory Reforms Stimulate Investment and Growth? Evidence from the Doing Business Data, 2003-07.” CGD Working Paper 159. Center for Global Development. 117 “World Bank Group.  2019.  Regulatory Governance for Development and Growth: Malaysia’s Experience with Good Regulatory Practices.  ©  World Bank, Malaysia. http://hdl.handle.net/10986/32440 License: CC BY 3.0 IGO.” 146 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth The official translation into Spanish of key legislation such as the OHADA laws and the new Customs Code is essential for a transparent and functional legal system that serves the interest of all stakeholders. The country is a member of the Organization for the Harmonization of Business Law in Africa (OHADA) since 1999 which means that the applicable business law in the country is that established by its Uniform Acts. Equatorial Guinea is the only Spanish speaking member state of the OHADA. Although Spanish is one of the official languages of the organization, all its laws are in English and/or French. The absence of a Spanish translation of the revised uniform acts and/or official validation of translated legal texts has deepened the legal uncertainty in the country. Five of the ten OHADA uniform acts118 were translated into Spanish through a WBG-funded project and delivered to the Government in July 2021, however their validation and publication by the Government is still pending. 4.3.2 Land titling and limited access to credit represent an important challenge to private sector development Privately held land in Equatorial Guinea is often either untitled or improperly titled. Secure land titling is essential for private sector development as it promotes investment, facilitates access to credit, stimulates market activity and helps resolve land disputes. By establishing a robust and transparent land titling system, Equatorial Guinea can support private sector growth and economic development. The issues with land titling are exacerbated by the weakness of the judicial system due to which it takes years to resolve title disputes. In addition, despite the existence of a clear legal framework that protects the rights of property owners, the government can use the judicial system to seize land in the interest of the country with little to no due process. Finally, property registration is costly and time consuming, presenting a significant obstacle for the private sector to secure land tenure rights. In 2022, only 299 property transactions were registered at the immovable property registration agency compared to 350 in 2021 and 644 in 2020.119 Property records are not available country-wide since the property registry only keeps paper records in its two locations in Malabo and Bata. These documents are not digitized and, in addition, there is no operational electronic database to verify if the real estate is encumbered with any charge. Similarly, the country’s two notary publics are only present in those cities, resulting in additional transportation costs for users in other locations. Equatorial Guinea lacks a comprehensive cadaster system that would allow the precise identification, description, and recording of physical characteristics for each real estate property. The newly formed Ministry of Land Management, established after the national election in November 2022, has prioritized the development of cadastral maps, initially focusing on the city of Malabo. In recent years, there have been several proposals for the establishment of a cadaster that for varied reasons have not materialized. Land titling can be leveraged by businesses to increase access to credit and reduce the cost of borrowing. In Equatorial Guinea, business loans through the local bank system generally require significant collateral and are offered with high interest rates, limiting opportunities for entrepreneurs. The lack of proper land titles may significantly contribute to this, as lenders will be hesitant to lend money without clear documentation of ownership and legal title. It also limits businesses’ ability to raise capital and grow. Moreover, with domestic credit to private sector representing only 10.5 percent of GDP (compared to 135 percent of GDP in UMICs, on average), the financial sector provides limited support for private sector development in Equatorial Guinea. Equatorial Guinea has low levels of financial inclusion with an account ownership rate of 31 percent of the population aged 118 General Commercial Law, Cooperative societies law, Organizing securities law, Arbitration law and Mediation law. 119 https://minhacienda-gob.com/doing-bussines-en-eg/ Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 147 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth 15 and more, well below that of structural (38 percent), SSA regional (42.6 percent), and income (72.4 percent) peers (see Box 11).120 While the government has made progress towards clearing domestic debt arrears, non- performing loans at 32 percent of total loans remain high in Equatorial Guinea, adversely impacting the banking system stability and the credit to private sector. The OHADA legislation allows several types of movable collateral, which could help unlock finance, especially for MSMEs that often lack immovable assets.121 However, there is not a collateral registry in the country. Therefore, until such a registry is created, in line with internationally accepted standards,122 creditors will remain reluctant to accept movable assets as collateral. In addition, knowledge of the Uniform Act on Organizing Securities Law123 among legal professionals and the private sector is limited due to the lack of a Spanish official translation and insufficient dissemination of the law. Access to credit could be improved by the implementation of a modern collateral registry and the effective implementation of the OHADA legislation. Entrepreneurs can also access credit through the investment fund of the National Institute of Promotion and Development (INPYDE) of Equatorial Guinea, which was created in 2013. However, INPYDE has only granted thirty-four loans since the investment fund was established, due to several reasons: i) entrepreneurs are not aware of the existence of the investment fund; ii) difficult procedures to obtain and disburse the credits; and iii) limited resources. There are legal limitations on acquisition of land by foreigners that impede foreign investment and create inequality between the property rights of married women and those of married men. Under Law 4/2009 on Land Ownership, foreigners cannot own land but can lease property from the government for up to 99 years. However, to secure a lease, prior authorization from the President of Equatorial Guinea is needed in the form of a presidential decree. There is also inequality in the law between the property rights of married women and the rights of married men. The Spanish Civil Code applicable and in force in Equatorial Guinea establishes that the husband shall be the administrator and usufructuary of the married woman’s property. Although in practice the husband’s authorization is not usually required, the law establishes that the wife will need the husband’s license to alienate, encumber or mortgage her property.124 4.3.3 Low levels of digitalization of public services hampers private sector development Constraints to private sector growth in Equatorial Guinea are compounded by the country’s digital gap. Digital connectivity is one of the lowest in the region, hindering the development of alternative models to improve access to public services and limiting productivity improvements in economic sectors such as agriculture and tourism, affecting the country’s rural areas in particular. Wider use of digital and e-governance platforms could help when it comes to consistency of implementation of public services. Almost all public services are conducted in person with very limited exceptions. Most ministries and other public entities lack dedicated websites, and do not display information on administrative requirements at their public boards. Providing clear information on regulations, requirements, and costs would help to reduce companies’ transaction costs, especially for SMEs, and lower legal uncertainty. Some improvements toward digitalization have been made in recent years. For example, in 2018 the Customs agency implemented an automated customs systems (ASYCUDA World) that allows the electronic processing of the customs declaration, as well as the online submission of supporting 120 Source: Global Findex Database, World Bank, latest data available. Account denotes the percentage of respondents who report having an account (by themselves or together with someone else) at a bank or another type of financial institution or report personally using a mobile money service in the past year. 121 Uniform Act: Organizing Securities Law and OHADA Insolvency law. 122 Electronic, geographically centralized, and unified collateral registry. 123 Model Law developed by the Organization for the Harmonization of Business Law in Africa (OHADA) to harmonize securities laws across member states in Africa. The Act provides a framework for the issuance, circulation, and transfer of securities, and establishes the rules for the operation of securities markets and intermediaries. 124 Civil Code, Articles 59 and 1412. 148 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth BOX 11 Financial inclusion assessment in Equatorial Guinea © urbazon/istockphoto.com Financial inclusion has demonstrated a positive impact on economic growth, poverty reduction and resilience generation. Access to suitable products by MSMEs allow them to invest in assets and grow their businesses, increasing productivity, which in turn contributes to job creation and the economic growth of the country. Equatorial Guinea has low levels of financial inclusion and adoption of digital financial services. Only a third of the adult population has a bank account, with forty out of every thousand adults being borrowers from a bank and 79 out of every thousand adults having a debit card. These indicators have slightly improved in recent years. For example, the number of people with accounts increased from 167 to 293 (per 1,000 adults) between 2013 and 2019, and the number of debit cards grew from 35 to 79 (per 1,000 adults) between 2016 and 2020. There is also evidence of a significant gender gap in access to financial services, although it has decreased in recent years. In 2020, 244 women per 1,000 adults were depositors in commercial banks, compared to 309 men. Equatorial Guinea presents similar levels of financial inclusion to countries in the CEMAC region but is far below the levels of countries with similar income levels. There is no information (on supply or demand) that allows to understand the situation of financial inclusion for SMEs. Equatorial Guinea is at an early stage of capacity building and commitment towards financial inclusion. Under the CEMAC’s Economic and Financial Reforms Program (PREF-CEMAC), a regional financial inclusion strategy has recently been developed. At the national level, there is a draft financial inclusion strategy under consideration which is a transposition and an adaptation of the regional strategy prepared at the CEMAC level. Capacity building in both the public and private sectors is crucial to advance the national financial inclusion strategy. Generating information from both supply and demand to understand the country’s situation and identify barriers and improvement opportunities should be a priority. To advance financial inclusion, Equatorial Guinea must prioritize reforms to achieve five main objectives. These include i) strengthening the financial system; ii) improving telecommunications infrastructure and internet connectivity; iii) enhancing institutional capacity at both national and regional levels regarding financial inclusion; iv) coordinating the efforts of various relevant institutions on this issue; and v) developing a national financial inclusion strategy to establish a roadmap for progress toward this goal. Source: World Bank (2022). Diagnosis and Strategic Roadmap for Improving Financial Inclusion in Equatorial Guinea, and IMF CEMAC Staff Report (2023). IMF Country Report No. 23/440 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 149 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth documents to facilitate cross-border trade. However, even though ASYCUDA is implemented at the port of Malabo, economic operators continue submitting physical copies of the same documents to the Customs authority, the Port Administration, Ministry of Commerce, the Chamber of Commerce, among others. To enhance the expansion of digital government services, these measures should be complemented by a concerted effort to increase the accessibility of a digital skills courses for public sector employees (see Chapter 5). Digital connectivity is low also at the individual level. According to the Digital 2023 report on Equatorial Guinea produced by the DataReportal organization,125 the internet penetration rate stood at 53.9 percent of the total population. Data from the Global System for Mobile Communications (GSMA Intelligence)126 indicate that mobile connections in Equatorial Guinea were equivalent to 49.3 percent of the total population in January 2023. Social media users in the country remained low. For example, data published by Meta’s advertising resources indicates that Facebook had 80,900 users, while Instagram had 32,800 users in Equatorial Guinea in early 2023, equivalent to 5.7 percent and 1.9 percent of the total population respectively. The low usage of internet, resulting from insufficient investment in broadband infrastructure, limits the ability to expand the digitalization of public services. Unless corrected, the digital gap could impede the potential advances in the country’s productivity. Chapter 5 provides policy options to enhance digitalization in Equatorial Guinea. 4.3.4 Addressing gender gaps in regulations can foster private-sector led and inclusive growth Outdated regulations are still restrictive to women’s participation in the economy. A legal environment that is in line with principles of gender equity and inclusion can foster economic growth by promoting economic diversification, reducing income inequality, improving financial stability and competitiveness, and countering the negative impact of demographic changes.127 Legal barriers that hinder a woman’s ability to start a business, choose where to live, or obtain access to credit in the same way as her male counterpart delay economic progress by limiting an economy’s ability to fully realize the potential of its labor force. Legal gender equality is a prerequisite to enabling women’s full economic participation, as women are unlikely to be able to, or want to, work in economies where the law makes it more difficult for them to do so. Reducing persistent gender gaps in employment opportunities and outcomes is not only important to promote equity, but also beneficial for society- wide outcomes (Duflo, 2012). Gender gaps in the labor market can lead to low human capital, low productivity, low economic growth, and less equal economic development (Goldin, 1995; Dollar and Gatti, 1999; Lagerlöf 2003; Gaddis and Klasen, 2014; Bandara, 2015). The civil legislation of Equatorial Guinea does not allow women to open a bank account, register a business or sign a legally binding contract in the same way as men. Some labor laws are also unequal: Equatorial Guinea forbids women’s access to certain jobs. Existing legal restrictions are reflected in the World Bank’s Women, Business, and the Law Index128 which rates Equatorial Guinea substantially below the SSA average (Figure 56). However, Equatorial Guinea does well in some areas, including offering equal remuneration for work of equal value or the same pension benefits for all genders. Additionally, it is worth mentioning that last year, Equatorial Guinea enacted legislation protecting women from sexual harassment in employment, which includes criminal penalties for such conduct. To properly operationalize the new law, it will be important to accompany the reform with a nationwide continuous communication campaign, providing training to both public and private sectors on the new law and its implications, and implementing special procedures for handling cases of sexual harassment. The recent business census also sheds light on the gender gaps in business ownership and women’s participation in employment. It reveals that only 26.9 percent of the total of formal companies are owned by women, with approximately 28 percent of formal employees being women. 125 https://datareportal.com/reports/digital-2023-equatorial-guinea 126 https://www.gsmaintelligneeded. ence.com 127 Bertay, Ata Can, Ljubica Dordevic, and Can Sever. 2020. Gender Inequality and Economic Growth: Evidence from Industry-Level Data. IMF Working Paper No. 20/119. Singapore: International Monetary Fund. 128 https://wbl.worldbank.org/en/data/exploreeconomies/equatorial-guinea/2024 150 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth FIGURE 56 Equatorial Guinea and Sub-Saharan Africa’s Performance in Women, Business, and the Law report 2024 a. WBL Indicator-level scores, Equatorial Guinea, 2024 b. WBL overall scores, Equatorial Guinea and SSA, 2024 Pay Mobility Sub-Saharan 74 regional average Pension Workplace Assets Parenthood Equatorial Guinea's 58.1 overall average Marriage Entrepreneurship 0 50 100 150 0 20 40 60 80 100 Source: Women, Business, and the Law (WBL) 2024 Indicator-level scores are obtained by calculating the unweighted average of the questions within that indicator and scaling the result to 100. Overall scores are then calculated by taking the average of each indicator, with 100 representing the highest possible score. © Freepik.com Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 151 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth 4.4 Removing barriers to entry and attracting investment 4.4.1 Barriers to business entry hinders the establishment and growth of new businesses Equatorial Guinea needs to break down barriers to entry while building pathways to incentivize investment Despite progress to improve the business registration process, Equatorial Guinea still shows several constraints to market entry. Barriers to business entry can take various forms, such as cumbersome bureaucratic procedures, high licensing fees, complex regulations, limited access to financing, or inadequate infrastructure. When barriers to business entry are high, it limits competition and stifles entrepreneurial activity. To simplify and speed up registering a company, the Government of Equatorial Guinea implemented a One-stop shop (abbreviated VUE for its Spanish name Ventanilla Única Empresarial ) at the Ministry of Commerce’s headquarters in Malabo in January 2019. Later, in July 2021, the Government launched a second one-stop shop in the mainland city of Bata. The Government is planning to create new VUEs in the border cities of Wele-Nzas and Kie Ntem in the next couple of years. At the VUEs, entrepreneurs can register a company in almost all sectors, except oil, gas, and mining, and complete several procedures, such as search availability of company name, legalize business articles of association, obtain a tax identification number, obtain confirmation of payment from the Treasury department, obtain business licenses from the Department of SMEs and Department of Commerce of the Ministry of Commerce, and register the company at the Commercial Registry. In 2020, the government published Decree 45/2020 which removed the requirement that national partners must hold a minimum of 35 percent of the capital in non-oil companies established by foreigners or foreign companies operating in Equatorial Guinea. The same decree also reduced the minimum capital requirement to register a limited-liability company (from XAF1,000,000 or approximately US$1,650 to XAF100,000, roughly US$165).129 Following the implementation of these reforms, the process to start a business improved. Information collected by the One-Stop Shop for Business Registration indicates that the time and cost to register a new business was cut by more than half compared to previous years,130 making it possible for 3,699131 entrepreneurs to register their businesses from 2019 to 2022.132 So far, the majority of the registered businesses have been created in the services sector.133 Thirty-six percent of the total of registered companies were created by women.134 However, lately, there has been a setback and the private sector is again using traditional methods,135 such as legalizing the business articles of association directly with the notary public, instead of doing it at the VUE, due to the lack of a full-time notary public working at the VUE’s office, which makes the process of registering a company difficult and lengthy. To overcome this issue, the Government has approved a Decree136 to increase the number of notaries and public registrars which, however, has not yet been implemented. 129 Decree No. 45/2020 of March 24, 2020. 130 Before the implementation of these reforms, a World Bank report stated that Equatorial Guinea had the second highest number of procedures required to start a business in the world, a total of sixteen in an average of 33 days and the cost associated to those procedures were approximately 59.1 percent of the income per capita. https://archive.doingbusiness.org/en/data/exploreeconomies/equatorial-guinea#DB_sb 131 Prior to the establishment of the VUE access to company data was severely limited and not accessible to the public. Out of the total 3,699 registered companies in the VUE, a notable proportion consisted of existing companies that were actively encouraged to re-register within the VUE system. 132 https://www.ventanillaunicaempresarialge.com/que-es-la-vue 133 Ibid. (VUE’s data base). 134 Ibid. (VUE’s data base). 135 Traditional method to start a company in Equatorial Guinea: i) Undergo criminal background check; ii) legalize business articles of incorporation before a Notary Public; register the company at the VUE, adding a unique company name, which is not usually verified; open bank account and obtain bank solvency certificate; finalize the registration at the VUE; register before the Ministry of Labor and the Social Security Institute (INSESO). 136 Decree No. 140/2021 of November 5, 2021. 152 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth Important challenges remain. First, Equatorial Guinea still requires the notarization of the company’s articles of association, being one of the few OHADA members to maintain this requirement. Second, the business licenses from the Department of SMEs and Department of Commerce of the Ministry of Commerce must be renewed every year. Third, there are still additional procedures that are not integrated in the VUE, such as obtaining a registration number from the Ministry of Labor or registering the company’s employees with the social security Institute (INSESO). Fourth, the registration must still take place in person, as there is no registration website. Fifth, there remains a parallel process to register companies which creates confusion in the private sector. Sixth, improvements in coordination between the two locations, Bata, and Malabo, and fee transparency are needed. Seventh, a digitized database of the Commercial Registry does not exist, therefore name authentication is done manually through the books that are in the premises of the Commercial Registry. Eighth, the minimum capital required for limited liability companies (XAF 100,000) in the country is higher than the minimum allowed by OHADA legislation of XAF 5,000, which has already been implemented by the majority of the OHADA member countries.137 Furthermore, issues in key sectors remain, such as lack of pro-competition regulation in digital infrastructure to enable competition in retail services (see Chapter 5) as well as banking sector vulnerabilities. 4.4.2 An Investment Promotion Agency can be a catalyst for a country’s investor appeal Investment Promotion Agencies (IPAs) can help attract higher quality FDI and increase FDI inflows, to transform the receiving country’s economy. Estimates of the magnitude of these effects vary in the literature, including a preliminary cost-benefit analysis indicating that US$1 spent on investment promotion yields US$189 in FDI inflows and that spending a relatively modest US$78 in investment promotion creates one additional job in the promoted sectors.138 Currently, Equatorial Guinea is pursuing strategies to diversify its economy, aiming for sustainable long-term growth. This economic diversification process is a crucial component of the second phase outlined in the “National Development Plan 2035”. Among the top priority reforms outlined in their national roadmap to enhance the business environment and boost the country’s competitiveness is the establishment of an Investment Promotion Agency. Box 12 discusses key strategies that helped the Costa Rican IPA in attracting investment. However, it is important to understand that several factors can contribute to the ineffectiveness or failure of IPAs. These include: i) Weak institutional design, inadequate governance structure, and lack of clear mandates; ii) Insufficient By fostering human and financial resources; iii) lack of expertise in investment promotion, a robust marketing and business development; iv) lack of autonomy and authority to make investment decision independently; v) Excessive bureaucratic hurdles, complex regulatory climate, IPAs frameworks, and lengthy approval processes; vi) Policy and legal uncertainty; can effectively among others. Addressing these challenges requires concerted efforts from the public and private sectors of a country to strengthen institutional capacity, attract improve governance structures, enhance coordination mechanisms, and create investment, an enabling environment for investment promotion. Therefore, Equatorial Guinea foster economic must first evaluate the readiness of its business environment, the strength of its growth, and governance structures, the effectiveness of intergovernmental coordination, and create job the level of its institutional capacity. By fostering a robust investment climate, opportunities. IPAs can effectively attract investment, foster economic growth, and create job opportunities. 137 Twelve OHADA member countries have liberalized the minimum capital requirement for the creation of new enterprises (Benin, Burkina Faso, Côte d’Ivoire, Gabon, Guinea, Guinea-Bissau, Mali, Niger, Congo, Democratic Republic of Congo, Senegal, Togo. And Cameroon and Chad are already working on a new law that will establish this liberalization. Once these new laws are enacted, the only remaining states will be Comoros, Central African Republic, and Equatorial Guinea. 138 Global Investment Competitiveness Report 2019/2020, World Bank. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 153 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth BOX 12 The Costa Rican Investment Promotion Agency, known as CINDE (Coalición Costarricense de Iniciativas de Desarrollo), has played a crucial role in attracting investment to the country Key approaches and adopted policies by CINDE to facilitate investment: • Streamlined Regulatory Processes: CINDE has worked closely with the Costa Rican government to simplify and expedite administrative procedures for foreign investors. This includes reducing bureaucratic hurdles and providing clear guidelines for establishing and operating a business in the country. • Sector-specific promotion: CINDE focuses on promoting specific industries where Costa Rica has a competitive advantage. These include advanced manufacturing, technology and innovation, life sciences, shared services, agribusiness, and clean energy. By emphasizing these sectors, CINDE attracts companies looking to leverage Costa Rica’s strengths. • Incentives and Benefits: CINDE assists investors in accessing a range of incentives offered by the Costa Rican government. These can include duty-free imports, and other financial benefits designed to make investing in Costa Rica more attractive. • Workforce development and education: Costa Rica is known for its highly educated and skilled workforce. CINDE works closely with educational institutions to align curriculum with industry needs, ensuring a steady supply of qualified labor for investors. • Global Outreach and Networking: CINDE actively participates in international investment forums, trade shows, and business events to promote Costa Rica as an attractive investment destination. They also engage in diplomatic efforts to strengthen bilateral investment agreements. • Infrastructure Development: CINDE collaborates with government agencies and private sector partners to ensure that Costa Rica’s infrastructure is conducive to business operations. This includes supporting the development of industrial parks, ensuring reliable utilities, and improving transportation networks. • Sustainable and Responsible Investment: CINDE encourages responsible and sustainable business practices among investors. They promote environmentally friendly technologies and social responsibility initiatives, aligning with Costa Rica’s commitment to environmental conservation. • Aftercare Services: CINDE provides ongoing support to investors even after they have established operations in Costa Rica. This includes assistance with any challenges they may face, as well as helping them take advantage of additional opportunities for growth and expansion. Through these initiatives and policies, CINDE has been instrumental in attracting and nurturing a diverse range of investments to Costa Rica, contributing significantly to the country’s economic development and growth. Source: CINDE, Invest in Costa Rica. https ://www.cinde.org/en 154 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth 4.5 Shaping government interventions to promote well-functioning markets Promoting well-functioning markets in Equatorial Guinea requires tailoring the government’s roles as regulator, supplier, buyer, and developer Governments intervene in markets for many different reasons and in doing so, they impact the ability of markets to work effectively. The government intervenes both as a regulator (setting rules to regulate specific domestic markets, interactions with international markets and among market participants) and through providing resources to develop markets (as a buyer or seller of goods and services and providing state support to business) (Figure 57). These interventions can be justified and necessary, but they can also either enhance or distort markets. Policies to promote well-functioning markets include two main pillars. One focuses on combating anticompetitive behavior (such as abuse of dominance and economic cartels) and taming market power that harms consumers. The other encompasses the introduction of government interventions that can improve market dynamics (or that minimize negative effects of government policies). FIGURE 57 How governments shape markets: An analytical framework Government Role Means Tools Network industries, markets with information Sector problems (finance), scarce resources markets Entry, prices, level playing field. regulator (water, minerals, oil), statutory requirements and Regulator consumer protection. Market Competition framework, Antitrust: abuse, cartels, merger control. referee effective enforcement. Pro-competitive tender design, Buyer Public procurement of good and services. competitive selection, level playing field. Rationale for SOEs, Provision of goods and services (SOEs/SOFls), Provider of Supplier co-investor (PPPs). competitive neutrality, competition criteria for PPP. Resources Transfers (explicit or implicit) to firms to achieve various goals (industry transformation, regional/ Principles to mitigate distortive Market disadvantage groups development, R&D/ effects and transparent developer innovation/tech adoption, sustainability/climate allocation of support. change. Source: Adapted from World Bank (2023) Markets and Competition Policy Toolkit Note: SOFIs stands for State-owned financial institutions. 