What would it take for Chad to escape the low-income trap?

One of the least developed countries in the world, Chad’s GDP per capita has contracted since 2015. Its GDP per capita (in constant 2010 US dollars) was $710 in 2019, down significantly from $961 in 2014 and lower than the average of $840 and $1,590 in low-income countries and Sub-Saharan Africa (SSA), respectively.

Figure 1: Chad - Real GDP Growth Cycles, 2000–2022 (in percent)

Chad faces complex and often interlinked challenges that have contributed to its economic fragility while slowing down or undermining inclusive growth. The recently published Chad’s Country Economic Memorandum (CEM) identifies the country’s main growth constraints among which insecurity; overreliance on oil revenue and the failure to use those revenues to bolster broad-based growth; climate change and variability ; weak public finance management and business environment; and limited physical and human capital. Chad’s growth cycle (see figure 1) provides an illustration of some of these constraints. Increased insecurity in Chad and neighboring countries, constitutes a significant driver of short-run growth volatility.

The prospect of a significant decline in oil production, solid population growth, and growing climate change challenges implies that giant steps would be necessary for Chad to gain a middle-income status in the two decades.

Oil is Chad’s main resource. Its production is however projected to sharply decline due to a modest proven petroleum reserve, long distance from infrastructure, security risks, and commercialization challenges.  Hence, in order to strengthen this sector and the economy in general, reforms are needed to improve the oil revenue management framework. This will help strengthening oil revenue management mechanism, which will include establishing a general fund designed to house the non-budgeted surplus, divided into stabilization and investment components, and with clear utilization rules and procedures that promote more productive and effective utilization through the budget. Moreover, there is an urgent need to diversify the economy away from oil. Improving agriculture productivity, supporting light agro-processing, and services, specifically the digital economy, will be instrumental.

Besides, efforts are needed to improve the quality and supply of economic infrastructure. Chad’s infrastructure network lags that of peers and is characterized by internal inequalities and limited access. Infrastructure services are twice as expensive as elsewhere in Africa, reflecting inefficiencies and the lack of competition. A large share of infrastructure is domestically financed, with the central government budget being the main driver of infrastructure investment, although development partners provide significant support in critical areas. The CEM estimates that the cost of addressing the country’s infrastructure needs by 2030 would be more than 50% of the 2021 GDP. Even if major potential efficiency gains are achieved and domestic revenue can be increased from their current low levels, Chad would still face important infrastructure funding gaps that would need to be financed by innovative and non-traditional financing sources. The adoption of institutional, regulatory, and administrative reforms will be key to promote such private investment in economic infrastructure.

Figure 2: Projected Chad’s GDP per Capital per scenario (in Constant US$ 2010)

Meanwhile, Chad’s formal unemployment rate has been growing, adding to the dominantly informal and often poorly utilized labor. Failures to address informal and under-utilized labor have raised significant economic and social risks.  Most of the workforce is employed in the low value-added informal sector, and low-skilled and poorly educated workers make up most of the labor force. The labor market tends to require more unskilled labor, although there is a growing trend toward more skilled labor, particularly in the formal sector. The country remains ill-prepared to produce relevant skills for the job market, which hampers competitivity and productivity. Private sector development is the main engine for job creation and labor mobility. But that sector is under-developed in Chad as the public sector remains the main employer.  The CEM proposes some options to use part of the oil revenues to invest in developing relevant skills to leverage economic transformation, with the aim to accelerate job creation and increase labor mobility. To spur the formal job market, some labor market regulation may also be needed to strengthen competition among firms for skilled labor.

Chad could become a low-middle-income country by 2045 if the country implements the full set of reforms in the labor market, infrastructures and oil sector as recommended in the Country Economic Memorandum.  Assuming that all CEM reforms are implemented, Chad's per capita GDP growth is projected to average 0.2% in 2025-29, 3.2% in 2030–39 and 5.2% in 2040-49. Chad’ net national income (GNI) per capita would reach the current official threshold of low-middle-income status only reach by 2045, (see figure 2). By contrast, failure to implement the proposed reforms would be costly, as Chad would remain a low-income country even by 2050, with no meaningful improvement in the quality of life of its population and no significant poverty reduction.