The government's current expenditure plans cannot be reconciled with the large stock of unsettled payment obligations carried forward from 2009, and the government is under pressure to reduce its budget. Local media had anticipated a reduction in the 2011 budget, but overall expenditure in 2011 is almost identical to the 2010 budget, producing a slight reduction in real terms. However, the government will struggle to contain recurrent expenditure and the accumulation of new domestic payment arrears, particularly in advance of the presidential election scheduled for late 2011. For example, in recent months the government has begun subsidising electricity costs and has boosted the size of the military. After the presidential election is held the government is expected to start tackling the budget deficit by reducing expenditure.

Oil revenue will fall in 2011 as prices stabilise and production continues to fall, but production will pick up in 2012 and revenue will increase. Non-oil revenue is forecast to continue to rise on the back of increased investment in sectors such as telecommunications, timber, mining, gas and construction. However, budgeted increases in the tax base from the informal sector are unlikely to be strictly enforced in the lead-up to the presidential election. In view of these trends, we forecast that the fiscal deficit will expand to 3.5% of GDP in 2011 but that in 2012 the deficit will reduce to 1.3% of GDP. The government should have no difficulty financing the deficits through domestic or concessional external borrowing.