4.5.1 The Equatoguinean government must set the rules by which private firms operate to ensure well- functioning markets The government provides the set of rules and parameters under which markets must operate. This includes the government’s role as an international rule maker in setting rules which determine exposure to international markets (trade and FDI rules); as a regulator and supervisor of markets (especially those with market failures such as natural monopolies); and as a market referee to tackle anticompetitive behavior by firms. In Equatorial Guinea, there is a gap in rules to combat anticompetitive practices and space to further integrate principles of well-functioning markets to ensure that these rules enable rather than curtail competition. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 155 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth Existing rules in selected sectors undermine well-functioning markets In analyzing the business landscape of Equatorial Guinea, restrictions have been identified. These practices can be categorized as either de jure (legally established) or de facto (practices based on experience and prevailing conditions). Reportedly, these restrictions primarily affect foreign companies operating in the country and companies without political connections. Data on regulatory quality shows that Equatorial Guinea ranks lowest among CEMAC countries and structural and aspirational peers. The regulator quality index reflects information on unfair competitive practices, price controls, discriminatory tariffs, excessive protections and discriminatory taxes. Furthermore, progress has been virtually nonexistent: Equatorial Guinea’s regulatory quality index has remained almost constant since 1996, increasing from 0.1 to 0.15 (out of a maximum of 1) in 25 years. FIGURE 58 EIU regulatory quality indicators for Equatorial Guinea, other CEMAC countries and aspirational peers Aspirational peers Structural peers and other CEMAC countries 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Malaysia Oman United Arab Emirates Bahrain Qatar Kuwait Timor-Leste Azerbaijan Central African Republic Chad Gabon Cameroon Congo, Rep. Equatorial Guinea Source: Economist Intelligence Unit (EIU) Lack of enabling regulations can restrict entry and competition, for example in financial services and digital infrastructure. Weak regulation of operators with significant market power in digital infrastructure, especially access to the national fiber backbone, constrains competition in downstream retail data services.139 In finance, barriers to the operation of non-finance institutions constrain competition in lending for SMEs.140 Regulation of essential market variables can facilitate collusion or distort market signals, for example in agriculture and financial markets. The agricultural sector is subject to price regulation, with the government setting the prices for commodities such as cacao, coffee, and coconut with the purpose of protecting vulnerable farmers. The most recent Decree on the price of these products is from 2016. When prices are regulated, it limits the ability of firms to set prices based on market forces, supply and demand dynamics, and cost considerations. This removes the incentive for firms to compete on price, as they are bound by regulatory constraints, and provides a reference point around which traders can coordinate to avoid offering higher prices than the controlled price to farmers and limiting ability for quality-based pricing. Price regulation discourages 139 See World Bank. 2024. Digital Economy for Africa Assessment for Equatorial Guinea and Chapter 5. 140 See World Bank 2022. Diagnosis and Strategic Roadmap for Improving Financial Inclusion in Equatorial Guinea. 156 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth new entrants from entering the market, as they may find it challenging to compete effectively within the regulated price framework. These tools which may be relevant instruments for supporting farmers should only be employed after assessing alternative interventions – such as targeted support to vulnerable farmers – and when necessary, only for a limited duration, employing a transparent methodology that includes built-in mechanisms for the eventual removal of price regulation when it becomes unnecessary. In the financial sector, the usury interest rate and the obligation to provide a variety of services free of charge affect firms’ ability to compete.141 The usury rate is established by the BEAC and is a few points higher than the overall effective rate. For example, in the first half of 2021, this rate fluctuated between 8 and 10 percent, depending on the loan duration. Due to the increased risk inherent in certain types of loans, such as microcredit, setting a relatively low usury rate may constrain Financial Service Providers (FSPs), thereby making it an impractical offering in the current formal market environment and fueling informal markets. In addition, FSPs are required to provide 22 free financial services, including account opening, account maintenance, balance inquiries, sending account statements, among others. Understanding the effects of such price regulations and looking for alternative less distortive interventions is advisable. Rules can, intentionally or unintentionally, discriminate and protect incumbents or vested interests. A level playing field between market players is crucial to enable the most efficient and innovative firms to thrive. Licensing and authorization processes are not clearly defined in Equatorial Guinea’s laws and this increases the risk of high discretion and discrimination. The government tends to co-invest in foreign companies fueling concerns regarding an unlevel playing field. De facto restrictions based on experience and prevailing conditions create legal uncertainty and weaken governance. In the fishery sector, restrictions include priority given to nationals for accessing fishing resources and the National Fishery Commission regulates the fishing industry but also oversees the state-owned enterprise SONAPESCA. Where a regulator exercises ownership right on the incumbent conflict of interest arise as regulation can be steered to protect the incumbents. Foreign companies without connections face significant challenges in entering the market, for example, when trying to obtain licenses. Certain sectors, such as oil, face several types of restrictions at once and these can interact with each other to worsen outcomes. National partners must hold a minimum of 35 percent of the capital in oil companies operating in Equatorial Guinea. National partners must account for at least one-third of the representatives on their Boards of Directors. Further, GEPetrol, a state-owned company, has preferential rights – first right of refusal – for mixed shareholdings in the oil sector and related subcontracting companies. Prices for oil and gas are fixed by SOEs (SONAGAS and GEPetrol) in the national market, instead of being technically regulated. The distribution and sale of natural gas within the country are the exclusive responsibility of SONAGAS. Overlapping regulations such as these create daunting barriers for prospective firms seeking entry into the market. Underdeveloped competition law framework curtails ability to fight anticompetitive practices Equatorial Guinea has not approved a national competition law or decree, nor has it created a national competition authority that would implement competition regulations. The absence of a clear and national competition law increases the risk of anticompetitive practices in key sectors, that are not prevented by competition mandates granted to sectoral regulators. While a competition law framework is developed and enforced, ensuring that sectoral and economy wide policies integrate competition principles is essential to safeguard and promote competition. 141 Ibid. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 157 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth There are some competition provisions for sector regulators in key sectors like oil and gas and telecommunications, however, they do not have the necessary powers to apply them effectively. Articles 99 and 100 of the Oil and Gas Regulatory Decree prohibit anticompetitive agreements and abuse of dominance by sectoral providers. Among those behaviors the Decree lists excessive pricing, price discrimination, refusal to deal, and tying. However, the Oil and Gas regulator has not dealt with any competition case, nor does it have effective powers to implement the competition mandate. Promoting free market competition is one of the objectives of the Telecommunications regulation in Equatorial Guinea. ORTEL, the Telecommunications regulator in the country, has the mandate to establish and control the conditions under which the market should operate to promote competition (Art. 24 i. Telecommunications Act). ORTEL also has the power of sanctioning and investigating telecommunications operators regarding abuse of dominance and anticompetitive agreements. Nonetheless, the regulator has not issued any guidance or decided on competition-related cases. Equatorial Guinea stands to benefit from enforcing both the CEMAC competition provisions and the competition protocol of the African Continental Free Trade Area (AfCFTA), when ratified. CEMAC’s competition regulation is applicable to cases in Equatorial Guinea with a cross-border element, but its enforcement has been limited. CEMAC has passed several regulations since 1999. The CEMAC regulations impose an economy-wide merger notification mandate, and prohibits anticompetitive practices and agreements. Merger notification is required if the merger has a ‘community dimension’, where the merger is likely to have an effect in at least two CEMAC member states. Despite these obligations, the CEMAC’s competition regulations are not effectively enforced in Equatorial Guinea. The regulations can only be found in French and have not been translated to Spanish, limiting the number of public officials who can understand and implement regulations. Lack of a regulator with national presence in charge of implementing the CEMAC regulations limits the impact these have in Equatorial Guinea. The AfCFTA Competition Protocol seeks to establish a harmonized regulatory framework across the African continent. Through institutions such as the AfCFTA Competition Authority and Tribunal, it not only aims to oversee competition activities but also to ensure fair adjudication. The Protocol regulates and prohibits business practices that are deemed anti-competitive, restrictive, or incompatible with the proper functioning of the AfCFTA market. The Protocol was published in January 2023 and adopted by the African Union in February 2023, but it has not yet been ratified. Once ratified, efforts should be made to adhere to the framework. Additionally, compliance with these CEMAC and AfCFTA rules would enhance Equatorial Guinea’s reputation as a responsible member of the regional networks. 4.5.2 As an important market participant, Government interventions can strengthen or undermine private sector activities The state is an important partner for private enterprises, functioning as a supplier through SOEs, a buyer via public procurement, and a financier offering support to businesses (Figure 57). Through these avenues the government wields considerable influence over market dynamics and its appeal to private investors. Through transfers of resources (as financier), governments can change the relative costs for market players, for example, through granting subsidies or tax exemptions, and access to finance at favorable conditions. Where the government acts as market supplier, through an SOE, the government can be present in the market alongside private firms. PPPs, on the other hand, involve private firms making investments alongside the government, assuming a managerial role, and contributing financial, technical, and managerial resources, all while sharing risks and rewards with the government. Public procurement, which encompasses government purchases of goods and services, whether executed by SOEs or other government bodies, stands as a widespread and impactful form of direct state market intervention. 158 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth The state as supplier through SOEs has a role in enabling effective A markets and attracting private investment SOEs play a significant role in the Equatoguinean economy. SOEs are present in key network sectors, such as electricity and telecoms, as well as in potentially competitive sectors, such as fisheries. Deloitte (2017) identified 15 commercial SOEs in Equatorial Guinea including CEIBA Intercontinental (airline), Gecotel (mail delivery), GITGE (telecommunications infrastructure), SEGESA (electricity) and SONAPESCA (promotion of fishing). Holding GE, established by the government in 2014 to manage the investment fund and find co- investment opportunities, has projects listed in sectors such as chemicals and agriculture.142 The government controls several key companies in the oil and gas sector, including the national oil company, GEPetrol. GEPetrol is responsible for oil and gas exploration, production, and marketing in the country. The government also controls SONAGAS, the state-owned gas company responsible for the development of gas infrastructure and distribution. These companies play a critical role in the economy as they generate significant revenue for the government through taxes and royalties. However, there have been concerns about the lack of transparency in the management of these SOEs, their performance, and their impact on the broader economy. Monitoring and governance of SOEs is quite limited and not consistent, and corporate rules are not applied systematically. There is no entity or public office in charge of monitoring the State’s investments in SOEs or autonomous entities. Further, SOEs do not fully adhere to corporate rules. Deloitte (2017) identified SOEs which did not have up to date financial statements, or complied with all regulations imposed on corporations. Deloitte (2017) also found that the subsidies received by many SOEs have not been reported in their financial statements for the years 2015-2016. A lack of governance and monitoring of SOEs can result in inefficient resource allocation and mismanagement of public funds. SOEs with privileged access to government support or subsidies may have an unfair advantage over private enterprises, hindering competition and creating market distortions, in addition to fiscal risks. Poor governance and monitoring can also contribute to moral hazard and risk-taking behavior. The Presidential Decree No. 009/2024, dated February 7, 2024, is a step in the right direction. It sets general rules on the management of SOEs, including their creation, governance, and financial reporting. It also sets salary guidelines and requires financial obligations to be approved by the Ministry of Finance, Planning, and Economic Development. SOEs must submit their financial statements to the Ministry of Finance, Planning, and Economic Development on a quarterly basis, which will be verified and validated. In addition to financial performance, non-financial indicators such as on service delivery, efficiency and competition with private sector should be monitored as well. More transparency and oversight of enterprises with minority or non-controlling State shareholdings would help reduce business uncertainty. The Equatoguinean government has expressed ambitions to privatize SOEs as part of the AGENDA 2035. In April 2022, the government revealed plans to privatize several entities, including GETESA (telecommunications), SEGESA (electricity), GITGE (telecommunications infrastructure), and Ceiba Intercontinental (airline), along with its mail delivery service, known as GECOTEL (Guinea Ecuatorial de Correos y Telecomunicaciones in Spanish), and the vehicle inspection service (ITV). Additionally, the government indicated its intent to proceed with the privatization of unspecified assets within the hospitality, health, and education sectors, as well as at airports. In October 2022, the government announced their intention to privatize a port, demonstrating their interest to crowd in private sector participation.143 The decree No. 009/2024 states that the government must continue with the diagnostic study of SOEs, to determine their privatization, concession, restructuring or liquidation. Mapping the footprint of enterprises with any level of state shareholding across the economic activities they perform, assessing the economic rationale of State ownership, and applying the principle of subsidiarity to identify alternative government interventions to achieve policy goals would help give more space to the private sector while reducing the fiscal burden and risks. 142 https://www.holdingequatorialguinea.com/espa%C3%B1ol/planes-de-acci%C3%B3n-e-informes/proyectos/ 143 https://realequatorialguinea.com/en/destacado/guinea-ecuatorial-toma-la-decision-de-privatizar-sus-puertos/ Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 159 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth Private participation could enhance efficiency in key sectors of the economy if pre-conditions such as good governance for competitive selection of private partners, appropriate regulations and strong regulators, and rules that ensure the level playing field are in place. Private participation can come in the form of full divestiture, strategic partnerships, such as Public-Private Partnerships, opening the capital of the SOE to private investors, or through management contracts without change in ownership. For private participation to support productivity and inclusion, it is essential to remove regulatory protections to SOEs prior to full or partial divestment, and ensure a competitive selection of private investors. Improving SOE governance and enabling operation of private competitors on a level playing field, such as disclosing economic support provided to private firms and SOEs, separation of accounts for commercial and non-commercial activities, and elimination of regulatory advantages to SOE, constitute a complementary step. The government of Equatorial Guinea has considered engaging in Public-Private Partnerships (PPPs). PPPs are an option to combine public sector oversight and mitigation of risks with private sector expertise and investment. PPPs are an alternative to crowd in private investment that has been considered for transport infrastructure in Equatorial Guinea. Decree No. 009/2024 establishes that the Ministry of Finance, Planning, and Economic Development will establish a legal framework for PPPs, however, there is no legal provision or institutional setup yet. A procurement framework law drafted in 2023 has provisions and provides a solid foundation to enable PPPs, but the law still needs to be passed. PPPs are an option when pure private sector solutions and financing are not possible, and therefore competition in the market is not feasible. Partners for PPPs should be selected in an open, transparent and competitive manner to ensure that the government gets the best partner, and that the government is not providing more than necessary resources to make the project viable. Given the costs of organizing a PPP process and the conditions needed to make it attractive, PPPs should be considered when gains are clear. Maintaining separation between strategic planning and implementation agencies is crucial to prevent conflicts of interest that could lead to excessive costs and misguided projects. Rules and institutions for the preparation, procurement and contract management stages matter. South Africa’s National Treasury, Australia’s Partnerships Victoria, Singapore’s Ministry of Finance, and UK’s Treasury are examples of authorities that regulate the PPP process and have developed detailed procurement guidance (Box 13). The PPP process should be designed to encourage competition considering the prevailing characteristics in the market. Competitive auctions or tenders should be open, promoting transparency, yet specific situations warrant restrictions, such as preventing incumbent firms from stifling competition in sectors like ports through the control of various ports in a geographical area. PPPs could target new investors and cap incumbent bids, as seen in Mexico’s universal broadband access PPP. Unsolicited proposals, though innovative, can suppress competition and pose risks, necessitating a framework to assess their alignment with national priorities and to ensure competitive procurement. Furthermore, PPPs should be designed to enable competition in linked markets and include appropriate regulation of price, service standards and investments to ensure benefits for users. The state as provider of resources to business to develop markets B and attract investments should be subject to appropriate rules for effective design and impact The government also functions as market developer and financier in the economy, affecting the private sector by setting investment incentives (including tax reductions or exemptions), providing subsidies or other state support measures. As the government has requested sectoral ministries to update investment incentives to amend the investment law (Decree 009/2024), it is essential to follow basic principles to ensure that incentives are justified and effective and avoid distorting the level playing field. Equatorial Guinea lacks a framework to control the design, execution, and impact of business support measures. State support or subsidies to enterprises can be beneficial because they can promote economic growth, innovation, and stability by fostering the development of vital industries, encouraging research and development, and providing a safety 160 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth BOX 13 Good practices in the preparation of PPP Good practices that help ensure that the decision to procure a PPP is justified and that the procuring authority is ready to initiate the procurement process include the following: • The Ministry of Finance or central budget authority approves the long-term financial implications of the project. • There is a specific budgetary and accounting/reporting treatment for PPP projects. • The project is assessed and prioritized along with all other public investment projects in the context of the national public investment plans. • The project is adequately justified based on: » Socioeconomic analysis » Fiscal affordability assessment » Financial viability » Risk assessment » Comparative assessment of PPP versus public procurement » Market assessment » Environmental impact assessment • The results of these assessments are included in the request for proposals and/or tender documents and published online, together with the tender documents. • The procuring authority prepares a draft PPP contract and includes it in the request for proposals and/or tender documents, and these are published online. • The procuring authority has standardized model PPP contracts and/or transaction documents to expedite and guarantee consistency. Source: World Bank (2018). Procuring Infrastructure Public-private Partnerships Report net during economic downturns. However, where designed without competition principles in mind, state support can introduce distortions to competition. Some governments implement frameworks to regulate the provision of support and ensure a level playing field. These state aid frameworks (implemented extensively in the EU and provided for in ECOWAS and the East African Community) are designed to ensure that state aid is granted in a transparent and non-discriminatory way, and that it complies with the rules of fair competition. Crucially, the necessity of government subsidies and other support programs, their proportionality given the expected benefit, and alternatives that are less distortive to competition should be evaluated. For example, SOEs and private companies should face similar costs of capital, labor, access conditions to inputs and infrastructure. It is important to introduce transparency on the criteria for being eligible for state aid, limit unfettered discretion on the selection of beneficiaries of aid, assess the effects of subsidies on markets and public accounts before granting aid, systematize and publish information on granted aid and the cost for government, and evaluate the effectiveness of the aid (see Box 14 for principles of design of state support and competitive neutrality principles). Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 161 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth BOX 14 Design of business support measures Clarify objectives: Support to firms must have a clear objective to address market failures, that is the root cause of pain points for business. Assess the cost of public funds and ensure proportionality: As public resources are scarce, governments need to consider if support to firms is feasible given the limited budgetary resources. It may imply fewer resources for other critical areas such as health care. The cost in terms of fiscal resources and opportunity costs should be considered. Firms should not be overcompensated to meet the specific objectives as this could result in market distortions especially when they compete with others in the same market. At the same time, the aid must maintain an incentive effect, i.e., it should nudge the beneficiary in the direction of the stated objective. Select the least distortive instrument: The level of distortion introduced by the support heavily depends on the instrument used (See Table 10 for instruments used for recovery). In general, one-off and time- limited subsidy measures are less likely to have harmful effects. Guarantees provided by the state typically offer a less distorting effect on market functioning compared to loans directly issued by the state, given the element of private sector participation and risk-sharing. A loan typically leads to less distortion than a grant as it will ultimately need to be paid back by the beneficiary. Yet, the use of loans will require that they are targeted adequately, limited in their duration and size and involve market-based interest rates. Recapitalizations in particular can generate market inefficiencies and are a ‘sticky’ form of support, which can be hard to terminate. TABLE 10 Distortions of different state support instruments Competition Moral Additional transaction costs Type of financial support distortions hazard required for unwinding Deferrals (of taxes, contributions, payments for LOW LOW inputs) Guarantees Not required Loans Grants Equity (or asset purchase) HIGH HIGH Required Source: World Bank Group Supporting Firms in Restructuring and Recovery (March 2021a) Adapted from World Bank, Markets and Competition Policy Assessment Tool (2024); World Bank Group Supporting Firms in Restructuring and Recovery (March 2021a). Minimize selectivity (discrimination and unfettered discretion): Governments should consider clear criteria for aid design and disbursements to minimize distortions. They should also ensure that support is not exclusively and unnecessarily granted to large, dominant firms, incumbents or SOEs. Where small, large, incumbent, new, SOE and private firms are capable of realizing a specific objective any preferential treatment can only create distortions. Information about the business support programs should be easily available and elements for discretion in the allocation of support should be minimized. Monitor and evaluate the direct and indirect effects of the measures. Transparency on the type and amount of business support provided by program and beneficiary is important for accountability and evaluation. The achievement of the business support measure’s objectives should be monitored. Both the direct and indirect effects of the measures should be evaluated since business support can favor certain types of firms in a market or crowd out resources from certain viable and productive activities. Mechanisms should be in place to adjust the measure if it is not achieving its intended effect or is creating negative unintended effects. 162 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth Governments may also consider the introduction of geographic based support programs such as Special Economic Zones (SEZs) to attract investment and promote growth. SEZs are geographically delimited areas within which governments facilitate industrial activity through fiscal and regulatory incentives and infrastructure support. They are typically seen as a way to provide a competitive investment climate on a limited basis while the country tries to improve the situation nationally. In 2020, Equatorial Guinea signed a contract with a firm for the development of the Bata special economic zone. Several studies were carried out to delimit the area, but it was not feasible due to the high cost of evicting the occupants. A new area was identified, but so far no studies have been done and there is no proposal for a law to establish SEZs, although the government through the decree 009/2024 has announced that a framework for SEZ will be developed. In developing economies, SEZs have been implemented as a strategy to attract FDI, stimulate economic growth, and enhance competitiveness in the global market. Overall, an estimated 237 SEZs have been established by law in Africa, representing about 4 percent of the tally of zones around the world, but the success of these initiatives has been mixed (UNCTAD, 2019). The number of fully operational SEZs is estimated to be about half that amount, given that at least 56 zones are under construction and others are still at an early stage of development. Objectives and strategies of SEZs can evolve over time as countries progress economically. For example, many lower income economies, including in Africa, are using SEZs to kick start manufacturing, industrialization, and exports. They may start with a focus on labor-intensive industries and gradually shift toward technology-intensive and knowledge-based sectors as their economies mature. The effectiveness of SEZs as a policy tool can vary based on factors such as the local business environment, global economic conditions, and the specific incentives and support provided within each SEZ. In addition, the success of SEZs depends on the regulatory environment, its governance, infrastructure development, the ability to attract investment and skilled labor, and global economic conditions. In Equatorial Guinea where the regulatory and policy frameworks for zones are underdeveloped, the ideal decision-making approach is to consider from the beginning if zone development is the only solution to address the identified problems and if there are any other alternatives. Depending on the rationale for the SEZ and the binding constraint, there may be alternatives which better correct the market or government failures, such as land use planning, environmental The mixed regulations, regulatory environment, investment policy, trade policy or skills global results development. Once it is decided that a zone approach is necessary, the government show that it can decide the types of zones144 and locations and conduct a thorough market is not easy demand assessment. A systematic approach, supported by a solid market demand to develop assessment for infrastructure development, is important because the “special” successful regimes that zones provide have sometimes proven ineffective and excessively supply-driven, leading to limited impact (Figure 59). The mixed global results show Special that it is not easy to develop successful SEZs, and the successful ones usually take Economic 5-10 years to bear results. Even where an SEZ approach is well justified, policy Zones, and the makers should approach SEZs with a clear objective, a long-term commitment, successful ones and a strong technical team. It is also crucial to recognize the different impacts usually take 5-10 on firms inside and outside of the zones. Companies outside of the zones may years to bear face disadvantages in terms of the incentives and benefits available to firms within results. the zones. This can create unfair competition if the SEZ firms sell some of their production on the local market. The advantages offered to SEZ firms are justified by the fact that they are expected to export in highly competitive global markets. The World Bank has classified the lessons for successful SEZs into four dos and don’ts (Figure 59). 144 There are many different types of zones across the globe with varying definitions, including special economic zones, free trade zones, and industrial parks. Among these, SEZs and industrial parks are the dominant types. SEZs often involve a special legal and regulatory regime, which includes preferential incentive mechanisms, whereas industrial parks involve fewer incentives. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 163 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth FIGURE 59 African SEZ policies heavily rely on fiscal incentives (left), but their impacts on employment are limited (right) Incentives and services offered by African SEZ policies SEZ employment as % of national industrial employment (2019) 60 African countries Non-African countries Fiscal incentives 87% 48 50 Special customs regime 73% 40 36 30 Investment protection 40% 30 23 19 20 16 Investment facilitation 33% 14 10 5 5 3 3 4 4 Trade facilitation 23% 1 1 1 2 2 0 Angola Ghana Senegal Rwanda South Africa Tanzania Togo Ethiopia Kenya Egypt Morocco Djibouti China Philippines Vietnam Malaysia Honduras Dominican Republic Preferential land use 23% Infrastructure provision 20% Social amenities 7% Source: Rodriguez-Pose et al (2022). Source: Rodriguez-Pose et al (2022). Note: The number of African SEZ policies included in the sample is 30. Note: Except for Djibouti, African SEZs generally account for 1% to 5% of total employment in the national industrial sector. National industrial employment from World Bank Development Indicators. TABLE 11 The four Dos and four Don’ts of SEZ DOs DON’Ts 1. Choose the right location. 1. Lack of strategic planning and demand-driven approach. 2. Foster a conducive business environment with a reform-oriented mindset (use SEZs to pilot 2. Fail to address the critical market and policy reforms). government failures (such as infrastructure and government coordination). 3. Increase the market contestability through a rigorous market demand assessment and 3. Poor policy and legal environment and weak private sector participation. implementation capacity. 4. Maximize the positive spillovers through an 4. Inability to mitigate the environmental and inclusive and sustainable approach. social risks. Source: Zeng, D.Z. 2021. The Dos and Don’ts of Special Economic Zones. Policy Notes. World Bank Group. Zones should consider the means to increase sustainability from the beginning, including by reducing environment and carbon footprints and complement government’s broader policies to increase sustainability such as fossil fuel subsidy reform.145 Increasingly, foreign investors are looking for good environmental and social practices in order to meet the demands of their ultimate customers. The International Framework for Eco-industrial park (EIP) provides a good conceptual framework and benchmarks to consider in enhancing both competitiveness and sustainability of the industrial zones (World Bank Group, UNIDO and GIZ 145 Fossil fuel subsidies have significant fiscal, economic, environmental, and social consequences. They distort markets, send the wrong price signals to consumers such as energy-intensive industrial consumers, increase the fiscal burden, and discourage the adoption of cleaner, energy efficient, and renewable energy solutions. They incentivize firms to overconsume energy, which in turn contributes to increasing GHG emissions and air pollution (World Bank 2023a). The fiscal cost of subsidies was estimated at 1.2 percent of GDP in 2023. The Government has committed to remove fuel subsidies. 164 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth 2021). The framework consists of four performance categories: park management, economic, environmental, and social performances. The Framework has been integrated into numerous countries’ industrial zone regulations, including Vietnam, Turkey, and China. The Government of Equatorial Guinea could consider benchmarking lessons learned from countries that are taking on the EIP concept and integrating the international EIP framework into both brownfield and greenfield industrial parks. There are several African countries that have already been taking on the EIP concept, including Morocco which is converting existing (“brownfield”) industrial parks into EIPs, while Ethiopia develops new (“greenfield”) EIPs (see Box 15). BOX 15 Implementation of EIPs in Morocco and Ethiopia In Morocco, the Government is going beyond the traditional industrial zone development policy by identifying ways to lower the carbon and environmental footprints of the zones. Facing the enforcement of EU Carbon Border Adjustment Mechanism (CBAM), which will impact Moroccan exports and industrial ecosystems, key industrial zones such as the Tanger Free Zone have examined various green infrastructure investment options. These investment options at the zone level were identified and assessed by benchmarking the International EIP Framework (see Box A4.1 in Annex 4 for more detail). In Ethiopia, the Government has developed the Hawassa Industrial Park into Africa’s first sustainable industrial park with state-of-the art infrastructure and operational practices. The park sources power from a renewable hydroelectric power plant and has a centralized zero liquid discharge (ZLD) water treatment system. The ZLD system was developed to mitigate water quality deterioration of Lake Hawassa and Tikur-Wuha River. Like Morocco, Ethiopia also faces a water scarcity problem due to variability in rainfall patterns and distribution, exacerbated by extreme climatic events. The ZLD systems, which consist of 3 different treatment processes, help facilitate circulation of 100 percent of treated wastewater in the industrial park. The system helps reduce 8,000 m3 of freshwater consumption. Although the capital investment cost is high, with government support, it could secure an economic return of US$5 - US$13 for every US$1 invested in water (World Bank 2021c). Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 165 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth The state as buyer through public procurement can enable private C sector participation while ensuring a level playing field Public procurement (government purchases of goods and services—whether by SOEs or by other government institutions) is one very common form of direct state intervention in markets that can also support private sector development. As the government is such a large buyer in the economy, the way that public procurement is carried out can have a major impact on markets and competition in several sectors. Indeed, governments can set tender rules in a way that boosts the chances that they face a competitive market and enable the entry and growth of new and smaller firms. If not well designed, government rules for public procurement may restrict competition by: (i) unnecessarily reducing the number and range of participants in a tender; (ii) creating an unlevel playing field for firms participating in a tender; and (iii) making it easier for firms to collude in public procurement markets (otherwise known as bid rigging). Given that the procurement framework established in 1967 is obsolete, a new public procurement law has been proposed in Equatorial Guinea which will address these issues. However, the law has not yet been implemented, pending parliamentary adoption as of March 2024. The aim of the new law is to achieve greater transparency in public procurement for better efficiency, effectiveness, and use of public resources. The Law aims to facilitate access to public procurement markets, particularly for small and medium-sized business through simplified procedures. Ensuring competition in markets where the state is the buyer is important for several reasons: 1. It improves the ability to deliver public services and value for money for the public sector: A lack of competition in markets for selling to the state raises the price paid by the state and reduces quality, thus reducing the value obtained from public funds. This can have budgetary impacts and reduce the ability of government to deliver public goods and services. There is also a clear opportunity cost for scarce public funds where rents paid to firms that hold excessive market power affect the budget available for essential goods and services or other productive uses. 2. It increases access for companies to procurement opportunities: The market for sales to government represents an important source of business and a pathway for development for several types of firms. Promoting competition in these markets can allow a wider range of firms the ability to develop their capabilities and product offering in an environment that encourages innovation. For example, for emerging solutions and technologies in the digital economy, selling to government can be an important path to developing local digital ecosystems. However, this requires that tender specifications and requirements are set so that new digital technologies are able to compete on a level playing field with more traditional solutions (for example, allowing for delivery of services as well as goods). 3. Public procurement is often used explicitly to pursue socio-economic policy objectives which may impact market dynamics. Public procurement is often used as a policy tool to promote social, industrial, and environmental goals (for example, enhancing domestic manufacturing capacity, supporting nascent renewable energy industries, supporting SMEs or disadvantaged groups, etc.). While there may be valid reasons for doing this, the procurement rules and conditions used to achieve these objectives typically impact the range of players that can participate in the market and the level playing field. A prime example is the imposition of local content requirements which specify that only locally-produced goods, services or works (or goods with a minimum threshold for local production and content) may be procured. 166 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth 4.6 Policy recommendations to boost private sector development and investment The success of regulatory reforms often relies on effective coordination and consultation mechanisms and the implementation phase of reforms. While research on the impact of the business environment is growing,146 less is known about the way countries can organize to implement successful reform strategies.147 Often, regulatory reforms fail to materialize not because they lack potential benefits, but due to unforeseen circumstances in the implementation phase among which lack of coordination within the different actors plays an important role. Establishing institutional mechanisms that are resilient and enduring, along with securing the different actors’ buy-in, can significantly enhance the success of reform efforts. Successful reformers, such as Singapore (Box 16), share common characteristics including strong commitment at the highest levels, long-term vision, effective coordination mechanisms, and involving the private sector in the reform process. Roadmaps, with clear actions, deadlines, and assigned responsibilities serve as essential tools for monitoring reform progress and ensuring accountability. Countries missing some of these features often encounter challenges in initiating or sustaining reform. As Equatorial Guinea embarks on regulatory reforms, the experience of countries where successful reform processes were implemented could support their design and implementation. To unleash the full potential of the private sector, the Equatoguinean government and policymakers must create an enabling environment that encourages entrepreneurship, investment, and business expansion. In the legal sphere, translating and publishing relevant legislation, updating the Official Gazette, and refining judicial processes are imperative. Property rights can be strengthened by simplifying registration procedures, enhancing legal protections, and implementing a cadaster. A legal gap analysis would help address gender inequalities in economic opportunities. Streamlining business entry would involve approving a decree to reduce the minimum capital for limited liability companies and developing an online public database for company registration. The inclusion of post-registration processes in the VUE system and improving interconnectivity between existing one-stop shops are also important to facilitate business entry. Establishing an Investment Promotion Agency (IPA) could help attract domestic and foreign investments, supporting economic diversification. These reforms along with pro-competition policies would help create a transparent, efficient, and investor-friendly environment, fostering economic growth and achieving the government’s long-term development goals. Enabling well-functioning markets involves not only adopting a competition law but also dismantling barriers that impede market entry and building a strong competition framework. To promote effective markets and economic efficiency, targeted policies are needed. It is essential to remove restrictions hindering free market features, allowing prices to accurately reflect supply and demand dynamics. Firstly, in terms of price regulation, a thorough reassessment of pricing regulations in agricultural and financial markets is necessary. This includes identifying underlying issues and exploring alternative and less distortive government interventions. The Equatoguinean authorities need to modernize the overall competition framework, update outdated laws and strengthen antitrust enforcement mechanisms. Addressing the absence of a national competition law and authority in Equatorial Guinea by strengthening the overall competition framework is critical to mitigate the risks of under-functioning markets and anticompetitive practices in key sectors. CEMAC competition regulations ought to be translated into Spanish. The overall competition framework can be buttressed by empowering sectoral regulators with clear authority and adequate resources. This reinforcement will enable robust enforcement of competition provisions, fostering a competitive market environment in critical sectors. 146 See summary of the literature in World Bank. 2013. Doing Business in 2014: Understanding Regulations for Small- and Medium-Sized Enterprises. Washington, D.C. 147 Kikeri, Sunita, Vincent Palmade and Thomas Kenyon. 2006. Reforming the Investment Climate. World Bank Policy Research Working Paper 3986; Akinki, Gokhan and Peter Ladegaard. 2010. Lessons for reformers: how to launch, implement, and sustain regulatory reform - an analysis of six case studies in developing and high-income countries. Washington, DC: World Bank.; Peiffer, Caryn. 2012. Reform Coalitions: Patterns and hypotheses from a survey of the literature. The Developmental Leadership Program; Several case studies at http://www.doingbusiness.org/reports/case-studies/view-all. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 167 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth BOX 16 Singapore has boosted its private sector through the creation of a strong institutional mechanism that supports business environment reforms; sustains reform implementation and shapes public official’s incentives © dibrova/istockphoto.com Singapore has been a leader in implementing business environment reforms worldwide. The establishment of the Economic Development Board (EDB) within the Ministry of Trade and Industry has played a pivotal role in this endeavor. The EDB has direct access to the office of the Prime Minister and assumes responsibility for overseeing all business environment reforms in the country. Its primary objective is to strategize and execute plans that enhance Singapore’s standing as a premier global business and investment hub. The EDB focuses on attracting foreign investment, fostering the growth of local industries, and facilitating the development of Singapore’s economy. When the Ministry of Trade and Industry of Singapore embarked on the Ease of Doing Business agenda in the 2000s, the EDB made a priority to enhance the business environment and include in its objectives the improvement of the business environment. This was achieved by introducing business reforms that encompassed various aspects of a firm’s life cycle and its participation in the market while opening, operating, expanding, and closing or reorganizing a business, aiming to facilitate a more favorable and conducive environment for enterprises. Additionally, several institutions were set up to help Singapore design and implement regulatory reforms: i) the Pro-Enterprise Panel (PEP) actively engages the private sector to identify regulatory shortcomings and potential policy improvements. It serves as a feedback and troubleshooting platform when new policies and public initiatives are tested and rolled out; ii) the Ministry of Trade and Industry coordinates the Ease of Doing Business agenda, working closely with the relevant lead agencies it nominates to advance reforms across the Government. Regular meetings between the agencies championing reforms and high-level members of the government also increase accountability. A series of business environment reforms has been successfully implemented under this structure throughout the last decade. For instance, Singapore simplified the process to start a business by combining tax registration with the business registration on a single online form and by abolishing the corporate seals. Obtaining a building permit in Singapore is now very easy because of a series of reforms, such as: implementing a risk-based approach to inspections; improving public access to soil information and reducing the steps to obtain a construction permit. Enforcing a contract has become easier by introducing a consolidated law on voluntary mediation. Source: World Bank Group. 2020. Organizing for Reform: Global Experiences. © World Bank, Washington, DC. http://hdl.handle.net/10986/33864 168 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth © mtcurado/istockphoto.com Establishing a clear economic justification for State intervention in the market and improving the governance and performance of SOEs are imperative. Completing the assessment of the current SOE portfolio and expanding it to cover any enterprise with state shareholdings is a necessary step to assess the economic rationale of government ownership given the fiscal burden and risk that SOEs raise. A subsidiarity principle should govern the creation and maintenance of SOEs, limiting direct State intervention to situations where other less costly and distortive interventions to achieve public policy objectives while crowding in private investment are not available. Improving SOE monitoring of financial and non-financial indicators as well as guaranteeing competitive neutrality in the application of laws and regulations and the access to state support measures (e.g., direct subsidies, below-market interest rate loans, and guarantees) would be important to facilitate healthy competition of SOEs and private firms on a level playing field, and to ensure any future divestment is successful. Reshaping the Equatoguinean authorities’ approach to government interventions to integrate principles of effective markets is important. Equatorial Guinea should expedite the adoption of the new public procurement law. Ensuring competition in markets where the state is the buyer is crucial for improving public service delivery, maximizing value for public funds, and fostering private sector development. Moreover, the passage of this law is essential to provide a solid foundation for enabling PPPs that can be completed by a full PPP framework. Partner selection for PPPs should be transparent, competitive, and based on an open process to ensure optimal resource allocation. Careful consideration of the costs and benefits of PPP processes is necessary, with a focus on clear gains before undertaking such endeavors. It is important to maintain a separation between strategic planning and implementation agencies to prevent conflicts of interest and avoid excessive costs. Learning from international best practices, Equatorial Guinea should adopt rules and institutions for the preparation, procurement, and contract management stages, similar to successful models in countries such as South Africa, Australia, Singapore, and the UK. Additionally, as the country identifies necessary incentives to attract investments, a clear framework for control of business support measures should be applied. Special attention should be given to the necessity, proportionality, appropriateness and the balance of positive and negative effects of business support measures. These evaluation criteria should be considered for the design and implementation of the planned Special Economic Zones (SEZs) framework. For implementation, the government should conduct a thorough market demand assessment and carefully consider alternative solutions before committing to SEZ development and linked incentives. In case the assessment finds that a SEZ is the best policy option, Equatorial Guinea can integrate lessons from successful SEZs: prioritizing strategic planning, demand-driven approaches, and comprehensive policies to ensure competitiveness, sustainability, and inclusiveness. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 169 CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth TABLE 12 Recommendations to promote competition, private entry, and investment Focus area Policy recommendations Importance Timeframe148 Responsible Agency Foundational business environment reforms Legal • Translate, validate, and publish all the framework relevant legislation applicable in the • Ministry of Justice, Worship, High SHORT TERM country, such as OHADA laws, CEMAC laws, and Human Rights Customs Code and AfCFTA protocols. • Update periodically the website of the • Official Gazette of High SHORT TERM Official Gazette of Equatorial Guinea (BOE). Equatorial Guinea • Amend the Judiciary Organic Law to • Ministry of Justice, Worship, introduce a clear process to select, appoint High SHORT TERM and Human Rights and promote judges. • Draft a new legal framework for notary • Ministry of Justice, Worship, Medium MEDIUM TERM publics. and Human Rights MEDIUM TO • Ministry of Justice, Worship, • Enact a new Civil Code. High LONG TERM and Human Rights Digitalization • Ministry of Finance, of public • Develop dedicated e-governance websites Planning, and Economic services Development to display information on administrative and SHORT TO High MEDIUM TERM • CNIAPGE – National Center legal requirements and offer public services for the informatization of delivery. Public Administration of Equatorial Guinea Property • Simplify the procedure to register a • Property Registry rights Medium SHORT TERM • Ministry of Cadaster and property. Land Management • Property Registry • Increase the legal protections of property High MEDIUM TERM • Ministry of Justice, Worship, rights. and Human Rights • Property Registry • Digitize the archives and systems of the MEDIUM TO High LONG TERM • Ministry of Cadaster and land registrar. Land Management • Establish a cadaster to create a census of real estate showing their locations and MEDIUM TO • Ministry of Cadaster and High LONG TERM boundaries in order to improve the legal Land Management security of real estate in the country. Gender • Develop a legal gap analysis to identify • Ministry of Justice, Worship, equality the legal differences between access and Human Rights High SHORT TERM of men and that of women to economic • Ministry of Gender Equality, opportunities. Social Affairs, and Crafts Business • Approve Decree on the reduction of the entry minimum capital required for limited liability companies from XAF100,000 • Ministry of Justice, Worship, to XAF5,000 as allowed by the OHADA High SHORT TERM and Human Rights legislation (Uniform Act on the Law of Commercial Companies and Economic Interest Groups (AUSMAIE). • One-stop shop (Ventanilla • Develop an online public database Unica Empresarial ) for registration of companies and High MEDIUM TERM • Ministry of Commerce and authentication of company names. Promotion of Enterprises and Industry • One-stop shop (Ventanilla Unica Empresarial ) • Include in the VUE the post-registration • Ministry of Commerce and processes with the Ministry of Labor and MEDIUM TO Promotion of Enterprises Medium LONG TERM with the National Institute of Social Security and Industry (INSESO). • Ministry of Labor • Institute of Social Security (INSESO) • Improve the interconnectivity between • One-stop shop (Ventanilla Unica Empresarial ) the existing one-stop shops for business High MEDIUM TERM • Ministry of Commerce and registration (Malabo and Bata) and in the Promotion of Enterprises future with newly created ones. and Industry 148 Short-term reforms are defined as changes achievable within 6 months. Medium-term spans from 6 to 12 months. Long term reforms extend beyond a year. 170 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 4 Setting the Framework for Economic Diversification and Private Sector-led Growth Investment • Evaluate the readiness of Equatorial promotion Guinea’s business environment in order to establish an Investment Promotion Agency • Ministry of Finance, SHORT TO (IPA) to promote both domestic and foreign High MEDIUM TERM Planning, and Economic investments, streamlining bureaucratic Development procedures, and providing necessary support and incentives for businesses. • Ministry of Finance, • Establish an Investment Promotion Agency MEDIUM TO High LONG TERM Planning, and Economic (IPA). Development Government interventions in markets integrating competition principles Public • Approve the proposed public procurement procurement law and ensure enforcement, and thereafter law implement manuals and guidelines to • Ministry of Finance, support implementation of the new public High IMMEDIATE Planning, and Economic procurement law. Fast-track the launch of Development an e-procurement system and contracting agencies’ connectivity to the system. State support • Develop a framework to regulate or provide to businesses guidance on state support measures, including increasing transparency of the eligibility criteria for state support, limiting • Ministry of Finance, unfettered discretion on the selection of Medium MEDIUM TERM Planning, and Economic beneficiaries of aid, assessing the effects of Development subsidies on markets and public accounts, systematizing and publishing information on granted aid and the cost for government, and evaluating the effectiveness of the aid. Special • Assess whether a Special Economic Zone • Ministry of Commerce and Economic (SEZ) is necessary, and if so, engage in Promotion of Enterprises Zones comprehensive market demand assessment SHORT TO and Industry High MEDIUM TERM and planning, including promoting • Ministry of Finance, sustainability through an Eco-industrial Planning, and Economic Park. Development SOEs and • Map the footprint of SOEs and enterprises PPPs with state shareholdings and set guidelines to refocus state presence. Put in place • Ministry of Finance, prerequisites for successful actions to SHORT TO High MEDIUM TERM Planning, and Economic crowd in private investment, including Development enhanced governance and appropriate regulatory frameworks in sectors with SOEs. • Improve SOE governance and oversight • Ministry of Finance, including for support provided to SOEs High SHORT TERM Planning, and Economic and competitive neutrality to instill market Development discipline. • Establish provisions for Public-Private Partnerships (PPPs) and develop institutional setup to facilitate and • Ministry of Finance, encourage PPPs to ensure open and High SHORT TERM Planning, and Economic competitive selection for PPPs, value for Development money, and attracting the most qualified private partners. Regulatory reforms for competitive markets Price • Reassess price regulations in agricultural regulation and financial markets to understand • Ministry of Agriculture, Livestock, Forests and underlying problems and consider less Medium MEDIUM TERM Environment distortive government interventions. • BEAC Consider targeted cash transfers or • COBAC vouchers for farmers at risk as alternatives. Antitrust and • Develop and strengthen antitrust • Ministry of Finance, competition Planning, and Economic enforcement to address anti-competitive framework Development behavior and prevent anticompetitive Medium MEDIUM TERM • Ministry of Commerce and mergers effectively (including through Promotion of Enterprises implementation of CEMAC rules). and Industry • Strengthen the current competition • Ministry of Transport, framework by granting sectoral regulators Telecommunications and High SHORT TERM clear authority and resources to enforce Artificial Intelligence competition provisions effectively. Systems • Translate CEMAC competition rules SHORT TO • Ministry of Justice, Worship, applicable to Equatorial Guinea into High MEDIUM TERM and Human Rights Spanish. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 171 172 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth © Media Lens King/istockphoto.com CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Empirical research finds that no country has achieved faster growth and significant poverty reduction without greater integration into the global economy (World Bank, 2020). Given the heavy reliance of Equatorial Guinea’s economy on hydrocarbon and its small size, it is critical for the country to integrate more into the global economy, especially in the non-hydrocarbon sectors. While trade openness is higher in Equatorial Guinea than in most peers, it is falling with the decline in the oil sector. The ecotourism and digital sectors – two sectors with potential to connect further and transform the Equatoguinean economy – are still nascent. This chapter examines and provides policy recommendations on how Equatorial Guinea can promote digitalization, trade facilitation and integration, and ecotourism. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 173 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy 5.1 Enhancing digitalization to promote productivity growth and economic transformation 5.1.1 Why digitalization matters for Equatorial Guinea’s productivity and economic transformation Digital technologies and digitalization are key contributors to 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. The downside of not doing so may deepen the digital divide, creating leaders or laggards, or worse, winners or losers, in the global digital economy. The economies of tomorrow will be driven by digital transformation across sectors, especially in response to the COVID-19 crisis and aftermath. In the past decade, technology has become ubiquitous in our daily lives: from the way we socialize, work, travel, bank, communicate, purchase, study, and perform our daily tasks. This ubiquity has become even greater in the unprecedented fight against COVID-19, during which, digital technologies were in most instances the only channel for governments, individuals, and businesses to cope with social distancing, ensure business continuity, and prevent service disruptions. COVID-19 has ultimately redefined how social and economic activities occur across and within countries, paving the way towards digital economies, at national, regional, and global levels. The digital economy is a transformative opportunity across Africa for economic growth, diversification, financial inclusion, poverty reduction and job creation. There is increasing evidence of the positive impact of access to internet and mobile Growing technologies in SSA (Sub Saharan Africa) on growth (Katz and Callorda, 2019), jobs evidence shows (Hjort and Poulsen, 2019), innovation (George et al., 2021), firm and agricultural that access productivity (Ordu et al., 2021), and, critically, household consumption levels (Bahia, et al., 2020). In 2020, mobile technologies and services generated more to internet than US$ 130 billion of economic value added (8 percent of GDP) in Sub-Saharan and mobile Africa (GSMA, 2022). It has been estimated that this figure will reach US$ 155 billion technologies by 2025. Digitalization and digital technology adoption have spurred innovation positively and brought enormous gains for consumers, businesses, and governments, as impacts job well as for the much-needed structural transformation and diversification of its creation, economies. Digital technologies have contributed to increased financial inclusion in Western and Central Africa. The region has witnessed increased access to innovation, and transaction accounts (from 33 percent in 2014 to 48 percent in 2021) thanks to both firm and the development of digital financial services (i.e., mobile money). Furthermore, agricultural Information and Communication Technologies (ICTs) have significantly reduced the productivity. costs of searching and acquiring information, bargaining, and making decisions, as well as monitoring and enforcing transactions. The digital economy has potential to enhance productivity but also carries risks. A digital economy can change the way economies of scale are achieved, particularly with online service delivery, as the incremental cost of offering an additional product or service may become negligible. The digital economy can provide a myriad of benefits, such as better matching of buyers and sellers in a competitive marketplace. In addition, it can address certain concerns with asymmetric information, solving some principal-agent problems where buyers and sellers are separated by intermediaries, including at multiple levels. It may also allow products and services to be customized and targeted—enabling better inclusion but also easier ways to exclude some. Digital 174 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy economies also introduce new risks and would require safeguards to mitigate these risks and ensure robust job markets. Poor digital literacy can in turn expose people to risks linked to cyberattacks or harmful content – risks which can be mitigated by designing appropriate policy and regulatory frameworks. While many SSA countries are participating in the digital revolution, the continent as a whole —and Equatorial Guinea, in particular — is not yet prepared to capture a larger fraction of the global digital economy or benefit from its gains. More than two thirds of the population in SSA remain unconnected to the Internet and digital divides persist. Making the internet universally accessible and affordable thus remains an urgent priority and although technology costs have dropped, consumer access costs still vary greatly across the region. In terms of coverage and usage gaps, in 2020, 19 percent of its population remained without access to mobile internet services and 53 percent did not yet use mobile internet services despite living in areas covered by mobile broadband networks (GSMA, 2022). Furthermore, the gender gap in both mobile internet access and use across the region has not improved and continues to be the highest in the world. Women in Sub-Saharan Africa are now 30 percent less likely than men to own a phone, compared to 22 percent in 2017, as men’s ownership is far outpacing that of women. The gender gap in usage has remained flat each year since 2017, at 37 percent (GSMA, 2023). While primary data around internet usage by gender is not available, estimates suggest that women’s use is much lower than that of men. On top of this, 18 percent of its rural population has no mobile network coverage at all, and another 11 percent has only 2G coverage – meaning that almost 30 percent cannot access the Internet (ITU, 2021). The development of digital skills is pivotal to fully benefit from the use of internet and services and fulfill new employment opportunities. Digital transformation offers important opportunities for accelerated, inclusive and sustainable socioeconomic development and job creation Digital technologies are expanding access to global markets, changing business models, fostering innovation, and delivering productivity gains. ITU estimates that a 10 percent increase in mobile internet penetration in Africa is estimated to increase GDP per capita by 2.5 percent (ITU, 2021). According to recent research from Nigeria, increased mobile broadband coverage reduces the proportion of households below the poverty line, driven by an increase in labor force participation and employment—particularly among women— that allowed for higher food and non-food consumption in rural areas (Bahia, et al., 2020). Digital transformation is key to improve financial inclusion, especially to close the financial gender gap. Digital technologies, and more specifically, digital finance offers the possibility to bring underserved communities and the unbanked to the formal financial system. In the wake of new challenges and its prolonged oil-dependency, Equatorial Guinea’s government is aiming for economic diversification as a key course of action for growth and stability in the medium and long term. In January 2021, the Government of Equatorial Guinea announced a new wide-ranging AGENDA 2035. The Ministry of Transport, Posts and Telecommunications, through the General Directorate of Telecommunications and New Technologies, is implementing the Digital Agenda for Equatorial Guinea (ADIGE), a strategic Plan to promote the development of the Digital Economy in a coordinated and gradual manner. It has a roadmap that includes the extension of mobile internet coverage throughout the country, incentives for digital transformation for companies and developers, digitization of administrative services, and training the population on digitalization and cybersecurity issues. Despite the enormous opportunities, there is a need to protect Equatorial Guinea against the risks of digital transformation. Indeed, digital transformation is increasing risks around cybersecurity, data privacy, and market concentration. The digital divide can aggravate exclusion and inequality. Nevertheless, the economic potential of digital transformation— including opening up and reusing data, unleashing digital entrepreneurship, and enabling a digital workforce—is too large to ignore; rather, what is needed is to mitigate the downside risks Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 175 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy (African Development Bank, 2017). Ensuring that Equatorial Guinea’s digital divide is not further widened, and that data leads to better lives, will require supporting regulations that allow firms to connect and compete, skills development that augments rather than replaces, institutions that are capable and accountable, and a new social contract for data use that promotes the public good (World Bank, 2016; 2021). 5.1.2 Equatorial Guinea’s digital economy ecosystem This section draws on the assessment of Equatorial Guinea’s digital economy as part of the Digital Economy for Africa (DE4A) initiative. Through the DE4A Initiative, which supports the operationalization of the African Union’s Digital Transformation Strategy for Africa (2020-2030), the World Bank has committed to undertaking country-level digital economy diagnostics across the continent. The DE4A Initiative has set an ambitious vision, underpinned by measurable goals and indicators, to ensure that every African individual, business, and government is digitally enabled by 2030. The initiative, rooted in five core pillars (i.e., digital infrastructure, digital public platforms, digital financial services, digital businesses and digital skills, see Figure 60), also seeks to ensure that the digital economy is truly inclusive and addresses emerging risks, such as cybersecurity. The resulting country reports serve to highlight key policy reforms and investments needed for African countries to achieve their digital transformation ambitions while also mitigating the risks. This section focuses on digital infrastructure, digital skills and digital businesses pillars. FIGURE 60 Digital economy foundations and pillars DIGITAL ECONOMY FOUNDATIONS / PILLARS APPLICATIONS LIKELY TO DEVELOP ONCE THE FOUNDATIONAL ELEMENTS ARE IN PLACE • GOVTECH applications • ECOMMERCE adoption • OPEN BANKING: non-banks offer tailored services USE CASES • DATA LOCKER to access selected services DIGITAL BUSINESSES DIGITAL DIGITAL PUBLIC DIGITAL FINANCIAL SERVICES SKILLS PLATFORMS DIGITAL INFRASTRUCTURE CROSS-CUTTING AREAS • Strong legal and regulatory frameworks to foster competition and MFD agenda • Manage risks including from legal and regulatory perspectives, data privacy, cyber security • Opportunity to empower women and apply to FCV Source: Equatorial Guinea DE4A Report Equatorial Guinea’s digital economy is nascent and constrained by significant bottlenecks Significant constraints in digital infrastructure have stifled wider development, leading to a mismatch between supply of and demand for digital skills. Furthermore, in 2020 Equatorial Guinea scored 43 out of 100 points in the ITU (International Telecommunication Union) ICT regulatory tracker (ITU, 2022), which reflected the following respective scores: the regulatory authority (13 out of 20 points), regulatory mandates (16 out of 176 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy 22 points), regulatory regime (8 out of 30 points) and level of competition (9 out of 28 points) in the ICT sector main market segments.149 This demonstrates limited reforms and low levels of liberalization and privatization in Equatorial Guinea’s ICT sector. Equatorial Guinea’s telecommunications sector will need to become more competitive to become an engine of growth for its economy. In terms of how the country is using information technologies to promote access and inclusion of its people, Equatorial Guinea was ranked 183rd out of 193 counties on the E-Government Development Index (EGDI), which incorporates access characteristics, such as infrastructure and educational levels (Figure 61). FIGURE 61 Equatorial Guinea ranked below peers on the 2022 E-Government Development Index E-Government Development Index for Equatorial Guinea and peers, 2022 1.0 0.8 0.6 0.4 0.2 0 Equatorial Guinea Congo, Rep. Timor-Leste Cameroon Gabon Azerbaijan Qatar Kuwait Bahrain Oman Source: United Nations Digital transformation could play a critical role in diversifying Equatorial Guinea’s economy in the upcoming years, aligned with the AGENDA 2035 and the Digital Agenda (AGIDE). The adoption of digital technologies has a potential to increase the productivity of small and medium enterprises (SMEs) and stimulate innovation. As described below, the private sector is falling behind in the adoption of these technologies, and the firms, public sector, civil society organizations and individuals are losing from the benefits these technologies can have in accelerating product and process innovation, increasing productivity, and creating high-skilled jobs. Given the size of Equatorial Guinea’s economy, digital marketplace platforms could help firms to expand and access other markets, which could be especially important to stimulate the development of the private sector. Digital infrastructure Accessible, reliable, and affordable broadband internet is the backbone of an inclusive and sustainable digital economy. Improvements in digital infrastructure can drive the emergence of new job opportunities, lead to substantial socioeconomic benefits, and promote gender equality, particularly in industries that rely heavily on ICT such as information, professional (i.e., lawyer, marketing, graphic design), scientific, and technical services, as well as management and administrative services. Studies have established a clear and positive correlation between broadband penetration and GDP growth (Lehr et al., 2006; Kolko, 2010; Katz and Koutroumpis, 2012; Gilchrist, 2015). A 10 percent increase in broadband penetration could lead to significant boost in GDP in Africa, with estimates ranging from 2.5 percent (according to the International Telecommunication Union) to 5.2 percent (Google and IFC, 2020 based on a sample of 139 countries over the period 2007-2018). 149 The total of the scores for the ICT regulatory tracker is 100 points. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 177 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Recent negotiations with mobile operators to reduce telecom service tariffs by 50 percent mark a positive step forward However, important areas of improvement in Equatorial Guinea’s digital infrastructure remain. Regulatory challenges and limited competition in the broadband sector continue to be significant hurdles. Notably, quasi- Regulatory monopolies in international bandwidth access and national backbone challenges, markets are one of the key reasons why Equatorial Guinea has one of the highest broadband prices in the region. The absence of sufficient insufficient digital competition has resulted in an inadequate national fiber backbone, which infrastructure, and still needs to be further expanded to cover significant portions of continental limited competition Equatorial Guinea. High prices and weak infrastructure translate into only in broadband 7.8 unique mobile-broadband subscriptions per 100 inhabitants, the lowest sector are major penetration rate in West and Central Africa. The regulator, ORTEL (Órgano constraints for the Regulador de las Telecomunicaciones), lacks the decision-making and financial powers, which together with the weaknesses of cybersecurity development of the policies and measures, jeopardizes the development of the required digital digital economy in infrastructure for the digital economy to securely thrive. Nevertheless, Equatorial Guinea. these challenges underscore the potential for significant growth and improvement in broadband accessibility and affordability. Digital Infrastructure challenges remain a major constraint for the development of the digital economy in Equatorial Guinea. Access to electricity can affect the availability, uptake, and usage of mobile connectivity and digital inclusion. Despite being a major oil and gas producer, Equatorial Guinea has seen a very slow improvement in its electricity access rate since 2000 (64.8 percent in 2000 versus 66.8 percent in 2021). Furthermore, there are large disparities in access between urban (90.3 percent) and rural areas (1.4 percent). In addition, Equatorial Guinea lacks the appropriate infrastructure and ecosystem, which results in low levels of internet access and high connectivity prices in the country. Equatorial Guinea Digital Infrastructure is assessed below according to the first mile, middle mile, last mile and invisible mile framework described in Figure 62. FIGURE 62 How networks are built INVISIBLE MILE Hidden elements that are vital to ensuring the integrity of the value chain Nonvisible network components include the spectrum, network databases, cybersecurity, etc., but can also include potential bottlenecks, like international frontiers. FIRST MILE Where the internet enters a country International internet access, including submarine cables, landing stations, satellite dishes, cross-border microwave, etc. MIDDLE MILE LAST MILE Where the internet passes Where the internet reaches the end user through that country Local access network, including local loop, National backbone and intercity central office exchanges, wireless masts. network, including fiber backbone, microwave, internet exchange points (IXPs), local hosting of content, etc. Source: Barriers to investing in last-mile connectivity, USAID, 2020 178 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Equatorial Guinea’s first mile150 is comprised of five international submarine cables, ACE (Africa Coast to Europe), SAIL (South Atlantic Inter Link), CEIBA-1 and 2, and ULTRAMAR GE. Equatoria Guinea was first connected to an international submarine cable in 2012, when the ACE cable landed in Bata. In that same year, Equatorial Guinea’s Telecommunications Infrastructure management and operator company (Gestor de Infraestruturas de Telecomunicaciones de Guinea Ecuatorial, GITGE 151) took control of the recently built Ceiba-1 domestic submarine cable connecting Malabo to Bata. Ceiba-2 undersea cable linking Malabo, Bata and Kribi (in Cameroon) became operational in 2017 – providing extra capacity and enabling to connect to other cable systems such as WACS, SAT-3 and Main One. In 2018, the Ultramar GE cable was landed linking Sao Tome to the island of Annobon (in Equatorial Guinea), to relieve its dependence on satellites. Equatorial Guinea is also a partner in the South Atlantic Inter Link (SAIL) consortium for the Cameroon-to-Brazil cable, which allowed a new cross-border high-capacity link to become live in March 2021 with the aim of lowering prices and providing back-up connectivity. Regarding the country’s middle mile,152 GITGE is also responsible for managing the National Fiber Optic Network (RNFO, Red Nacional de Fibra Optica in Spanish), a terrestrial fiber that connects a total of 19 cities. The RNFO is comprised of a ring in the island of Bioko, connecting Malabo, Luba and Riaba, and another one in the continental region, connecting 16 areas in the continent (Bata, Bachinda, Niefang, Nkimi, Nkue, Micomeseng, Bidjabijan, Ebibeyin, Ayene, Anisoc, Mongomeyen, Mongomo, Oyala, Evinayong, Bicurga). Despite the wide national fiber backbone, mobile operators are mostly using microwave for their national backbone. More than 90 percent of sites are connected via microwave. The last mile153 in Equatorial Guinea, as in many developing countries, mainly relies on wireless networks technologies. This is due to: (i) relatively high cost of deploying fixed broadband infrastructures, (ii) relatively vast and geographically hard-to-reach areas, (iii) low population density (50 inhabitants per km2 of land area), and (iv) lack of enabling legal and regulatory framework. Finally, the Invisible Mile, which includes all requirements for effective and sustainable deployment and operation of digital infrastructure, comprises two main institutions – MTCT (Ministry of Transport, Post and New Information and Communications Technologies) and ORTEL (Órgano Regulador de las Telecomunicaciones). The telecommunication sector in Equatorial Guinea is regulated by the Ministry of Transport, Post and Telecommunications (Ministerio de Transportes, Correos y Telecomunicaciones , MTCT in Spanish)154 and its subordinate Telecommunications Regulatory Body (Organo Regulador de las Telecomunicaciones, ORTEL). MTCT and ORTEL take joint responsibility for telecoms pricing regulation, technical standards, phone numbering, universal service/universal access management, and QoS (Quality of service). ORTEL is also responsible for monitoring spectrum usage and operators’ compliance with license obligations. In terms of competition and market structure, Equatorial Guinea’s telecommunications market has three main service providers, including GETESA (Guinea Ecuatorial de Telecomunicaciones SA),155 GECOMSA156 and MUNI.157 GETESA launched GSM (Global System for Mobile communication) services in 2000, and enjoyed a monopoly until 2009 when MUNI launched GSM services. In 2012, GECOMSA initiated activities deploying 150 The First Mile, where the internet enters a country, ensures access to the worldwide internet network (through the submarine cable systems, landing stations, cross-border terrestrial cables, international gateways, satellite dishes, cross border microwave, etc.). 151 The State-Owned Entreprise Gestor de Infraestructuras de Telecomunicaciones de Guinea Ecuatorial (GITGE) was created in 2011 (via Decree 44/2011) and tasked with managing and operating the government’s public telecoms infrastructure. 152 The Middle Mile, where the internet passes through the country, is referred to as the national backbone and intercity networks, meshes metropolitan networks across cities, internet exchange points, and local data centers. 153 The Last Mile, where the internet reaches the end-users, can be a wireless (2G, 3G, 4G, 5G, WiMAX) or fixed (in copper pair or fiber optic) access network, connecting the end-user to the Digital Services Providers. 154 In the August 19, 2024 decree (84/100), this ministry was renamed as Ministry of Transport, Telecommunications and Artificial Intelligence Systems. 155 GETESA was established as a 60/40 joint venture between the state and French telecoms giant Orange Group, but a legal dispute between the partners soured the business relationship, causing the French investor to have no tangible involvement in the running of the company, and an Orange exit from Getesa’s ownership was finally agreed via an international settlement in September 2018. 156 Guinea Ecuatorial de Comunicaciones Sociedad Anonima (GECOMSA) is a joint venture between the government of Equatorial Guinea and a Chinese state investment vehicle. 157 GreenCom (MUNI) launched GSM mobile services under a unified telecom license awarded to its Kuwaiti-backed forerunner, HiTS Equatorial Guinea, in 2008. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 179 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy CDMA (Code Division Multiple Access) technology, including the first 3G network in the country, although largely focused on Bioko Island. GETESA’s 3G network was only launched in 2014, and was slow to expand across the country. 3G competition was further improved by the launch of MUNI’s network in August 2016, however, the take-up has remained modest in scale. Despite these competitors, GETESA is still the leading mobile operator, and its dominance is supported by its launch of 4G services in 2021 (Figure 63). GETESA introduced its own LTE-based services in December 2020 when it began marketing 4G smartphone and modem connectivity, before swiftly expanding commercial 4G mobile coverage across five main cities – Malabo, Bata, Djibloho, Mongomo and Ebebiyin – with its LTE (Long Term Evolution) population coverage exceeding 70 percent as of February 2022. FIGURE 63 Guinea Ecuatorial de Telecomunicaciones SA remains the leading mobile operator in Equatorial Guinea Mobile players market shares in Equatorial Guinea 99% 82% 76% 16% 14% 5% 8% 1% 0% GETESA MUNI GECOMSA 2G 3G 4G Source: Telegeography, December 2022. In terms of affordability, 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 cut internet/data prices on 1 September 2022, including an obligation to set a maximum retail mobile data charge of XAF1 (including VAT) per 1MB. Furthermore, the price of smartphone devices in Equatorial Guinea remains relatively high, costing around US$ 118 in 2022, which represents over 23 percent of the monthly income per capita.158 Although this is below the average relative cost of a smartphone in Sub-Saharan Africa – 39 percent of average monthly income per capita – smartphones are more expensive in Equatorial Guinea than in most Western African countries such as Côte d’Ivoire (US$ 32), Ghana (US$ 42), Senegal (US$ 32) and Guinea-Bissau (US$ 25). Prices in Equatorial Guinea are also higher than the average cost in SSA countries (US$ 56) and the average cost in Central African countries (US$ 65). According to GSMA, owning a smartphone is one important enabler for becoming a regular mobile internet user and high device prices can be a barrier to mobile internet adoption and use.159 158 Alliance for Affordable Internet (2022). Prices and Affordability of Smartphones and Feature Phones by Country https://a4ai.org/research/device-pricing-2022/ Smartphone referenced used: Tecno FI Android. 159 GSMA (2021). State of Mobile Internet Connectivity 2021 https://www.gsma.com/r/somic/ 180 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Regarding quality, Equatorial Guinea is currently not benefiting from fast internet connections and has the second slowest broadband quality in SSA. In 2021, the average download speed was 1.30 Mbps and it took around 8.5 hours to download a 5GB file. This is far below the average speed in West Africa of 5.08 Mbps. Equatorial Guinea ranked 220th out of 224 countries in the Worldwide Broadband Speed League ranking.160 Broadband speed could become a challenge for the development of local digital content and the implementation of digital platforms and applications, hindering internet usage. Digital skills Digital skills consist of the skills, competencies, knowledge, and attitudes needed to live, work, and thrive in the digital economy. A digitally literate population is a prerequisite for the development and growth of a country’s digital economy. The most common way to categorize digital skills is according to the broad classifications of proficiency levels: basic,161 intermediate,162 and advanced.163 Digital skills can broaden employment prospects for youth, particularly girls and women. It is expected that digital skills will increase in demand in SSA by 2030, with over 230 million jobs requiring them, resulting in a US$ 130 billion investment opportunity in digital skilling (IFC, 2019). While the services industry will take the majority of these jobs, manufacturing and agriculture increasingly require digital skills as well. Access to education has expanded in the last couple of decades, but there are still limitations to produce a digitally-skilled population. A specific ICT (Information, Communication and Technology) policy in education, the centralization of decision-making across multiple agencies, and the coordination of programs funded by partners, are essential to strengthen the digital skills framework. It is also critical that basic education properly develops foundational STEM (Science, Technology, Engineering, and Math) skills, that the system provides the infrastructure to teach digital skills (i.e., electricity, computers, internet), that teachers become qualified and receive specific training on digital skills and that ICT is included in the education curriculum. Beyond the basic education sector, the challenges persist. Higher education and TVET (Technical and Vocational Education and Training) institutions currently have limited capacity to provide the necessary programs. As a result, there is a consistent shortage of both skilled and unskilled local labor in Equatorial Guinea, with a clear mismatch between the supply and demand for digital skills. Nonetheless, as the digital economy continues to flourish, taking prompt, national-level actions become increasingly vital to alleviate the digital skills shortage. The digital skills framework in Equatorial Guinea is weak There is no specific ICT policy in education, decision-making is fragmented across multiple agencies, and programs funded by partners are isolated. The country does not have a digital skills framework and the overall skills qualification framework does not feature digital skills prominently. Most of the digital skills interventions are primarily made by civil society organizations or the private sector and are not at scale, which creates a fragmented system. To foster innovation and job creation Equatorial Guinea still relies on an outdated 1992 labor law, which establishes a number of incentives.164 However, these have not been utilized to invest specifically in digital skills, and the law does not have specific provision to incentivize digital skills. 160 Cable.co.uk (2021). Worldwide broadband speed league 2021 https://www.cable.co.uk/broadband/speed/worldwide-speed-league/ 161 Basic digital skills are the general skills required broadly for all workers, consumers, and citizens in a digital society. 162 Intermediate digital skills build upon basic skills and are effectively job-ready skills, as they encompass those skills needed to perform work-related functions. 163 Advanced digital skills form the basis of specialist ICT occupations and professions mostly at the post-secondary level and are crucial to developing innovative ICT products and services. 164 (i) A reduction in the company’s tax base equivalent to 50 percent of the salary of an employee in a newly created position; (ii) a reduction in the company’s personal income tax equivalent to 200 percent of the cost of training offered to local employees; (iii) a credit worth equivalent to 15 percent of non-traditional exports value, which can be used in the payment of any fiscal obligations; and (iv) additional incentives offered to investors operating in the country’s rural areas, as described in the government’s tax law. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 181 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy The challenges with respect to learning levels are more alarming, given the low proportion of students who show proficient levels across subjects. Even though there is no consistent data on learning outcomes, in 2011, more than 70 percent of grade 1 students were classified as having “low achievement” in non-reading test components and at the end of grade 1, few students were able to write more than five words (see Chapter 3). The results in mathematics were also low, as fewer than 10 percent of grade 1 students achieved a high achievement level. In other words, foundational skills seem to be extremely low, which constitutes a key challenge to develop digital skills in the short run and to advancing the country’s digital economy in the medium term (INEGE, 2021). Furthermore, Information and Communication Technology (ICT) has not been officially integrated into the curriculum at any level of education. This hinders students from acquiring essential digital literacy skills. While teacher training is improving, there are still low rates of qualified teachers (5 percent in preschool, 54 percent in primary school, and 69 percent in secondary school) and no mechanisms to hire or promote teachers based on performance (World Bank, 2017). In terms of digital skills, there are no specific programs at scale to guarantee that teachers acquire basic digital skills, and it is not clear if the pre-service teacher training includes any digital skills. The shortage of teachers is more acute for specialized subjects (World Bank, 2017). In addition, access to the internet in schools is extremely low and concentrated in the capital. These deficiencies pose a significant challenge in effectively leveraging technology for educational purposes. Beyond the basic education sector, challenges in higher education and TVET (Technical and Vocational Education and Training) persist. The higher education system in Equatorial Guinea is still relatively new and mainly consists of the offerings at the National University of Equatorial Guinea (Universidad Nacional de Guinea Ecuatorial in Spanish) (UNGE). The only degrees directly related with technology or STEM are “Information Science and Linguistics”, and “Engineering and Agricultural Technologies and Fishing”. In 2020, the graduates from Engineering and Technology represented 12 percent of the total (70 out of 584). Regarding TVET, as of 2019, the country had a total of 70 VET centers, 38 in the continental region and 32 in the insular region, most of them private. Many of the training centers aim to provide the skills needed for the current economy of Equatorial Guinea, but they are not typically conducive to the objective of diversifying the economy. Centers such as the National Technological Institute of Mines and Hydrocarbons of Equatorial Guinea (Instituto Tecnológico Nacional de Minas e Hidrocarburos de Guinea Ecuatorial in Spanish), offer many technical programs that are aligned with the petrol-intensive nature of the economy. However, access to digital skills training is limited and usually fragmented. Finally, there are some isolated corporate-led initiatives, like TEG Campus (see Box 17) or Girls in Technology (Chicas en Tecnologia, CET in Spanish) launched by IDENTIC,165 with the objective of addressing the under-representation of women in the technological space. The initiative aims to train at least 50 girls on digital skills each year, inspire girls to pursue careers in STEM and obtain higher-education scholarships for girls working on ICT. Consequently, the private sector in Equatorial Guinea reports serious difficulties in finding local talent and human resources with appropriate digital skills. Given the current nature of labor markets, digital skills are required across almost all sectors. The digital skills gap in the country has forced local companies to either recruit foreign workers, especially in sectors like the oil industry or the telecommunications sector, or train their personnel internally through ad-hoc programs and train the trainers frameworks. An example of the latter is illustrated by BANGE (Banco Nacional de Guinea Ecuatorial ) business school,166 hosted as part of the National Bank of Equatorial Guinea. The school was created because of the difficulties for the bank to recruit local talent and its need to train employees abroad. Even though the school is specialized in banking and financial topics, it also teaches tech-related subjects, such as cyber-security and artificial intelligence. 165 IDENTIC Foundation, a technological innovation organization whose main mission is to support and create technological projects in the country. IDENTIC has four areas of activities: an academy focused on digital skills, a startup incubator focused on digital companies, a social responsibility projects that aims to reduce digital skills gaps, and an area focused on creative and digital cultural industries. See Digital Businesses section for additional information on IDENTIC Foundation. 166 The Business School has been working for over two years, and currently, the school has an alliance with UDIMA, the Distance University of Madrid, which provides certifications for the courses. The school has plans to open an additional campus in the continental region. Interviews with key stakeholders show that the Business School is currently harnessed by several banks in the country, such as the Société Générale de Banques from Equatorial Guinea. Many public sector agencies also rely on the business school to train their public servants. 182 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy BOX 17 TEG Campus Malabo 2022 – TEG Planet Edition The TEG Campus is the first technological event in Equatorial Guinea and emerged within the framework of GITGE’s Corporate Social Responsibility activities. It is the largest youth tech event in Central Africa aiming to promote awareness, connecting entrepreneurs, innovators, and developers in order to create a professional network all around the African ICT sector. The TEG Campus is reaping its first fruits in the development of the technological innovation ecosystem that has been created since the first edition of the TEG Campus in Malabo in 2018. In 2022, the in-person 5th edition of TEG Campus, TEG Planet 2022 took place from the 16th to 21st of December in the Malabo National Park, with the slogan “Technology for a sustainable planet.” Thus, the focus of inventions and technological projects was to find solutions and mechanisms for the sustainability of the planet and reduce the impact of climate change. TEG Planet included a session on good practices for energy saving, a bootcamp, a workshop for digital drawing and a Labzone for the preparation of projects. On November 18, 2022, sixteen young Equatoguineans who were shortlisted for the Teg Campus Labzone traveled to India to participate in the UNESCO India-Africa hackathon technological event. The efforts for investing in the creation and development of a technological innovation ecosystem in Equatorial Guinea were recognized – creating technological events such as the TEG Campus, social events such as GITGE Educa, and GITGE as a pioneer in the creation of the Center for Technological Innovation (IDENTIC), the first technological foundation at the national level. The event is not limited to the development of technology through training and competitions of talented young people, but also aims to create an experience for all those who participate in the event. For this reason, during the five days of activity, workshops, panels, talks, idea contests, entrepreneurship training, video game contests and a space for entertainment were offered. The TEG Campus also has the mission of educating all audiences about ICT knowledge and the benefits of digitalization, which play a transversal role in all sectors of society. The next edition of TEG Campus was postponed to 2024. Instead, an international Hackathon was scheduled to take place in Malabo at the end of 2023. Its main objective was to promote the development of innovative and disruptive technological solutions to address a range of social problems. Source: TEG Campus 2022 https://tegcampus.com/ Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 183 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy The public sector also faces the lack of digital skills, with many civil servants not even having basic digital skills. The main body responsible for training public servants is the National Institute of Public Administration (INAP, Instituto Nacional de Adminsitración Pública in Spanish). Typically, when a new tool or need for public employees arises, including the deployment of new software, the INAP is supposed to develop the curriculum to train them and hire the appropriate professors. The INAP is also in charge of planning future needs related to training on digital issues. For instance, the body is currently working on the development of an online learning platform for public servants. However, there is no systemic plan to train government workers on digital skills, and ministries tend to ignore INAP and develop their own training programs, which creates duplications and increases the inefficiency of the system as a whole. Furthermore, many ministries and government agencies do not have internet connection or lack reliable connectivity. Digital businesses The Digital Economy opens unique opportunities for businesses in developing economies. In the long run, mobile technology is expected to have a transformative effect on economies, driving new business models and innovations not only within digital start-ups (i.e. early-stage ventures that create new and innovative solutions or business models as part of their core products or services), but also for established digital firms (i.e., platform- based and data-driven firms that have passed the initial start-up stage, having acquired suppliers, contractors, and consumers) (European Investment Bank, 2021). The digital solutions developed by startups as well as the use of digital inputs in existing firms can stimulate jobs, new industries and economic growth. The adoption of digital technologies has been shown to affect firm- and industry-level labor productivity. At the firm level, digital technologies can increase the automation of routine tasks and enhance workers’ abilities to complete non-routine tasks. At the industry level, labor productivity in ICT industries has been shown to be higher on average than in other industries in the non-agricultural business sector in almost all OECD countries. Research has further suggested that productivity benefits accruing from the adoption of digital technologies are greater in manufacturing industries—where the share of automatable tasks is greater—as more data-intensive decision-making has led, on average, to increased productivity (OECD, 2020). The digital business ecosystem is still in emergence, with few domestic digital services Initiatives to improve the business climate are being implemented, i.e., the Single Business Window, but digital entrepreneurs still face numerous barriers when launching or expanding their businesses. First, as highlighted above, expanding internet access holds one of the keys to unlocking growth opportunities for businesses, especially those in the digital domain. Otherwise, it will limit their outreach, service potential and automation capabilities, hindering their establishment and expansion. Second, access to finance remains a significant challenge for digital businesses and entrepreneurs. The stringent requirements set by financial institutions make it difficult for businesses to secure the necessary funds. Third, as described above, the shortage of qualified individuals with digital skills is notable. This is true both locally, because of the weaknesses of foundational digital skills in the national workforce, and internationally, because of the constraints to access the international pool of qualified staff. Finally, a weak regulatory framework hampers the development of the digital private sector in Equatorial Guinea. Developing regulations covering areas such as e-commerce, competence requirements, cybersecurity, and access to finance for digital businesses is paramount. The digital business ecosystem in Equatorial Guinea is still in its early stages of development. The growth of digital businesses is constrained, and many struggle to initiate operations and expand the existing ones. Most digital businesses begin their operations but tend to have a short lifespan. Two notable digital startups, 184 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Situcka and Rellanos Express, have emerged with a hybrid business model that allows them to leverage the advantages provided by digital platforms and e-commerce-driven product delivery, aligning with the changing demands of customers. However, they encounter various obstacles in establishing and expanding their business model, as they struggle with a complex business environment, lack of finance, technical difficulties such as developing mobile applications to enhance their online presence, establishing a secure digital payment system, and efficiency managing the logistical distribution of their products. In 2018, only 28 percent of companies in Equatorial Guinea had their own website, a rate lower than Africa as a whole (33 percent) and even lower than the average for Central Africa (31 percent) (AUC/OECD, 2021). The low adoption of new technology by local businesses explains, in part, the limited development of e‑commerce and online service platforms in the country. Equatorial Guinea ranks 168th out of 175 countries in digital security (AUC/OECD, 2021). Inadequate digital security can deter both domestic and foreign investment, particularly in sectors that are heavily reliant on digital technologies. Digital businesses in Equatorial Guinea rely on a diverse range of stakeholders present in the ecosystem, both from the public and private sectors (Figure 64). In the public sector, entities such as the Ministry of Finance, Planning, and Economic Development, Ministry of Commerce, National Agency for Development, and the Institute for the Promotion of Small and Medium Enterprises contribute to creating an enabling environment for business. In the private sector, there are three main groups of actors: (i) business associations such as EMEG and AIMUGE represent and advocate for the interests of entrepreneurs in the digital space, providing support and creating a space for networking and knowledge sharing; (ii) tech hubs, incubators and accelerators such as DREAMS Hub, IDENTIC, and BANGE Impulsa offer collaborative workspaces and support services, including mentorship, events and resources needed to scale their businesses and; (iii) educational institutions including Bange Business School and UNGE that offer educational programs and training initiatives. FIGURE 64 Actors of Equatorial Guinea Digital Businesses ecosystem • African Union • CEMAC • OHADA INTERNATIONAL REGULATORS • Ministry of Finance, Planning, and Economic • Dreams Hub Development HUBS AND PUBLIC • Ministry of Commerce • IDENTIC INCUBATORS BODIES • BANGE Impulsa • National Agency for Development • INPYDE • BANGE Business School DIGITAL • EMEG • IDENTIC ASSOCIATIONS SCHOOLS • AIMUGE • Dreams Hub • UNGE Source: World Bank staff elaboration Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 185 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy A nascent ecosystem of incubators, accelerators and civil associations is supporting the creation of digital businesses. Dreams Hub Research and Innovation Center and IDENTIC are two prominent players in this ecosystem, both part of the AfriLabs Network,167 the largest network of technology and innovation centers in Africa, boasting a strong presence in 52 countries across the continent.168 The IDENTIC Foundation provides support to entrepreneurs since 2018. Its support includes (i) capacity building (digital competencies, professional training for employment and entrepreneurship, an ICT program for women); (ii) digital inclusion (social projects aimed at reducing the digital divide); (iii) communications (promoting digital creative and cultural audiovisual content); (iv) digital entrepreneurship (incubation and acceleration programs). IDENTIC also aims to establish an investment fund or startup financing in collaboration with financial institutions and set up entrepreneurship laboratories. DREAMS Hub helps the development of digital entrepreneurship in Equatorial Guinea. Its main activities encompass: (i) Dreams Hub Talk (knowledge sharing among entrepreneurs); (ii) Huevos de Cristal (training for children between 7 to 13 in new technologies); (iii) Autoclax (online courses on business skills, technology, marketing and finance); and (iv) La Capsula (incubator for small businesses and young entrepreneurs and connections to networks of experienced investors and entrepreneurs). There are also professional associations that support the strengthening of the business environment for digital businesses. Among them, EMEG (Entrepreneurs Association of Equatorial Guinea),169 whose main activities include monitoring the implementation of new projects, providing training for entrepreneurs, and organizing events to encourage collaboration. Noteworthy initiatives include courses for the digitalization of SME management. However, its membership base remains small with only 17 companies listed as members. The business climate and access to finance are significant challenges for digital entrepreneurs in Equatorial Guinea.170 Domestic credit to private sector remains low at 10.5 percent of GDP in Equatorial Guinea as a result of weak credit infrastructure and a poor enforcement environment (see Chapter 4). Informality, small scale, and lack of sophistication and collateral exacerbate the challenges of SME access to finance. Venture capital and private equity are nascent in the CEMAC region and non-existent in Equatorial Guinea. Only 17 such companies have been identified throughout the region and none has a presence in Equatorial Guinea. The low penetration of Private Equity/Venture Capital is due to the weak business environment and lack of a dedicated legal framework. The limited availability of data makes it difficult for country authorities to design tailored strategies and policies to support the development of digital businesses. 167 Afrilabs is a pan-African network of technology and innovation hubs founded in 2011. It consists of over 250 member hubs spread across more than 45 African countries. The network’s main goal is to foster collaboration, knowledge sharing, and capacity building among its member hubs to drive innovation and entrepreneurship in Africa. Afrilabs serves as a platform for hubs to connect, exchange best practices, and collaborate on initiatives that support the growth of the tech ecosystem. The network also advocates for policies and programs that enhance an enabling environment for technology and innovation. It supports startups by providing resources, mentorship, and funding opportunities. Additionally, it organizes events and programs to facilitate networking, skills development, and ecosystem building within the African tech community. 168 “De las Incubadoras y Aceleradoras tecnológicas, a los ecosistemas de innovación corporativos en Guinea Ecuatorial”, Ahora EG (May 5th, 2020). https:// ahoraeg.com/tecnologia/2020/05/05/de-las-incubadoras-y-aceleradoras-tecnologicas-a-los-ecosistemas-de-innovacion-corporativos-en-guinea- ecuatorial/ 169 EMEG is an association promoting and supporting entrepreneurs in Equatorial Guinea. Link 170 Chapter 4 discusses the business environment and challenges facing the private sector. 186 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy 5.1.3 Policy recommendations This section provides a menu of actionable policy recommendations to help the Government of Equatorial Guinea strengthen the telecom sector competitiveness, increase technology adoption and participation in the digital economy for firms, boost digital skills and promote the emergence of new digital businesses. Tables 13, 14, 15 includes detailed policy recommendations to improve digital infrastructure, skills, and businesses, respectively. TABLE 13 Policy recommendations: Digital infrastructure Development Type of Recommendation Timeframe Outcome Intervention First mile: international connectivity • Increase Redundancy on international bandwidth by joining an additional major international Resilience Investment MEDIUM TERM submarine cable. • Reduce prices on international capacity services by declaring the international capacity wholesale Growth Policy reform QUICK WIN market a relevant market and regulating it in a cost- oriented way following a proper market study. Middle mile: national backbone • Strengthen the National backbone fiber wholesale market identifying the national backbone fiber wholesale market as a relevant Growth Policy reform QUICK WIN market and applying cost-oriented obligation to the significant market players. • Reduce microwave spectrum fees by aligning Growth Policy reform MEDIUM TERM them with international/regional benchmarks. Last mile: access networks • Increase coverage in rural areas putting in place incentives for mobile operators to invest in areas that are not economically viable, using Growth Policy reform MEDIUM TERM the Universal Service Fund (USF), government subsidies or infrastructure sharing obligations. • Address the usage gap: Mitigate the usage gap (population already covered by a 3G/4G) but not using internet) by improving digital Growth Policy reform MEDIUM TERM literacy, reducing taxes on digital services and on smartphone acquisition costs. Invisible mile: sector policies and regulations • Review the telecom law to create a separate and financially independent regulatory authority Productivity Policy reform MEDIUM TERM with all necessary power to regulate the market efficiently. • Perform a cybersecurity maturity assessment to determine the current state of cybersecurity and Productivity Policy reform QUICK WIN areas that need to be strengthened and developed. • Strengthen the legal and regulatory framework for cybersecurity by preparing and adopting Productivity Policy reform MEDIUM TERM necessary bills and applicative decree. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 187 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy TABLE 14 Policy recommendations: Digital skills Development Type of Recommendation Timeframe Outcome Intervention Policy environment • Develop a national education ICT policy, a clear Growth, vision, and EdTech strategies that recognize Equity, the fundamental role of digital skills in modern Policy Reform QUICK WIN Inclusion, and society, with a focus on developing the capacity of Productivity educators and administrators. • Conduct a digital skills gaps assessment to Equity, inform the design and approval of a digital skills Inclusion, and Policy Reform QUICK WIN framework, and ensure that digital skills are part of Productivity the overall qualifications’ framework. Strengthen capacity • Collect and utilize data on digital skills in order Growth, to measure digital skills across the education Equity, Capacity MEDIUM TERM system and create a culture of data collection and Inclusion, and utilization. Productivity Education sector • Ensure that teachers and students have access to teaching and learning devices and platforms. Equity, Devices are a window into a world of knowledge Investment LONG TERM Inclusion and information, but the provision of devices without a broader plan has shown to be ineffective. • Prioritize foundational skills. Focusing on basic Growth, literacy, numeracy, and transferable skills is Equity, Investments MEDIUM TERM essential, but also invest in socioemotional skills,171 Inclusion, and given their growing demand by the private sector. Productivity Expand access to digital skills Growth, • Scale up the availability of digital skills courses Equity, for public sector employees in order to expand Investment MEDIUM TERM Inclusion, and digital government services. Productivity Infrastructure Growth, • Deploy a connectivity plan which includes schools Equity, Investment LONG TERM both in urban centers and in rural or remote areas. Inclusion, and Productivity 171 Sometimes referred to in the literature as noncognitive skills or soft skills, relate to traits covering multiple dimensions (such as social, emotional, personal, behavioral, and attitudinal). These skills involve self-awareness, self-regulation, empathy, and social skills. Socioemotional skills are essential for personal and social development, as they influence how individuals interact with others and navigate the world around them. 188 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy TABLE 15 Policy recommendations: Digital businesses Development Type of Recommendation Timeframe Outcome Intervention General policy environment and coordination • Articulate a roadmap to support digital Investment entrepreneurship and productive use of digital Growth and policy QUICK WIN technologies. reform • Promote public-private dialogue in the area of Growth Capacity QUICK WIN digital businesses. Enabling digital regulatory environment • Develop regulatory and policy reforms that consider the intrinsic nature of digital Growth Policy reform MEDIUM TERM entrepreneurship. • Focus on developing essential digital market regulations and effective institutions to create Inclusion and Policy reform LONG TERM digital trust and boost digital technology Productivity adoption and innovation. Digital technology adoption and demand for digital business services • Promote digital technology adoption as part of the diversification and economic transformation agenda: Digitalization of primary sectors – Growth Policy reform MEDIUM TERM agriculture, fishing, and forestry – can lead to transformative change and create demand for digital solutions by domestic entrepreneurs. • Consider public procurement as a source of demand for digital services, supporting the Growth Policy reform LONG TERM development of a local digital ecosystem. Vibrant, cohesive and inclusive digital ecosystem • Promote the development of an inclusive digital entrepreneurship ecosystem. The system of entrepreneurship support organizations, Productivity incubators, and accelerators could be enhanced Policy reform QUICK WIN and Inclusion through greater coordination, transparency, and monitoring, and should consider the specific needs and challenges of female entrepreneurs. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 189 © Jan Ziegler/istockphoto.com 190 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy 5.2 Promoting trade integration and facilitation172 5.2.1 Why trade matters for economic growth and diversification Trade is an engine of growth that creates jobs, reduces poverty and increases economic opportunities. Trade openness is positively correlated with income per capita (Figure 65). Recent empirical research suggests that trade liberalization can result in a growth increase of 1.0 to 1.5 percentage points, potentially leading to income levels that are 10 to 20 percent higher after a decade (Irwin, 2019). Trade enables the transfer of technology, bolstering productivity, spurring innovation, and enhancing competitiveness across various sectors, including those beyond oil. It helps countries to reduce their reliance on volatile commodities, encouraging diversification into sectors like manufacturing or services. Trade also lowers inequality in emerging and developing economies (Bacchetta et al., 2021). Furthermore, trade liberalization has been linked to higher employment rates over the long term and is associated with increased female participation in the workforce, especially in developing countries, emphasizing its role in inclusive growth (World Bank, 2020). The adoption of sound trade policies and enabling factors, such as reducing trade costs and increasing regional connectivity, is crucial for countries like Equatorial Guinea to expand their small market sizes. Openness to trade creates opportunities for businesses to scale up production, attract investment, expand their customers base. FIGURE 65 Trade openness is associated with higher income per capita Trade to GDP ratio (in percent) and income per capita, average 2019-2022 6 Log of GDP per capita, constant 2015 US$ 5 4 Equatorial Guinea 3 2 0 20 40 60 80 100 120 140 160 180 200 Trade to GDP ratio Source: WDI, World Bank 172 This trade analysis relies and expands on the 2019 Equatorial Guinea Diagnostic Trade Integration Study (DTIS). Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 191 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy 5.2.2 Trade dynamics and outcomes Equatorial Guinea’s trade performance in recent decades has been linked to the developments in the hydrocarbon sector Equatorial Guinea relies heavily on both its import and export activities, with trade accounting for a significant portion of its GDP. However, the role of trade in the country’s economy has decreased Despite a significant in recent years on the back of the plummeting oil prices which have decrease in Equatorial significantly impacted the country’s export values. Trade to GDP ratio Guinea's trade-to-GDP decreased significantly from about 128 percent in the 2005-2007 to around 83 percent during 2020-2022 (Figure 66). Despite this ratio, trade continues decline, trade continues to play a crucial role in Equatorial Guinea’s to play a crucial role in relatively small economy, with its trade-to-GDP ratio still higher than the country's relatively in SSA and UMIC, on average. In comparison to the other CEMAC small economy. countries, Equatorial Guinea maintains a relatively open economy by this definition. FIGURE 66 Despite recording a decrease since the 2000s, Equatorial Guinea’s trade to GDP remains above that of most of CEMAC countries Trade to GDP ratio (in percent), 2005-2022 160 140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Equatorial Guinea Cameroon Chad Congo, Rep. Gabon CAR Source: WDI, World Bank Over nearly the past fifteen years, Equatorial Guinea has consistently experienced a trade surplus, albeit it was declining. Beginning in 2005, the nation has annually reported a positive trade balance, driven by its oil and gas exports (Figure 67). Since 2012, there has been a gradual decrease in the trade surplus, until 2022 when oil prices rebounded. This decline is attributed to a reduction in both the volume and price of oil and gas exports. Compared to the commodity boom period, exports have decreased and to a lesser extent imports as well, which translated into a decline in trade surplus. Overall, the trade surplus of Equatorial Guinea decreased significantly from nearly US$14 billion in 2008 to about US$2 billion in 2020 when COVID hit before increasing again to US$7.9 billion in 2022 supported by higher hydrocarbon prices. 192 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy © Jan Ziegler/istockphoto.com FIGURE 67 Equatorial Guinea trade dynamics, especially those of exports, are linked to oil production and prices a. Equatorial Guinea’s total imports and exports and trade b. Oil production in Equatorial Guinea and crude oil price, balance (US$ million), in Equatorial Guinea, 2005-2022 2010-2022 18,000 120 16,000 100 14,000 12,000 80 10,000 60 8,000 6,000 40 4,000 20 2,000 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total imports Total exports Trade balance Crude oil price, US dollar Oil production, millions of barrels Source: WITS (mirror data), World Bank, World Bank Pink Sheet, Equatoguinean authorities and World Bank staff computations Over the past two decades, Equatorial Guinea’s export basket has been predominantly concentrated on hydrocarbons, notably crude oil and since the mid-2000s, also gas. Exports began to rebound in the 2010s, achieving pre-crisis levels by 2012 and 2013, with a total value exceeding US$14 billion (Figure 68a). However, a sharp decline in oil prices towards the end of the commodity boom period significantly impacted the country’s exports. In 2015, the export value was roughly half of what it was in 2013, mirroring the drop in oil prices. Post- 2020 pandemic, there has been a gradual recovery in exports.173 Crude oil constituted about 70 percent of the value of all merchandise exports in recent years, although this percentage decreased to less than 50 percent in 2022. Liquified gas is the second major export, comprising 32 percent of the total exports in 2022 (Figure 68b). The export of other commodities has decreased from 58 percent of total exports in 1996 to about 6 percent in 2005, and then increased to about 11 percent in 2019. Their share doubled to over 20 percent in 2022. 173 Since trade statistics are derived from mirror data, 2022 data are less complete because there are fewer countries reporting data. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 193 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy FIGURE 68 Over the past two decades, the share of hydrocarbons in Equatorial Guinea’s goods exports has decreased a. Goods exports by type of product (US$ million), Equatorial b. Goods exports by type of product (percent of total exports), Guinea, 2005-2022 Equatorial Guinea, 2005-2022 18,000 100% 16,000 90% 14,000 80% 70% 12,000 60% 10,000 50% 8,000 40% 6,000 30% 4,000 20% 2,000 10% 0 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Crude oil Nat.gas Other goods, excl. oil and gas Crude oil Nat.gas Other goods, excl. oil and gas c. Equatorial Guinea’s goods exports by category excluding oil and gas, 2019-2021 3% Rest 0% Cocoa beans 1% Sawn wood 1% Gold 1% Veneer sheets 3% Aluminium ores and concentrates 76% Methanol (methyl alcohol) 14% Wood in the rough Source: UN Comtrade, WITS (mirror data), World Bank and World Bank staff calculations Equatorial Guinea’s main items in its “other exports” category are primarily methanol—sourced from offshore gas fields—and rough wood. In the late 1990s and early 2000s, various types of rough wood were Equatorial Guinea’s primary non-oil export products, representing about half of all non-oil exports. Starting in the early 2000s, Equatorial Guinea saw a significant increase in methanol production (Figure A5.1 in Annex 5). In recent years, methanol has overtaken rough wood as the leading non-hydrocarbon export (Figure 68c). The only additional exports are ferrous waste and scrap, cocoa beans, plywood, and a few re-exports, including machinery not produced domestically but used in the oil industry. These have typically constituted less than 1 percent of the total export value. While cocoa beans were once a major export product, they now make up only a small portion of the total exports, totaling about US$1.27 million over the 2019-2021 period. 194 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy The export of minerals remains the only area where Equatorial Guinea has maintained a clear comparative advantage. The country’s focus on oil and gas production and exportation has overshadowed its competitiveness in other areas. As a small-island economy with abundant hydrocarbon resources, it has a substantial revealed comparative advantage (RCA) in mineral exports, which constituted nearly 90 percent of its total goods exports in 2021 (Figure 69). Besides minerals, Equatorial Guinea also exports chemicals and related industry products, making up about 5.8 percent of its exports between 2019-2021, predominantly due to methanol exports. Additionally, the export of wood products, where the country holds a comparative advantage, represented approximately 2.74 percent of its total exports during the same period. All other sectors of the economy are negligible in terms of their exports or RCA index. The country’s export profile, heavily weighted towards extractive, chemical, and wood products, makes it susceptible to the high volatility associated with fluctuations in commodity prices and global crises. FIGURE 69 Equatorial Guinea has a comparative advantage in exports of minerals and wood and wood articles a. Largest exports (in percent of exports excluding oil and gas), b. Indices of Revealed Comparative Advantage in Equatorial Equatorial Guinea, 2005-2021 Guinea, 2012-2014 and 2019-2021 80 6 5 60 4 RCA Index 40 3 2 20 1 0 0 Minerals Chemicals Wood and wood 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (HS2=25-27) (HS2=28-38) articles (HS2=44-49) Methanol Rough wood 2012-2014 2019-2021 Source: WB staff computations. Data: WITS, World Bank. Note: mirror data. The country’s exports have traditionally been destined to large markets such as China, the European Union (EU) and UK, or the United States, but other destinations such as India and South Korea are becoming more prominent. Neighboring countries do not constitute primary export destinations. Cameroon was the only country in CEMAC and Africa to rank among the top ten export destinations from 2005 to 2021. The proportion of exports heading to Cameroon has markedly declined over time, from 19 percent in 1996 to less than 1 percent in 2004, eventually dropping to virtually zero between 2005 and 2020. In 2019, approximately 60 percent of the country’s export products were sold in the EU, UK, USA, and China, but the USA has become less important. The diversification of Equatorial Guinea’s export markets has largely been influenced by its oil and gas exports. For non-oil and gas exports, the primary destinations continue to be China, the EU, and the USA. Although a notable portion of the country’s exports was directed to neighboring countries between 2009 and 2011, and again in 2013, these were primarily re-exports of ships and vessels to the Republic of the Congo. The role of China as a destination for non-oil and gas exports has been slowly declining after 2017. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 195 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy FIGURE 70 The European Union and the UK, China, and India constituted Equatorial Guinea’s top 3 export destinations in 2021 a. Equatorial Guinea’s goods exports by markets, 2005-2021 b. Equatorial Guinea’s non-oil and gas goods exports by markets, 2005-2021 100% 100% 90% 90% 80% 80% USA USA Sub- 70% 70% Korea, Rep. Saharan 60% RoW 60% Africa Japan Korea, Rep. 50% 50% India RoW 40% 40% EU+UK Japan 30% China 30% India Cameroon EU+UK 20% 20% China 10% 10% 0% 0% 2005 2007 2009 2011 2013 2015 2017 2019 2021 2005 2007 2009 2011 2013 2015 2017 2019 2021 Source: WITS, World Bank and World Bank staff calculations Note: Mirror data. RoW = Rest of the world. In the past decade, Equatorial Guinea has experienced a more rapid expansion in the export of petroleum gas, methanol, and rough wood compared to other global exporters. This growth has enabled the country to increase its global market shares in these commodities (Figure 71). Although oil remains the largest export category for Equatorial Guinea, its growth rate has been on par with the overall growth rate of global oil exports. In contrast, the export of veneer sheets from Equatorial Guinea and its share in the global market has fallen. FIGURE 71 Growth rates for top exports, Equatorial Guinea and worldwide exporters, 2011-2021 Equatorial Guinea: Growth orientation of products Top 10 products Equatorial Guinea: CAGR of exports 2011-2021 (%) 10 Methanol Palm oil 5 Semi-milled rice Chicken cuts, frozen 0 Rough wood -5 Beer made from malt Veneer sheets -10 -15 Iron or steel -20 Rods of iron/steel -25 -6 -4 -2 0 2 4 6 World: CAGR of exports 2011-2021 (%) Source: WITS, World Bank and World Bank staff calculations Note: Mirror data. Exports exclude vessels (HS2=84,85,89) and pipes for oil industry (HS2=73). CAGR = Compound annual growth rate. 196 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Overall, Equatorial Guinea’s export portfolio features a low level of diversification. Among its CEMAC counterparts, Equatorial Guinea had the most concentrated export profile after Chad. Its product concentration has slightly improved in 2019-2021, compared to 2009-11 (Figure 72a). Export diversification across products reduces the risk of a country’s export portfolio to partner-specific shocks and volatility in export prices. There was a slight decrease in export product concentration during 2019-21. Post-2005, the goods export concentration index for Equatorial Guinea significantly decreased, primarily due to the monetization of gas from its oil fields. However, Equatorial Guinea has continued to rely heavily on hydrocarbon exports. Between 2019 and 2021, Equatorial Guinea’s Herfindahl-Hirschman Index (HHI) concentration index remained high at around 0.51, indicating that its exports are still concentrated compared to some regional peers. This pattern of dependency on a few export products is also observed in other CEMAC countries, although less pronounced in Cameroon and the Central African Republic. FIGURE 72 Product concentration, goods exports, Equatorial Guinea and peers, 2009-2011 vs. 2019-2021 a. HHI of product concentration, goods exports, Equatorial b. HHI of market concentration, goods exports, Equatorial Guinea and peers, 2009-2011 vs. 2019-2021 Guinea and peers, 2009-2011 vs. 2019-2021 0.60 Central African 0.54 Chad 0.79 Republic 0.49 Equatorial 0.51 0.51 Congo Guinea 0.55 0.56 Congo 0.45 Cameroon 0.50 0.72 0.50 Gabon 0.44 Gabon 0.49 0.54 0.50 Central African 0.27 0.48 Chad Republic 0.19 0.53 0.20 Equatorial 0.47 Cameroon 0.20 Guinea 0.55 0 0.20 0.40 0.60 0.80 1.00 0.40 0.45 0.50 0.55 0.60 avg. 2009-2011 avg. 2019-2021 avg. 2009-2011 avg. 2019-2021 Source: WITS, World Bank Note: The HHI (Herfindahl-Hirschman Index) is computed as the sum of squared shares of each product in total export. A country with a perfectly diversified export portfolio in terms of products will have an index close to zero, whereas a country with only one export product will have a value of 1. Regarding export sophistication, Equatorial Guinea has not been a significant exporter of technology products. However, there has been an uptick in medium-technology exports since the early 2000s (see Figure A5.2 in Annex 5). This shift is attributed to Equatorial Guinea’s move towards capitalizing on gas by-products through methanol production. At the same time, the export shares of resource-based products, such as rough wood, increased up until 2017, when they started to decline. In contrast, the export share of primary products, excluding hydrocarbons, has been on a steady decline since their peak in the late 1990s, due primarily to a slowdown in the export of cocoa beans. The brief appearance of high-tech exports in 2012 and 2014 is probably indicative of the re-export of machinery, not produced domestically, but used in the oil sector. Equatorial Guinea’s exports exhibit more diversity in terms of destination markets compared to product variety. The market concentration of its exports decreased during this period, primarily attributed to the export of hydrocarbons. Equatorial Guinea’s export portfolio is one of the most diversified within the CEMAC region. This suggests that the country does not overly depend on specific markets (Figure 72b). Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 197 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Equatorial Guinea’s imports are more diversified than its exports, mirroring the country’s requirement to meet domestic demands for a diverse array of products from overseas. While a portion of these imports includes machinery and equipment for oil-related activities, the country imports significant amounts of agricultural and food products. Between 2019-21, these accounted for 24 percent of total imports (Figure A5.3 in Annex 5). Most of these agricultural imports originate from outside the CEMAC region, consisting predominantly of alcoholic and non-alcoholic beverages and frozen meats. Imports of food and beverages from CEMAC countries constituted only around 3 percent of total imports between 2019-2021. However, the noticeable presence of horticultural products from Cameroon in local markets indicates that a considerable amount of this trade might be unrecorded, and its extent remains uncertain. 5.2.3 Enhancing trade policy and integration Trade policy and integration are critical for Equatorial Guinea’s non-hydrocarbon exports Despite its significant benefits, Equatorial Guinea is currently not member of the World Trade Organization. However, the government has made progress towards accessing the World Trade Organization (WTO) and there is a roadmap for the country’s accession to WTO. The Memorandum on Foreign Trade Regime (MFTR) was completed and submitted to the WTO Secretariat in December 2022. Currently, the government is at the stage of questions and answers in order to update the MFTR.174 Accelerating the process of the WTO accession is important given its potential benefits. For example, WTO membership helps reduce trade barriers, increases predictability and transparency of international trade, provides most favored nation treatment, meaning equal access for all companies of all WTO Members to the markets of all Members of the Organization, and increases competitiveness by removing unfair practices between trading partners aimed at stimulating trade. WTO accession can also increase the trade to GDP ratio, developing countries’ income and growth rate, improve the business environment and stimulate inward FDI (Chemutai and Escaith, 2017; Li and Wu, 2004; and Tang and Wei, 2009). Equatorial Guinea has, however, been involved in regional integration in Central Africa since the 1980s, and is a member of a number of regional economic communities including the CEMAC. To boost these efforts, the Economic and Monetary Community of Central Africa (CEMAC) was created in 1994 and became operational in 1999. CEMAC, with its array of institutions and a shared monetary and foreign exchange policy managed by the Bank of Central African States (BEAC), aims to strengthen economic cohesion among its members. The country is member of the Economic Community of Central African States (ECCAS) which includes all CEMAC members plus Angola, Burundi, the Democratic Republic of the Congo, Rwanda, and São Tomé and Principe. Trade integration within CEMAC, bolstered by its customs union, is more developed compared to ECCAS. In contrast to ECCAS, CEMAC is a smaller and more economically integrated group with strong regional institutions, offers a level of internal coherence and legitimacy. Like the other CEMAC countries, Equatorial Guinea has signed and ratified the agreement establishing the African Continental Free Trade Area (AfCFTA) in July 2019. While a national committee has not been appointed yet for the implementation of AfCFTA agreement, a working group composed of multi-sectoral focal points has been established at the Equatoguinean Ministry of Commerce with the objective of following up on the activities within the framework of the agreement implementation. AfCFTA has a larger scope than the CEMAC and aims at promoting intra-African trade. The regional agreement is expected to reduce tariffs 174 A Chief and a deputy Chief Negotiators have also been appointed. 198 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy among member countries and cover trade facilitation and services, as well as regulatory measures and technical barriers to trade (World Bank, 2023). Research shows that the AfCFTA could double intra-regional trade, and generate real income gains from tariffs liberalization but even more so from a significant reduction in non-trade barriers and trade facilitation measures (Maliszewska et al., 2020). If fully implemented, the AfCFTA could increase incomes by 9 percent by 2035 and lift 50 million people out of extreme poverty (Echandi, et al., 2022). The implementation of a free-trade area within the CEMAC region has been difficult. The CEMAC agreement to create the CEMAC customs union mandates the removal of all import duties on intra-CEMAC trade and calls for the elimination of all non-tariff measures (NTMs) within the union. It also outlines a process for harmonizing technical measures, mutual recognition of procedures, and streamlining approval and certification processes (World Bank, 2019). In practice, however, numerous tariff and non-tariff barriers persist and the harmonization of cross-border customs rules and policies has been limited, resulting in limited intra-CEMAC trade. Intra-regional trade in CEMAC is low at only 5.1 percent of total trade in 2019-2021. On average between 2019-2021, less than 1 percent of Equatorial Guinea’s exports were destined to the region, and around 5 percent of its imports were sourced from CEMAC partners (Figure 73). However, the official statistics do not account for informal trade. For instance, there exists unrecorded trade between Equatorial Guinea and other CEMAC countries, including horticultural imports from Cameroon (World Bank, 2019). FIGURE 73 Equatorial Guinea’s exports, imports, and share of regional trade a. Equatorial Guinea’s exports and imports (%), 2019-2021 b. Share of intra-regional trade by regional bloc (%), 2019-2021 80 20 70 60 15 50 40 10 30 20 5 10 0 0 CEMAC EU+UK Rest of world CEMAC COMESA WAEMU MERCOSUR EastAfrica ECOWAS SADC ASEAN Exports Imports Source: WITS, World Bank and World Bank staff calculations Note: mirror data. Common Market for Eastern and Southern Africa (COMESA); West African Economic and Monetary Union (WAEMU); Southern Common Market (MERCOSUR); Economic Community of West African States (ECOWAS); Southern African Development Community (SADC); and Association of Southeast Asian Nations (ASEAN). Equatorial Guinea applies the CEMAC common external tariff (CET) on imports from third countries outside the CEMAC region, which on average is high. In addition to a zero-rate preferential tariff for intra-CEMAC trade, CEMAC’s common trade policy include, since 2000, a common external tariff (CET) to imports from third countries. It consists of 6,064 10-digit tariff lines and is ad valorem for all lines. The CET is categorized into five distinct duty rate brackets (Figure 74), including (i) a zero percent tariff on certain cultural and aviation products, representing only 0.7 percent of all tariff lines, (ii) a 5 percent tariff on essential goods, accounting for about 4.9 percent of tariff lines, (iii) a 10 percent tariff on raw materials and capital goods, representing 45.5 percent of all tariff lines, (iv) a 20 percent tariff on miscellaneous goods, applicable to 11.9 percent of tariff lines, and (v) a notably high 30 percent tariff on consumer goods, accounting for 37.1 percent of all tariff lines. This tariff Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 199 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy structure particularly impacts certain sectors, including apparel and some agricultural products such as coffee and tea, beverages and tobacco. On the other hand, the extractive industries (where 90 percent of the tariff lines are subject to the 10 percent rate) are among the sectors that are the least protected. Overall, CEMAC’s simple average tariff rate is 18.3 percent in 2023 (up from 18.1 percent in 2013), higher than that of the Economic Community of West African States (ECOWAS) tariff schedule of 12.4 percent. While both ECOWAS and CEMAC have CET with similar levels of tariff bands, the highest tariff rate (35 percent) in ECOWAS is applicable to only 196 tariff lines while in CEMAC the highest tariff rate (30 percent) is applied to 1,968 tariff lines. FIGURE 74 The CEMAC’s average tariff rate at 18.3 percent is high with 37.1 percent of the tariff lines subject to the 30 percent rate and 45.5 percent subject to the 10 percent rate MFN duties by sector, Percentage, CEMAC, 2023 100 90.0 80 65.9 60 45.5 47.6 40 37.1 34.9 20 14.6 11.9 10.0 9.4 12.3 4.9 3.0 5.0 4.4 0.7 0 0 2.0 0.8 0 Total Agriculture Mining and quarrying Manufacturing (6,064 tariff lines) (519 tariff lines) (100 tariff lines) (5,444 tariff lines) 0% 5% 10% 20% 30% Source: WTO 2023. TRADE POLICY REVIEW WT/TPR/S/445 Note: International Standard Industrial Classification of All Economic Activities (Rev.2), electricity, gas and water excluded. Numerous non-tariff measures (NTMs) and procedural hurdles hinder intra-regional trade. NTMs include quantity and price controls such as quotas, import licenses, and para-tariffs as well as standards and regulations (e.g., sanitary measures and technical barriers). While core NTMs are more common in developing countries, technical standards are more prevalent in developed markets and in agricultural trade. In Equatorial Guinea, licenses and para-tariffs are reported as the main NTMs. All exports and imports require prior authorization or licenses from the Equatoguinean Ministry of Commerce, and sometimes additional ministries, such as the Ministry of Health for medicines. Para-tariffs further increase import costs, with licenses carrying a 10 percent ad valorem fee of the trade value (World Bank, 2019). Other charges include duties supporting regional blocs like CEMAC and ECCAS, and a general VAT of 15 percent on imported goods. All traders must register with the Ministry of Trade. The cumbersome process of obtaining prior authorization or licenses is a major concern for companies, suggesting a need for the government to streamline or eliminate these requirements for most goods, barring those needing stringent checks (like hazardous materials). Equatorial Guinea’s import and export regulations lack transparency, and access to official trade data is limited. This lack of clarity and the prevalence of informal payments (charges for unofficial services) pose significant challenges, especially for small traders and those dealing in non-traditional products, which are crucial for diversifying Equatorial Guinea’s exports. External data on NTMs is scarce, though UNCTAD’s Trade Analysis Information System offers some insight into regulatory measures affecting trade for a number of countries. 200 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Intra-CEMAC trade is also hampered by supply-side challenges, including a lack of trade complementarity and underdeveloped infrastructure. Infrastructure gaps persist across the region, as most CEMAC countries face severe challenges to develop regional road transport and improve the performance of customs processes, ports, and trade regulations. Trade complementarity index – which indicates the extent to which the export profile of one country matches the import needs of another – is low between CEMAC countries (Figure 75). In contrast, the level of complementarity in trade with some of CEMAC trading partners such as top European Union partners (France, Belgium, Italy, and Spain), China, and the US is high, nearly double of that found within CEMAC member states. This reflects, for CEMAC, the limited reach of regional and global value chains. FIGURE 75 The trade complementarity between CEMAC countries is limited Trade Complementarity Index, CEMAC Countries, 2019 (scale: 0-100 with 100 meaning perfect alignment in trade interests) 40 35 30 25 20 15 10 5 0 CEMAC Top EU China USA Source: World Bank calculations based on WITS data Note: Top EU partners include France, Belgium, Italy, and Spain. CEMAC includes CAR, Cameroon, and Congo. 5.2.4 Improving trade facilitation and connectivity Trade facilitation and connectivity are essential to help connect the Equatoguinean economy to regional and global markets For a small economy like Equatorial Guinea, trade facilitation and connectivity are critical in expanding trade, including regionally. Transport infrastructure and logistics services play a key role in the facilitation of trade While Equatorial and their inefficiencies constitute a major obstacle to connecting the domestic Guinea’s physical economy to regional and international markets. High trade and production infrastructure costs, partly due to inadequate transport and logistics infrastructures, (especially road impede competitiveness and development. While Equatorial Guinea’s physical network) is of infrastructure (especially road network) is of good quality, the soft infrastructure (i.e., logistics) needs to be improved. good quality, the soft infrastructure While Equatorial Guinea’s logistics performance has improved slightly (i.e., logistics) between 2016 and 2018, it is weaker than in peer countries on average. The needs to be World Bank’s Logistics Performance Index (LPI) evaluates countries across improved. six key areas: three related to policy and regulations (customs, infrastructure, and logistics services) and three associated with supply chain performance Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 201 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy (timeliness, ease of arranging international shipments, and tracking and tracing capabilities). The LPI score of Equatorial Guinea improved from 1.88 in 2016 to 2.32 in 2018, though slightly lower than the 2014 score of 2.35. While the quality of international shipments improved between 2014 and 2018, the country’s overall logistics performance index slightly deteriorated mainly because of the lower scores in the efficiency of customs clearance, quality of trade and related infrastructure, and the ability to track and trace consignments. Despite significant public investment in infrastructure, Equatorial Guinea ranked 136th out of 163 countries in 2018 and its logistics performance lags behind regional and income peers (Figure 76). The country’s score on the 2018 LPI was little more than half that of South Africa (the top ranked SSA country). Within CEMAC, Cameroon and Chad ranked higher than Equatorial Guinea. FIGURE 76 Equatorial Guinea ranks the lowest among peers in logistics performance a. Logistics Performance Index, Equatorial Guinea, 2014-2018 b. Logistics Performance Index, Equatorial Guinea and peers, (1 = low, 5 = high) 2018 5 3.5 3.0 4 2.5 2.0 3 2.88 2.75 1.5 2.32 2.25 2.13 1.91 1.88 1.0 2 0.5 1 0 Equatorial Guinea Structural peers SSA UMC Aspirational peers Aspirational peers+ Overall LPI Score Customs Infrastructure International shipments Logistics quality and competence Tracking and tracing Timeliness 2014 2016 2018 Source: World Bank LPI and World Bank staff calculations Note: Structural peers = Azerbaijan, Congo, Rep., Gabon, Timor-Leste. Aspirational = Bahrain, Kuwait, Oman, Qatar. Aspirational+ peers = Bahrain, Kuwait, Malaysia, Oman, Qatar, United Arab Emirates. SSA=Sub-Saharan Africa, UMC= upper middle-income countries. Equatorial Guinea’s lack of connectivity to foreign markets has resulted in high trade costs, partly due to structural factors. The country’s geographical distance from major trade hubs is a structural factor that naturally elevates trade costs. The UNCTAD’s Liner Shipping Connectivity Index (LSCI) provides a proxy for accessibility to global trade through the shipping network, which is important for international trade and competitiveness. Equatorial Guinea performs poorly on the LSCI indicating that the country is poorly connected to global shipping networks. Equatorial Guinea’s maritime transport costs are estimated to be higher than those of neighboring countries (World Bank, 2019). Overall, the costs incurred by Equatorial Guinea are significant. For instance, trading with distant countries like Spain is more cost-effective than with nearby Cameroon (Figure 77) and Table A5.1 in Annex 5).175 These high costs are further exacerbated by border closures, which force trade into costlier and riskier informal channels. This particularly affects the trade of agricultural products, which are essential for the livelihood of Equatorial Guinea’s economically disadvantaged populations. Deepening border cooperation and establishing effective protocols with neighboring countries—particularly Cameroon—to 175 Using data on bilateral trade costs from ESCAP-World Bank International Trade Cost Database. Bilateral trade costs capture the impact of different variables on trade, including: (i) tariffs; (ii) non-tariff barriers and restrictions to trade (quotas, standards, etc.); (iii) geographical distance between partners; (iv) logistics performance (cost, delay, reliability) and facilitation bottlenecks at origin and destination; (v) international connectivity of the countries; and (vi) facilitation at the border (customs and other procedures) for contiguous countries. Trade costs for country pairs are symmetric, i.e., the trade costs between Equatorial Guinea and Portugal are the same as those between Portugal and Equatorial Guinea. 202 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy improve border security and reduce the risk of border closures are critical. The passage of a decree (002/2021) in January 2021 providing provisions to regulate commercial exchanges on the land borders between Equatorial Guinea, Cameroon and Gabon is a step in the right direction. The efficient implementation of customs platforms would improve trade facilitation by reducing trade costs and leading to more predictable import-export process. Equatorial Guinea has recently carried out initiatives for trade facilitation, including the adoption of the ASYCUDA information system for Customs in April 2020 and the accession to the WCO (World Customs Organization). The Single Business One Stop Shop (Single Window, including for foreign trade) was created by decree 67/2017 and launched in 2019. However, ASYCUDA and the Single Window for foreign trade are not yet fully operational in all critical areas, including airports, ports, and cross-border areas. WCO members benefit from the organization’s extensive training and capacity building programs, which could help modernize countries’ customs procedures and improve customs performance. Equatorial Guinea has already benefited from technical assistance from the WCO. FIGURE 77 Trade costs between Equatorial Guinea and neighboring country Cameroon is higher than with China and the US Bilateral trade costs between selected countries, 2018 350 300 250 200 150 100 50 0 Cameroon Congo, Rep. Equatorial Guinea Cameroon Germany Spain Nigeria Portugal China USA Source: ESCAP-World Bank International Trade Cost Database FIGURE 78 LSCI is lower in Equatorial Guinea than in neighboring Gabon and Cameroon Liner Shipping Connectivity Index, Equatorial Guinea and selected countries 60 50 40 30 20 10 0 Equatorial Guinea Gabon Cameroon Congo, Rep. Qatar Oman Source: UNCTAD LSCI Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 203 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Digital connectivity and digital trade policies play also an important and growing role in decreasing trade costs and promoting trade across countries. Digitalization or digital trade policies can reduce overall trade costs at the border, facilitate the coordination of global value chains, help diffuse ideas and technologies, or help to identify new trading opportunities (suppliers or customers). Studies show that a one percent increase in digital connectivity is associated with a 0.3 percent decrease in domestic trade costs and a 0.1 percent reduction in international trade costs (OECD, 2023). Digital technologies can also connect remote economies to global markets through e-commerce. In addition to an enabling legal and regulatory environment, improving digital connectivity, ICT infrastructure, and digital skills is critical to enhance digital trade (IMF et al., 2023, see also section 5.1 on digitalization for detailed policy recommendations). In recent years, African countries such as Ghana, Egypt, and Rwanda are increasingly exporting digitally delivered services (Box 18). © mtcurado/istockphoto.com 204 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy BOX 18 Digital trade in Africa © pixdeluxe/istockphoto.com Digital trade is significantly changing the global economy. According to the OECD, there is a growing consensus that digital trade encompasses digitally enabled transactions of trade in goods and services that can either be digitally or physically delivered, and that involve consumers, firms, and governments. According to WTO estimates, digitally delivered services have experienced a nearly fourfold increase in value since 2005 (with an 8.1 percent increase per year in 2005-2022, on average), well above the growth rate of goods (5.6 percent) and other services (4.2 percent) exports. In 2022, they account for more 54 percent of total services exports. While advanced economies remain the main exporters of digitally delivered services, developing countries including in Africa, have made significant progress. Africa’s exports of digitally delivered services increased by 8 percent in 2022, double the rate of the rest of the world, to reach about US$33 billion. The 5 leading exporters in Africa include Ghana, South Africa, Morocco, Egypt, and Algeria. In 2022, the top 3 accounted for more than half of the region’s exports of digitally delivered services. In Ghana, the largest exporter of digitally delivered services in Africa with 19 percent share in the region, the large pool of English-speaking workers attracted foreign investment in the sector. In 2019 there were over 20 registered business process outsourcing (BPO) companies and more than 50 innovation hubs. Exports of computer and information services from the country have grown rapidly the last few years but remain low in value terms. Several global tech companies including the American Tower Corporation, Google, IBM, Oracle, and Uber are present in the country. Ghana’s IT sector is dynamic, and companies compete globally in software and applications platforms in many sectors including finance, payments, agriculture and medical services. Ghana’s success in digital exports can be explained by strong regulatory measures, legal frameworks and policies that protect consumers and enables a conducive and stable business environment. The country’s telecommunication infrastructure is well-developed compared to other countries in the region. The government has focused on human capital development by implementing programs to improve digital literacy, training, and entrepreneurship. Source: OECD https://www.oecd.org/trade/topics/digital-trade/, IMF et al. (2023), World Bank and WTO (2023), and Digital Progress and Trends Report (2023), World Bank, 2019 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 205 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy 5.2.5 Policy recommendations This section provides detailed policy recommendations for Equatorial Guinea to boost trade integration, facilitation, and connectivity. These include (i) accelerating the completion of steps to access the WTO and aligning policies and procedures with those outlined in the WTO Trade Facilitation Agreement in order to reap the benefits provided by the organization, (ii) expanding regional trade agreements with the implementation of the AfCFTA agreements, (iii) simplifying tariff structure and streamlining non-tariff measures to reduce obstacles to trade, (iv) increasing the transparency of trade regulations and information exchanges, and (v) improving trade facilitation by completing the implementation of the Single Window for Foreign Trade and expediting the digitization of customs processes with the full implementation of ASYCUDA at the airports and ports of Malabo, Bata and Luba. Table 16 provides detailed policy recommendations. These reforms would boost non-oil exports in Equatorial Guinea if combined with measures to improve non-oil sectors’ productivity. Policy measures to boost productivity and thus competitiveness in these sectors include improving the business environment and increasing the role of the private sector in the economy (see Chapter 4), diversifying the country’s asset base by boosting human development, strengthening institutions, and improving access to quality infrastructure (see Chapters 1 and 3). TABLE 16 Policy Recommendations: Promoting trade integration and facilitation Objectives Policy recommendations Timeline Responsible Agency World Trade • Complete the phase of questions and • Ministry of Commerce Organization answers about the Memorandum on SHORT TERM and Promotion of accession Foreign Trade Regime (MFTR) and its Enterprises and Industry update. • Follow up on the developed roadmap • Ministry of Commerce SHORT TO for the accession of Equatorial MEDIUM TERM and Promotion of Guinea to the WTO. Enterprises and Industry • Create a country strategy to start negotiations with WTO members, • Ministry of Commerce and the Ministry of Commerce should SHORT TERM and Promotion of coordinate the government’s position Enterprises and Industry through an interagency process. World Trade • Complete a joint assessment of Organization the deficiencies of the WTO Trade • Ministry of Commerce Trade Facilitation Facilitation Agreement to identify MEDIUM TERM and Promotion of Agreement areas in which the Government can Enterprises and Industry align its policies and procedures with international best practices. Deepen regional • Complete the National Strategy for • Ministry of Commerce trade agreements the Implementation of the AfCFTA. SHORT TERM and Promotion of with the African Enterprises and Industry Continental Free Trade • Establish a National Implementation Area (AfCFTA) Committee for the AfCFTA Agreement Agreement and an agenda to follow • Ministry of Commerce SHORT TO up on the ratification of the AfCFTA, MEDIUM TERM and Promotion of and introduce the paperwork, Enterprises and Industry protocols, and documents to ratify and deposit the agreement. 206 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Simplify tariff • Disseminate information among the • Ministry of Commerce structure and trade and customs agencies to create SHORT TERM and Promotion of align with CEMAC awareness about the tariff-free Enterprises and Industry and AfCFTA treatment of intra-CEMAC trade. implementation • Reduce the tariff burden of 30 percent to the next band of 20 • Ministry of Commerce percent in the CEMAC tariff schedule MEDIUM TERM and Promotion of for a large number of imports from Enterprises and Industry third parties. • Execute the harmonization and • Ministry of Commerce mutual recognition of CEMAC LONG TERM and Promotion of technical measures. Enterprises and Industry Increase the • Consolidate data and trade policy transparency of information (on tariffs, standards trade regulations and technical requirements, licenses, • Ministry of Commerce and information quotas, exceptions, and export MEDIUM TERM and Promotion of exchanges measures) and establish an official Enterprises and Industry online trade portal that provides information on all trade requirements and procedures. • Maintain active consultations between stakeholders from the • Ministry of Commerce private and public sector and civil MEDIUM TERM and Promotion of society on trade issues and possible Enterprises and Industry reforms. Improve trade • Finalize the implementation of the facilitation Single Window for Foreign Trade, • Ministry of Commerce which will help improve transparency SHORT TERM and Promotion of in trade procedures, and better Enterprises and Industry collect trade data. • Accelerate the digitization of customs processes and the full implementation of ASYCUDA (at the • Ministry of Commerce airports, and ports of Bata, Luba, SHORT TO MEDIUM TERM and Promotion of Malabo) to reduce the time it takes Enterprises and Industry to trade, improve transparency of processes, and better collect trade data. • Conduct time-release studies to map processes and assess bottlenecks at • Ministry of Commerce ports of entry. These studies should and Promotion of go beyond evaluating customs SHORT TO Enterprises and Industry clearance processes to include MEDIUM TERM • Department of Customs the full range of authorities and and relevant ministries institutions involved in the import and export process. Streamline non- • Ministry of Commerce tariff measures • Eliminate most licenses for importers and Promotion of that increase trade and exporters (or make them SHORT TERM Enterprises and Industry costs to reduce automatic for most goods). • Department of Customs obstacles to trade and relevant ministries • Support automation of licenses, • Ministry of Commerce permits, and other authorization and Promotion of processes through a Single Window MEDIUM TERM Enterprises and Industry (e.g., issuing circulation certificates • Department of Customs and certificates of origin). and relevant ministries Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 207 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy 5.3 Removing barriers to ecotourism growth in Equatorial Guinea for a more diversified growth For Equatorial Guinea, economic diversification through ecotourism can provide sustainable jobs and revenues to reduce inequality in lagging regions while serving as an entry point for reforms to further connect the country to the world. However, ecotourism remains at an incipient stage and requires various structural reforms and long-term investments in public goods, many of which are transversal and support other tourism segments and sectors as well, including the removal of tourist permits and travel restrictions, construction of ecotourism facilities and infrastructure, human capital investments, conservation financing and strengthened institutions. This section is based on a desk review of existing data and reports as well as limited virtual interviews. Tourism statistics on Equatorial Guinea are critically scarce and have not been independently verified. 5.3.1 Ecotourism impact and government objectives Ecotourism176 is a growing global tourism segment, and there are opportunities for Equatorial Guinea to attract this market In addition to its natural given its natural assets, relatively developed infrastructure and unique positioning towards the Spanish speaking market and cultural endowments, as one core segment, being the only Spanish-speaking African Equatorial Guinea's country. In turn, ecotourism has the potential to geographically relatively compact size, spread economic benefits to rural communities, particularly developed infrastructure, on the forested mainland, and fund conservation efforts if the and flight connections, and appropriate mechanisms are implemented. Ecotourism is one high-quality hotel room of the fastest-growing sectors in the travel industry (about 5 stock can fast-track tourism percent annually according to Global Data). Wildlife tourism, an ecotourism subsector for which Africa is a key global destination, sector growth. comprises 7 percent of global tourism according to the UN © roberthardingalamy.com 176 Ecotourism is defined as “responsible travel to natural areas that conserves the environment, sustains the well-being of the local people, and involves interpretation and education” (TIES, 2015) 208 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy Tourism Organization (UNWTO) and is growing annually at around 3 percent. Wildlife tourism makes up 36.3 percent of Africa’s travel and tourism economy and directly contributes US$29.3 billion to the African economy, employing 3.6 million people (Global Data, 2023). Developing ecotourism can serve as an entry point for reforms to further connect the country to the world (aviation, access, movement of labor, goods and persons, roads) and reduce its high inequalities (through training and skills development, dispersal of ecotourism revenues to lagging areas). It can contribute to shifting its economy away from polluting oil and gas sectors to a greener, non-extractive sector. Tourism also has substantial inclusion benefits, globally employing 50 percent women and a large amount of youth, important considerations for Equatorial Guinea’s young population. The development of the Equatoguinean tourism sector would generate revenues. If in the medium-term Equatorial Guinea grows its tourism sector to 3 percent of GDP (Rwanda’s tourism contributed 3.2 percent to GDP in 2019, Cameroon 1.5 percent and Costa Rica 4.8 percent), that could annually generate US$ 340 million, based on its 2019 GDP of US$ 11.36 billion. Wildlife tourism could make up US$ 123 million of this amount assuming it makes up 36.3 percent of its tourism sector, as is the estimate for Africa as a whole (Global Data, 2023). Equatorial Guinea’s natural and cultural endowments FIGURE 79 provide significant potential to position the country as Map of key tourism and natural sites of an ecotourism destination. Three quarters of Equatorial Equatorial Guinea Guinea’s mainland is forested and 19 percent of the land area is protected through 4 national parks, 2 scientific reserves, 2 natural monuments, 6 nature reserves and 3 Ramsar sites177 containing waterfalls, volcanic lakes, beaches and agritourism offerings as well as a significant concentration of primates (including gorillas, chimpanzees, and mandrills), leopards, buffalo, antelope, elephants, hippos, crocodiles, rare birds, endangered sea turtles and the world’s largest frog species, the Goliath Frog. Current main ecotourism destinations include the island of Bioko with its protected areas, beaches, waterfalls and towns, Corisco’s undeveloped beaches, the remote Rio Campo Nature Reserve for turtle nesting and the inland Monte Alen National Park (MANP), the wildlife and biodiversity jewel of the country– which has 265 species of birds, 105 mammal species, including elephants and 16 species of primates (3800 gorillas and 1600 chimpanzees) and 65 species of reptiles. In addition to this, its relatively compact size, developed infrastructure and flight connections (especially Source: World Atlas on Bioko Island), and high-quality hotel room stock can fast-track tourism sector growth. Despite these advantages, the tourism sector has languished Equatorial Guinea regularly makes the list of the 10 least visited countries on earth. Equatorial Guinea has had low and stagnant international visitor arrivals, hovering around 6,000 annually since 2013 – aside from a COVID-induced drop in 2020/21. Tourism’s contributions to its national accounts have been volatile, last estimated at FCFA 22,566,000 (US$37,000 equivalent) for 2017 (Global Data, INEGE). According to INEGE, the National Statistics Office, the tourism sector experienced an average interannual growth rate of 22 percent 177 A Ramsar site is a wetland site designated to be of international importance under the UNESCO Ramsar Convention. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 209 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy between 2008 and 2014, then dropping to an estimated 2 percent in 2015 followed by a 17 percent contraction in 2016, for a 10-year average real growth rate of 3 percent between 2008 and 2017 (Figure 80). Its tourism balance of payments is negative (estimated at US$-1.57m in 2022) and worsening, due to a widening gap between increasing outbound and stagnant inbound tourism expenditures, with implications for its foreign exchange reserves (Figure 81) (Global Data, 2023). Estimated air passenger arrivals, a proxy for trends in tourism arrivals which also includes returning residents – have been much higher and more volatile, with a downward trajectory since 2015 (Figure 85). Air arrivals peaked in 2015 and to a lesser extent in 2019, before plummeting in 2020 due to COVID and then recovering in 2022 to 57,488. FIGURE 80 FIGURE 81 Evolution of the tourism sector in national Tourism balance of payments and accounts (2007-2017) international tourism arrivals (2013-2022) 1.0 7,000 Tourism balance of payments ($US, million) 30 27.874 30% 0.5 6,000 22.383 22% 22.566 20% International tourism arrivals 0 20 5,000 10% -0.5 Millions 4,000 4% -1.0 2% -2% 0% 10 3,000 -1.5 -10% 2,000 -2.0 -17% 0 -20% -2.5 1,000 2007 Average 2008-2014 2015 Est 2016 Est 2017 Est -3.0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Tourism GDP (Millions FCFA) Tourism balance of payments (US$ millions) Interannual variation (Right axis) International tourism arrivals (Global data) Source: INEGE, 2020 Source: Global Data, OAG, 2023 Equatorial Guinea’s leisure tourism lacks the volume required to sustain all but a few private tourism operators, resulting in significant gaps in the ecotourism value chain. Global Data estimates that business travel is the most common type of international tourism in Equatorial Guinea (Figure 82), accounting for 35 percent of international tourism arrivals in 2022 (1,257 travelers), followed by Visiting Friends and Relatives (VFR) (28 percent; 1,070 travelers), then leisure (21 percent; 801 travelers) and other personal travel (16 percent; 616 travelers) (Global Data, 2023). Estimated average trip length has also been reducing from 8.4 days in 2012 to 7.8 days in 2022 (Global Data, 2023). Hotel occupancy rates tend to be low, with INEGE estimating that the 9 most prominent hotels (all on Bioko) had an average occupancy rate of 23.8 percent in 2017, insufficient for profitability and a drain on government budgets given government ownership of many of these hotels (which may also be crowding out private investment). Part of the reason for low occupancies is the over-investment in government-linked large hotel complexes targeting business and official travelers. Aside from these hotels, there are around 60 privately-owned hotels in the country and over 30 registered travel agents, although most service outbound travel from Equatorial Guinea. There are two inbound tour operators with ecotourism packages that have an online presence; a crucial component to an emerging ecotourism sector. They are Nexo Travels and Rumbo Malabo, both of which offer 7-9 day packages costing around US$330 per person per day, not including international flights. Packages feature destinations such as Malabo National Park, Sampaca Farm, Ureka Falls, Lake Biao, several island beaches, Pico Basile Caldera de Moka, Monte Alen National Park. Very few links with international outbound tour operators exist. 210 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy FIGURE 82 FIGURE 83 International arrivals to Equatorial Guinea Estimated international passenger and by purpose of trip (2009-2022) tourism arrivals to Equatorial Guinea (2013- 2022) 2500 140000 2000 120000 International arrivals 100000 1500 80000 1000 60000 500 40000 0 20000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Business Leisure Other Personal International Tourism Arrivals (Global Data) Visiting Friends and Relatives (VFR) Estimated international passenger arrivals (OAG) Source: Global Data, 2023 Source: Global Data, 2023 Equatorial Guinea’s ecotourism performance significantly lags regional peers with similar ecotourism asset offerings (Cameroon, Gabon, and Rwanda). Equatorial Guinea has far fewer international tourism arrivals than its regional peers (Figure 84), Before COVID, Rwanda and Cameroon each received over one million tourists and Gabon received over 600,000. Equatorial Guinea’s poor tourism performance is mainly due to the country’s inward-looking, relying on its oil and gas fortunes, while heavily restricting the entrance and movement of foreigners. Its de-prioritization of sectors other than oil and gas up until recently has stunted ecotourism development, allowing its competitors to make inroads in the sector. FIGURE 84 FIGURE 85 International tourism arrivals to Equatorial Estimated international air passenger Guinea and regional peers (2013-2022) arrivals to Equatorial Guinea and regional peers (2013-2022) 1,400,000 500,000 Estimated air passenger arrivals 1,200,000 International tourism arrivals 400,000 1,000,000 800,000 300,000 600,000 200,000 400,000 100,000 200,000 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cameroon Equatorial Guinea Cameroon Equatorial Guinea Gabon Rwanda Gabon Rwanda Source: Global Data, 2023 Source: OAG, 2023 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 211 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy However, recent reforms and new government prioritization of the sector – instigated by its push to diversify its economy – have opened the door to ecotourism development. The Government of Equatorial Guinea identified tourism as a key economic diversification tool in its recent Economic Diversification Initiative and its preceding plan, the National Plan of Economic and Social Development. The tourism sector is regulated by the Ministry of Tourism and Tourism Infrastructure The (Ministrerio de Turismo e Infraestructuras Turísticas, MTIT, previously called Ministry Government of Culture, Tourism and Craft Promotion, MCTCP). and guided by the 2016 Tourism Master Plan. This plan led to the design of a new sectoral legislative framework, of Equatorial including the drafting or modification of laws facilitating the arrival of international Guinea tourists and investment in the sector, the creation of the Malabo National Park, a identified new airport terminal and the establishment of Hospitality and Tourism Activities tourism as a Management schools in Mongomo and Malabo. In 2022, Vice-President Nguema key economic Obiang Mangue mandated the Department of Tourism to create a National Tourism diversification Office, a National Tourism Committee (public-private tourism stakeholder platform) tool in its recent and an official web page to promote the country to international visitors. Perhaps most importantly, in July 2023, the Government implemented an e-visa system,178 Economic removing a major barrier to visits by reducing transaction costs, document Diversification requirements, processing time and fees. Over 3,000 visa requests were received Initiative. between July-September 2023, more than 5 times the amount that its Embassies received in all of 2022. A National Plan for Economic Diversification through Tourism is being developed and a Memorandum of Understanding has been signed with China to facilitate inbound Chinese visitors. These reforms have removed some key constraints to ecotourism growth; however, many binding constraints remain. 5.3.2 Key constraints to demand Restrictions, roadblocks, and permit systems discourage visits Tourist permits are required to visit various protected areas, sites and beaches. These may need to be obtained in towns far from such areas (for example, permits for the Rio Campo Reserve need to be obtained in person in Bata, 50km away). These permits can take days to obtain and cost US$30-50. The Government is looking into removing these permits in 2024 and transitioning to a ticketing system at the entry of tourism sites and protected areas. According to the UK government, only essential (non-leisure) travel is allowed between provinces and districts on the mainland and military/policy roadblocks (and harassment) are common. These barriers and transaction costs discourage independent visits and increase costs to tour operators organizing itineraries. Importantly, a culture of state control, repression and distrust of non-official travelers (by military, police and the state apparatus) has not created a permissive environment for ecotourism or a tourism/service mindset amongst its population. This will require reforms as well as years of sensitization and training to overcome. Insufficient domestic aviation seat capacity, safety standards, and international flight access to Bata constrain tourism growth: All Equatorial Guinea-registered aircraft are banned from EU and other airspace on safety grounds. This is a critical constraint to tourist movement within the country, with foreign governments strongly discouraging travel on these airlines domestically. Consequently, international insurance carriers are not likely to cover international tour operators utilizing such airlines, a major obstacle to forging formal international tour operator partnerships. According to World Bank analysis of 2019 OAG aviation data, there is significant spare international seat capacity into Malabo with an average load factor (seats filled) of only 178 https://equatorialguinea-evisa.com/information 212 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy 24 percent. However, Bata airport has significantly lower available volume (1,637 seats compared to 451,919 to Malabo), and has 75 percent of its international seats occupied (Table 17). Thus, additional capacity may be needed to accommodate (eco)tourism flows, particularly for direct international flights not dependent on connections from Malabo, given the importance of direct flights to the competitiveness of tourism destinations. Load factors were similarly high on domestic routes, potentially constraining tourism growth unless carriers have the ability to ramp up supply to meet demand. TABLE 17 Estimated occupied scheduled aviation seats, international versus domestic (percent) Arrival Airport International Estimated Seats Occupied Domestic Estimated Seats Occupied Bata 75% 64% Malabo 24% 72% Annobon - 83% Mongomo - 66% Source: OAG. 2023 Lack of ecotourism marketing and branding: There is very little tourism information available online, with no official website, social media presence or travel guides, minimal travel trade promotion and no ecotourism branding or promotion from the country. This lack of brand awareness, positioning and promotion puts it at a disadvantage compared to regional and international comparators. Undeveloped tourism products and experiences: Many of Equatorial Guinea’s tourism assets are undeveloped, without the requisite hiking trails, viewpoints, visitor facilities and experiences (such as canopy walkways) to turn its natural and cultural assets into ecotourism products. This leaves tour operators without many options for activities during itineraries longer than a handful of days and constrains the niche markets that can be attracted (such as birdwatching that can be facilitated by viewing platforms). 5.3.3 Key constraints to supply There is a lack of tourism facilities around key ecotourism areas There is an unequal distribution of tourism infrastructure and services, as most tourism facilities are located in Malabo and, to a lesser extent Bata, away from the protected areas that characterize its ecotourism offering. Bioko has developed quality lodging, restaurants and access infrastructure that can be utilized to support ecotourism development today (albeit hotels tend to be luxury-grade geared towards business and official travelers rather than ecotourists). A large gap exists in the availability and quality of tourism ecosystem firms and infrastructure on the mainland, which is currently unable to host a minimum capacity of visitors required to create a viable/profitable ecotourism cluster. There are 46 hotels listed on TripAdvisor in 2023, mostly concentrated in Malabo, including the branded hotels of Sofitel and Ibis. There are 24 Airbnbs listed in the country, only 5 of which are on the mainland (all in Bata), and 37 restaurants listed on TripAdvisor, with all but 5 in Malabo. There is only one lodging option in Corisco, no operational lodging in MANP and a handful of cabins in the Rio Campo reserve – not enough capacity to support viable air links nor all but the smallest tour operator packages. Tourism establishments also tend to lack digital and international distribution linkages, with only 3 hotels in the country listed on Booking.com. Conversely, the existing tourism facilities (lodging) and infrastructure, such as roads, are under-utilized and have substantial spare capacity. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 213 CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy A critical lack of tourism statistics and data: Data on tourism flows, behavior, expenditure and impact is virtually inexistent. The Government does not have data on tourism’s contribution to GDP or employment, arrivals, recent hotel occupancy, visits at key sites/destinations or by purpose of visit (such as ecotourism). This lack of data makes sectoral prioritization decisions, policymaking and resource allocation difficult, and hampers private sector investment. A tourism statistics directorate has recently been created and will require consistent funding and public disclosure of data to enable effective sector monitoring and development. 5.3.4 Strategic considerations and recommendations The sector is likely to remain a niche source of growth in the short-term, until sustained investments in infrastructure, training and branding take effect. Even then, its economic (and related geographic) inequalities are likely to stunt sectoral growth until they are minimized through investment in human capital and personal freedoms. Its potential comparative advantage with the Spanish market can provide a catalyst for the sector; however, in the medium-term it will need to expand beyond a single source country and into a highly competitive regional ecotourism market, requiring a more compelling unique selling proposition to set itself apart. The prioritization of ecotourism will require a phased approach Opportunities exist to leverage Bioko’s relatively developed infrastructure and tourism facilities to catalyze the ecotourism segment in the short-term. Investing in ecotourism facilities on the mainland will take longer, focusing on the 1400 sq km Monte Alen National Park, where the greatest potential for ecotourism exists, with Corisco, Bata and the Rio Campo Nature Reserve rounding out ecotourism packages. The priority short term market should be Spain, with direct flights from Madrid and a shared language providing a unique comparative advantage that other African ecotourism destinations cannot offer. In the short-term, relying on package travel can sidestep the many restrictions, product and service gaps of emerging ecotourism economies such as that of Equatorial Guinea. However, in the medium-term, providing services for independent travelers (such as car rental, digital payments, signage) can increase the distributional impacts of tourism expenditures. As a second phase, incentivizing purpose-built ecotourism facilities around protected areas in Bioko can produce a more competitive product-market fit (such as ecolodges and agritourism providers through concessions, marketing support, public service provision). Encouraging an ecotourism cluster of similar businesses (lodging, restaurants, activity providers, retail, cultural events) near the MANP to provide services sought by visitors will require improved access roads, incentivizing of facilities, training of communities and building visitor infrastructure (signage, trails, restrooms, observation decks, canopy walks in MANP). These infrastructure and services will require an enabling environment conducive to ecotourism development, which includes an expanded sectoral institutional framework, improved tourism policies and regulations, consistent branding and marketing, a pipeline of qualified tourism and hospitality workers and environmental/social safeguards in place to mitigate tourism’s negative externalities. The provision of these public goods, coupled with incentives to de-risk the creation of first-mover tourism firms in key ecotourism areas can catalyze the growth of this segment and its positive economic and non-economic spillovers. The expansion of the tourism industry can lead to additional benefits by promoting the improvement and expansion of social services, electricity, health, communication, and transportation. Investing in human capital will be key to reaping the employment benefits of ecotourism, particularly in rural areas. However, the first requirement to open the door to ecotourism growth is the easing of restrictions on leisure travel, including tourism permits. Table 18 summarizes the sequencing of key required activities and reforms, many of which are transversal and support other tourism segments and sectors as well, to spur this development in a responsible and sustainable manner. 214 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth CHAPTER 5 Enhancing Digitalization, Trade Integration, and Ecotourism to Connect Further and Transform the Equatoguinean Economy TABLE 18 Sequencing of key initiatives for ecotourism development Responsible Category Interventions Timeframe Fiscal Costs Complexity Agency Enablers • Remove tourism movement • National restrictions and replace the Institute of Tourist Permits system with a Forestry centralized Sustainable Tourism Development Pass issued along with an e-visa that covers entrance to key sites, SHORT TERM • Management Net-positive Minimal and whose funds are reinvested of the in conservation and community Protected projects in ecotourism areas. See Areas System the Jordan Pass and Mallorca (INDEFOR- Sustainable Tourism Tax example. AP) • National Security • Train and monitor police Agency and military (particularly at • Ministry SHORT TERM Low Moderate checkpoints) on facilitating tourism of Tourism and reducing tourist harassment. and Tourism Infrastructure (MTIT) Investment • Develop incentives and/or • Ministry of Promotion concessions for the private sector Commerce, to invest in quality ecolodges SHORT TERM Industry and Moderate Moderate around protected areas with Business minimum sustainability standards. Promotion Marketing • Establish a para-public tourism marketing board, create a national tourism brand and marketing strategy consistent with an ecotourism positioning. SHORT TERM • MTIT Moderate Moderate See UNWTO’s Brand Africa – A Guidebook to Strengthen the Competitiveness of African Tourism. Aviation • Benchmark domestic aviation • Ministry of (Transversal safety standards to international Civil Aviation SHORT TERM High High Reform) requirements, and upgrade safety and Airport of domestic fleets. Infrastructure Statistics • Develop tourism statistics and explore the use of nontraditional data sources (digital and big data) to leapfrog sector monitoring while SHORT TERM • MTIT High High carrying out consumer market research and visitor surveys to set a minimum baseline of tourism data. Infrastructure • Improve last-mile road access, (Transversal telecoms and visitor infrastructure • Ministry of Reform) in key ecotourism sites (Monte Alen MEDIUM TERM High Moderate Transport National Park, Rio Campo Nature Reserve, Ureka waterfalls). Policy and • Develop a National Ecotourism • MTIT Regulatory Strategy to guide the long-term MEDIUM TERM Low Minimal development of the segment. • INDEFOR-AP Training • Train and equip communities and Skills (focusing on women and youth) Development near protected areas to become integrated into the ecotourism • MTIT MEDIUM TERM Moderate Moderate value chain as tour guides, craft • INDEFOR-AP producers, artisan agritourism producers and food and beverage providers. • Improve mainland tourism training and apprenticeship programs, MEDIUM TERM • MTIT Moderate Moderate focused on mainland exchanges with Bioko. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 215 Annex 216 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Annex Annex 1 TABLE A1.1 Selection of peer countries for Equatorial Guinea Groups Definition Selection Criteria Selected Countries Regional Countries in the same region as • Countries in SSA • Average of all SSA peers Equatorial Guinea per the World Bank • CEMAC countries • CEMAC countries classification Structural Countries that have similar economic • GDP per capita, PPP • Azerbaijan peers characteristics as Equatorial Guinea over (constant 2011 USD) • Congo, Rep. 2015-19 • Oil rent • Gabon • Population • Timor-Leste • Industry (% of GDP) • Trade (% of GDP) • Government Effectiveness Aspirational Countries that had similar structural • GDP per capita • Bahrain peers characteristics as Equatorial Guinea (constant 2010 USD) • Kuwait but grew to attain high-income status, • Diversification • Oman have better development outcomes, • Qatar and managed to diversify their assets overtime Aspirational In addition to countries with similar • GDP per capita • Bahrain peers+ structural characteristics as Equatorial (constant 2010 USD) • Kuwait Guinea but grew to attain high-income • Diversification • Malaysia* levels and managed to diversify • Oman overtime, this group include two • Qatar resource-endowed countries that have • United Arab Emirates* successfully diversified their economy Note: Equatorial Guinea’s structural and aspirational peers were identified using a data-driven approach, including relying on the World Bank CEM tool. TABLE A1.2 Overview of growth drivers under the baseline and reform scenarios Reform Scenario Growth driver Baseline scenario Moderate Ambitious Non-resource TFP -4.5% then converges to 0% -4.5% then converges to 1.3% by -4.5% then converges to 2% by (growth rate) by 2030 and until 2050 2030 and until 2050 (based on 2030 and until 2050 (based on SSA 75th percentile) UMI 75th percentile) Human capital 0.12%, 2003-17 average 0.12% then converges to 0.9% 0.12% then converges to 1.3% (growth rate) by 2030 and until 2050 (based by 2030 and until 2050 (based on average between median on SSA 75th) UMI, median SSA and AP 75th) Public investment 5.5% with a depreciation rate 5.5% then converges to 7.5% by 5.5% then converges to 10% by (% of GDP) of 6.72% 2030 and until 2050 (based on 2030 and until 2050 (based on UMI 75th) median of AP) Private investment 4.5% with a depreciation rate 4.5% then converges to 13% by 4.5% then converges to 17% by (% of GDP) of 6.72% 2030 and until 2050 (based on 2030 and until 2050 (based on median of AP over the 2000-19 75th percentile of AP over the period) period 2000-19, also similar to the UMI median) Female labor force 56.2%, latest value from 56.2% then converges to 66% by 56.2% then converges to 73% by participation World Development 2050 (based on median SSA) 2050 (based on SSA 75th) Indicators Note: SSA=Sub-Saharan Africa, AP=aspirational peers, UMI=upper-middle income countries Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 217 Annex Annex 2 BOX A2.1 Calculating the efficiency of public investment The efficiency of public investment is calculated through non-parametric approaches based on linear programming methods. One approach is Data Envelope Analysis (DEA), the standard non- parametric method used to calculate public investment and public spending efficiency, developed by Charnes, et. al. (1978), with efficiency scores ranging from 0 to 100. Efficiency scores are then calculated relative to a peer group consisting of linear combinations of input-output observations for efficient decision-making units (DMUs, representing countries). However, this deterministic approach is highly sensitive to outliers and measurement errors. An alternative nonparametric estimator of the “efficiency frontier” is partial frontier efficiency analysis, or Order-m, which is more robust to extreme values, noise, or outliers (Cazals, et. al., 2002). Order-m allows for super-efficient observations to be located beyond the estimated production-possibility frontier, so that efficiency scores can exceed the value of 100 (Tauchmann, et. al., 2012). The efficiency scores are calculated using an output-oriented DEA model. Efficiency scores should therefore be interpreted as the proportional amount by which countries could increase the quality of their infrastructure while leaving public capital (and other inputs) unchanged. The input variables for the efficiency of public investment are public capital stock and GDP per capita. The output variable is constructed using the four components of the Africa Infrastructure Development Index (AIDI), i.e., the transport composite index, the electricity composite index, the ICT composite index and the water and sanitation composite index. These components are developed through data on road surface, electricity production, fixed- and mobile-​ broadband subscriptions, and access to improved water source and sanitation facilities. The observations are normalized (using a min-max formula as in African Development Bank, 2013). The five variables are combined to obtain the output indicator, employing the same procedure as IMF (2015).179 Tables A2.1 and A2.2 show detailed results. TABLE A2.1 Data Envelope Analysis public investment efficiency scores (2008-18) Country/Area 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Equatorial Guinea 41.7 41.2 49.4 60.0 53.6 99.3 90.7 82.2 70.4 62.1 63.8 Congo 15.2 44.7 53.2 69.3 71.2 82.8 93.2 90.3 74.4 70.9 80.3 Gabon 15.8 20.5 56.7 76.3 72.3 84.3 84.0 80.8 74.1 72.3 82.1 WAEMU average 41.6 47.6 64.8 74.6 78.5 75.3 81.6 83.8 73.9 80.9 86.6 CEMAC average 43.0 51.1 55.8 62.4 68.8 70.3 89.2 90.6 81.3 78.3 87.1 (Excluding EQG) SSA average 48.1 52.3 64.3 75.4 76.2 74.9 84.9 85.4 77.4 79.8 82.2 (Excluding EQG) 179 https://www.imf.org/external/np/pp/eng/2015/061115.pdf 218 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Annex TABLE A2.2 Order-m public investment efficiency scores (2008-18) Country/Area 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Equatorial Guinea 48.6 48.6 51.2 61.9 57.6 103.5 95.1 87.3 78.1 68.1 70.7 Congo 16.7 50.2 55.2 70.4 77.1 88.4 100.0 95.4 81.4 77.3 82.7 Gabon 18.2 23.2 58.2 78.1 78.6 91.0 92.4 87.4 82.6 81.9 85.9 WAEMU average 45.3 51.9 68.0 84.0 89.0 77.6 89.5 88.1 84.4 87.6 90.1 CEMAC average 51.1 59.6 61.8 67.8 77.4 80.9 95.5 94.6 87.4 83.4 90.4 (Excluding EQG) SSA average 53.1 58.5 67.4 80.8 82.8 79.2 91.3 90.3 86.9 85.6 86.0 (Excluding EQG) Notes: WAEMU is West African Economic and Monetary Union. CEMAC is Central African Economic and Monetary Community. SSA is Sub-Saharan Africa. EQG=Equatorial Guinea. Sources: WDI: GDP per capita. IMF PIMA (2021) database: public capital stock. AIDI 2022 database: components of the AIDI. Charnes A, WW Cooper and EL Rhodes (1978). “Measuring the Efficiency of Decision-Making Units.” EJOR 2: 429-444. Cazals et al. (2002). Nonparametric Frontier Estimation: A Robust Approach. Journal of Econometrics. 106. 1-25. 10.1016/S0304-4076(01)00080-X. Tauchmann, Harald. (2012). Partial Frontier Efficiency Analysis. The Stata Journal: Promoting communications on statistics and Stata. 12. 461-478. 10.1177/1536867X1201200309. African Development Bank (2013), The Africa Infrastructure Development Index, July 2018. infrastructureafrica. opendataforafrica.org/rscznob/africa-infrastructure-development-index-aidi. BOX A2.2 The Climate Change Context in Equatorial Guinea Equatorial Guinea’s net contribution to greenhouse gas (GHG) emissions is negative, as the country is a significant carbon absorber. The country’s contribution to global GHG emissions was well below 0.1 percent of global GHG emissions in 2020. More than 60 percent of the country is covered by dense tropical forest, part of the Congo Basin Forest, which is a major global carbon sink. International carbon credit markets are not yet explored and there is no internationally determined price, but the country has already managed to access funding from the Reducing Emissions from Deforestation and Forest Degradation (REDD+) mechanism, World Environment Fund (WEF) and Green Climate Fund (GCF). Equatorial Guinea is nonetheless facing increasing temperatures and climate risks. Temperature projections by the Intergovernmental Panel on Climate Change (IPCC) indicate an increase of about 1.5°C by 2040, and 2°C to 3.5°C by 2070. Equatorial Guinea is ranked 136th out of 185 countries in the 2021 Notre Dame Global Adaptation Index (ND-GAIN), which measures exposure to climate risks. The country is particularly vulnerable to heat, flooding, sea level rise, and changes in pest and disease vectors. Climate change threatens communities with increases in the number of extreme heat days and the frequency of extreme weather events. The occasional floods that the country has historically experienced have become a regular phenomenon with serious consequences. Water, energy, forestry, health, tourism and coastal zones will likely be affected by climate change. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 219 Annex Equatorial Guinea has taken initial steps to strengthen its climate change governance framework. It has ratified several key international commitments such as the United Nations Framework on Climate Change (2000), the Kyoto Convention (2000) and the Paris Climate Agreement (2018). Climate change aspects have been integrated into the country’s National Economic Development and Social Plan (PNDES) 2020-2030. Equatorial Guinea recently revised its Nationally Determined Contributions (NDCs) for the period 2022-2030 to reduce its GHGs emissions by 35 percent relative to a “business- as-usual” scenario by 2030, and 50 percent by 2050. The government identified 43 mitigation actions in six key sectors (energy, industry, agriculture, health, land and waste management). The country’s NDCs also have a strong emphasis on adaptation, with the inclusion of 8 adaptation projects. The estimated cost of the adaptation and mitigation costs outlined in the updated NDCs is US$4.7 billion. A law on sustainable environmental management adopted in 2003 is being updated and a long- term vison for a low carbon emission strategy is being developed, while the ministry in charge of the environment and climate change has been strengthened by the creation of a national agency for climate change (ONCC). However, Equatorial Guinea’s public institutions are not yet ready to coordinate the management of cross-sectoral climate policies. The main climate planning instruments are lacking, and climate aspects are not integrated into many sectoral regulations and strategies, fiscal policy instruments, public finance, investments or reports. The multiplicity of agencies with identical responsibilities undermines effective coordination and implementation, as evidenced by the duplication of coordination mechanisms, the limited sharing of data collected and the compartmentalized work approach of sectoral ministries. There is an urgent need to strengthen the capacity of institutions and agencies at central and local levels, as well as to mobilize national and external funding. Although a stakeholder engagement mechanism exists, civil society engagement and accountability are weak due to a lack of incentives and political motivation. Weak coordination limits the capacity to integrate climate action planning. An Inter-ministerial committee (national sub-committee on climate change) was established under the national committee on environment with the political support of the Prime Minister to monitor the Kyoto Convention (law 2003) although it has not yet been convened. Another inter-ministerial committee was established in 2014 to support the REDD+ initiative and meetings were held until 2019. As part of the 2022 NDCs, efforts were made to establish an inter-institutional mechanism for strategic and operational coordination of climate commitments. But the proposed mechanism does not include economic ministries, subnational governments, civil society, or the private sector. Also, there is no legal basis establishing the national committee on environment nor its sub-committee dedicated to climate change coordination. This sub-committee has no explicit mandate to coordinate climate planning, climate budgeting and climate public investment decisions within the state. The NDC 2022 also proposed to create a committee for climate economic impact assessment as well as a national committee on climate change which are not yet established. Challenges exist in terms of regulation, quality, access, and use of data. Progress has been made in analyzing and considering vulnerability risks in sectoral programs and in identifying vulnerable populations, in developing early warning systems and in recording losses and damage caused by climate events in the agricultural, forestry and hydrocarbon sectors. Various institutions are involved in data management, producing climate maps, hydrological data, climate impact assessments, the forestry atlas, forest emissions reference level, and a greenhouse gas inventory (INGEI). However, limited public resources are spread thinly among these institutions. Information on risks and vulnerabilities is not produced and presented in a disaggregated, geographic basis. Data coverage is often confined to selected geographic areas and information on risks and vulnerabilities is neither 220 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Annex produced systematically nor in real time. Data which is produced is not adequately shared between ministries or with the public. The country faces challenges in using data to identify and implement the most appropriate measures for different situations. The lack of legislation clarifying institutional responsibilities hinders the country’s ability to pilot a proactive monitoring system disseminating real- time alerts and anticipating instructions for effective disaster and risk management. Transparency and accountability mechanisms for climate data are still embryonic. Access to data is discretionary, and there is no specialized website nor platform for climate services and information. While progress has been made in stakeholder engagement in the form of consultative workshops or national forums (NDC, National Action Plan for Adaptation, PNDES), the feedback mechanism for climate-related action, natural disasters and risk management (civil protection’s call center) is not yet operational and the capacity of institutions to monitor and evaluate climate performance is limited. Parliament’s involvement in climate change issues is rare and the Court of Auditors has no experience in evaluating or auditing environmental or climate change-related projects. Improving climate governance will determine the capacity to implement NDCs and respond to the challenges posed by climate change. The government needs stronger legislation which provides a credible commitment to climate objectives. Strong political commitment will be essential to ensure that national policies, capacities, and resource mobilization are aligned with the country’s climate objectives. The 2003 law on the environment needs to be updated to provide a legal basis and support the mainstreaming of climate change into policies and sector strategies. The forest, agriculture, air transport and energy sectors have strategies including objectives and activities consistent with the NDC, but resources for implementation are lacking. Other sectors simply allude to climate (e.g., urban), and some do not reference climate issues at all (mining, education, health, water, fishing, land). There is also a need to pass a decree adopting the 2022 NDCs, set up an NDC coordination mechanism, and clarify operational responsibilities of the different institutions in managing climate change-related risks. Climate considerations must be integrated into public finance instruments, notably in public investment management. Transparency can be improved by posting climate data and indicators on an on-line platform. Widespread capacity-building will be required, and external funding will be essential. Over the 2019-2020 period, public funding allocated through the government amounted to US$102.62 million (AfDB 2023), which represents only 22 percent of the financing that Equatorial Guinea needs each year (US$472 million). It is important to act now. Research shows, for Equatorial Guinea, as for other lower and middle- income countries, that addressing climate change will cost far less than continuing with business-as- usual (World Bank, 2019). The upfront cost of adding resilience to public investments will be offset by lower maintenance and repair costs. Investments incorporating adaptation are associated with lower socio-economic cost due to less disruption in public services, reduced exposure of assets to natural hazards, and better household well-being. The benefits from a commitment to climate resilience today outweigh the investment costs by avoiding the costs of inaction tomorrow. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 221 Annex Annex 3 FIGURE A3.1 Cross-country correlation between health outcomes and per capita income, 2020 1.0 Fraction of children under 5 not stunted, 2020 0.8 0.6 0.4 6 8 10 12 Log per capita income, 2020 1.00 Probability of survival to age 5, 2020 0.95 0.90 0.85 6 8 10 12 Log per capita income, 2020 1.0 Survival rate from age 15-60, 2020 0.9 0.8 0.7 0.6 0.5 6 8 10 12 Log per capita income, 2020 Source: World Bank data, 2020. 222 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Annex Annex 4 BOX A4.1 The experience of Morocco in introducing Industrial Acceleration Zones The Government of Morocco has developed Industrial Acceleration Zones to strengthen the export-oriented manufacturing ecosystem (World Bank 2021b). To attract foreign investment and promote its economic activity, Morocco has established Industrial Acceleration Zones, formerly known as industrial free trade zones.180 The government aims to lower production costs for SMEs by tapping into shared infrastructure and services and by clustering suppliers, universities and research institutions, as well as customers, in areas close to their workforces. This kind of industrial zone development strategy has been successful in expanding the country’s automotive and aerospace industries and building the ecosystem of the automotive industry.181 Most of the automotive industry’s OEM ecosystems ranging from electrical wiring, battery, vehicle interior, seats, etc. have been mainly developed in industrial acceleration zones such as Tanger Free Zone. Tanger MED integrated industrial network (including 5 zones) has generated exports of €1.2 billion182 in the last few years (almost 5 percent of the total exports), providing an example of successful impact generated by structured services and logistic infrastructures (Tangier port). The Moroccan industrial zones face water scarcity issues and are also exposed to the impacts of climate change, including sea level rise. Morocco’s demands for domestic and industrial water supply are expected to grow from 1,437 million m3 /year in 2010 to 2,368 million m3 /year by 2030, which represents a 65 percent growth.183 Certain cities, such as Tanger and Tetouan, could even experience a doubling of their urban water demand.184 The increased urban water demand can cause severe industrial water supply shortage. Morocco also has an extensive coastline on which 60 percent of the population and 90 percent of industrial activity are located.185 Coastal erosion from sea level rise can undermine the competitiveness of industrial activities in Saidia and Tangier. For example, if sea level rises 0.86 meter by 2100, Tangier Bay is projected to lose its port infrastructure and 63 percent of the city’s industrial zone.186 Port logistics will be severely affected by the sea level rise, and the inoperability service terminal and those dedicated to containers, vehicles and general cargo will exceed 30 percent of the time by 2100.187 The cost-benefit analysis of potential green infrastructure investments in the two selected zones including Tanger MED shows that these investments can generate great economic benefits while at the same time helping to mitigate both mitigation and adaptation challenges. US$60 Mln worth of combined investments in renewable energy (estimated potential capacity: 60 MWp), industrial symbiosis and circular economy opportunities can generate about 25 percent improvement in the carbon footprint of the zones and 20 percent reduction of the energy cost, material recovery about 4000 tons/year, and water recovery up to 80 percent without impacting on the water/wastewater treatment cost. 180 Main features of industrial acceleration zones: total exemption from Corporate Income Tax (CIT) during the first five consecutive years following the date of commencement of their operations; and a taxation at the specific rate of 15 percent beyond this period; exemption from withholding tax of dividends originating from activities carried out in industrial acceleration zones, which are paid to non-residents; exemption from VAT with right of deduction for operations carried out inside or between industrial acceleration zones; exemption from registration fees applicable to acts of incorporation and capital increase, as well as to acquisition of the necessary land for the realization of the company’s investment project; exemption from professional tax for the first 15 years consecutive to their operation; facilitation of the foreign exchange transfer abroad for incomes generated by foreign investments made in Morocco, such as dividends and interests generated by shareholders’ loans; special customs regime allowing the companies located in industrial acceleration zones to benefit from various advantages, mainly the exemption of the goods entering or leaving free export zones, as well as those obtained or staying there, from all duties, taxes or surcharges on import, circulation, consumption, production or export. 181 The Moroccan automotive industry in 2019 comprises over 250 companies, creating over 148,000 direct jobs in the 2014-2019 period, and producing in excess of 400,000 vehicles with a local integration rate of 60 percent. Source: Government of Canada, country analysis, 2020. 182 Source: World Free Zones Organization (2016) 183 World Bank. 2017. “Managing Urban Water Scarcity in Morocco.” https://openknowledge.worldbank.org/bitstream/handle/10986/29190/122698- WP-P157650-Summary-Report-Urban-water-scarcity-in-Morocco-ENG-P157650-2017-12-25-04-12.pdf?sequence=1&isAllowed=y. 184 ibid. 185 USAID. Climate Change Risk in Morocco: Country fact sheet. 186 ibid. 187 ibid. Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth 223 Annex Annex 5 FIGURE A5.1 Exports, excluding oil and gas, Equatorial Guinea 2005-2022 2500 2000 1500 1000 500 Transport Rough wood Methanol 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: WITS, World Bank and World Bank staff calculations Note: Mirror data. FIGURE A5.2 Goods Exports by Level of Technology in Equatorial Guinea, 2005-2021 a. Total Goods Exports by Level of Technology, 2005-2021 b. Non-oil and non-gas Exports by Level of Technology, 2005-2021 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 High technology Low technology High technology Low technology Medium technology Primary products Medium technology Primary products Resource based Resource based Source: WITS, World Bank. Mirror data and World Bank staff calculations Note: Mirror data 224 Equatorial Guinea - Building the Foundations for Renewed, More Diversified and Inclusive Growth Annex FIGURE A5.3 Imports by BEC (consumer, capital, intermediate), Equatorial Guinea, 2012-2014 and 2019-2021 Goods not elsewhere speci ed Consumer goods not 0% Food and elsewhere speci ed beverages 7% 12% Transport equipment and parts and accessories thereof 13% Industrial supplies not elsewhere speci ed 2012-2014 25% Capital goods (except transport equipment), and parts and accessories thereof 37% Fuels and lubricants 6% Goods not elsewhere speci ed Consumer goods not 0% elsewhere speci ed 10% Food and beverages 24% Transport equipment and parts and accessories thereof 9% 2019-2021 Capital goods (except transport equipment), and parts and accessories thereof 27% Industrial supplies not elsewhere speci ed 29% Fuels and lubricants 1% Source: WITS, World Bank. Mirror data and World Bank staff calculations Note: The BEC classification (Classification by Broad Economic Categories) TABLE A5.3 Bilateral Trade Costs, Equatorial Guinea and other CEMAC countries, Total trade, 2018 Central African Republic Equatorial Guinea Congo, Rep. Korea, Rep. Cameroon Germany Portugal Malaysia Nigeria France Benin China Spain Chad India Italy USA Central African 136.1 231.3 287.0 380.0 180.0 411.8 334.0 309.8 464.4 492.7 367.9 337.0 296.5   Republic Cameroon 298.8 136.1 98.1 220.9 180.3 139.2 186.2 241.2 150.4 342.1 152.0 203.2 186.1 151.3 170.5 215.4 Congo, Rep. 259.9 231.3 98.1 212.3 148.0 124.7 174.3 240.5 178.1 223.9 183.9 253.7 188.3 329.5 144.3 197.7 Equatorial 454.9 411.8 186.2 174.3 208.3 122.9 183.2 354.2 319.6 332.7 308.5 303.8 273.8 159.7 175.8 Guinea Chad 516.7 337.0 151.3 329.5 321.6 427.5 199.7   273.5 353.8 511.5 448.1 525.4 247.0   291.4 283.7 Source: ESCAP-World Bank International Trade Cost Database Note: CEMAC comprises Cameroon, Central African Republic, Chad, Congo, Gabon, and Equatorial Guinea. Data for Gabon is missing. 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