Background

A strong and transparent framework for the management of public resources is the first line of defense against poor governance and potential corruption. The CEMAC has designed and adopted at the regional level the relevant regulations to build this framework and improve efficiency in managing public resources. The challenge is to ensure proper and full implementation of these principles at the national level. This is best done by ensuring regular assessments, reporting on implementation status, and supporting member countries in their efforts in this area.

The CEMAC’s PFM framework provides a sound basis for managing public resources in a transparent and efficient manner and addressing PFM vulnerabilities to corruption. The architecture underpinning the regional framework in the area of PFM is rooted in six CEMAC directives. Taken together, these directives form a coherent framework within which to direct the roles and responsibilities, the processes, the reporting, and the internal and external controls and audits related to the collection of taxes and management of public resources. They also provide clear guidance on consultation with civil society, publication of data, and, importantly, the interaction between executive and legislative bodies in budget preparation, execution, and reporting. Principles included in these directives reflect international standards and best practices for promoting fiscal transparency and effective management of public funds (Table 5.1).

As CEMAC standards are defined with the legal instrument of a directive, their provisions need to be transposed into national laws to become applicable in member states. This transposition requires that member countries submit their draft law to the CEMAC Commission for the latter’s assessment of conformity. Recommendations of the CEMAC Commission are then embedded in the finalized law, which can then be approved by national authorities. This process is meant to ensure coherence between the regional framework and the national level. There are a set of administrative actions that then follow the approval of legislation at the national level to ensure that processes and procedures, as well as specific obligations in the area of data reports and audits, are well defined and guide work practices in the public administration.

The transposition of these PFM directives into national legislation has been uneven, which limits the potential for harmonization and adherence to key standards in this area (see Figure 5.1). In particular, CEMAC central directives on governance and transparency (06/2011) and on the budget law (01/2011) have been transposed into national legislation by all CEMAC countries, except by Equatorial Guinea. Implementation on all other directives is also partial, as Equatorial Guinea has not transposed these into national legislation.

At the same time, transposition into national legislation does not guarantee that the regional—framework of these PFM directives to enhance governance and prevent corruption is effectively implemented. When a national law or regulation is enacted to transpose a CEMAC directive, there are several administrative steps that need to follow, as well as sometimes deep modification of procedures, IT systems, and work practices, for the new legislation to be effective.

^{Table 5.1}

CEMAC: Key Directives on Public Financial Management

^{Table 5.1}

CEMAC: Key Directives on Public Financial Management

CEMAC PFM Directive Number	Adoption Date	Scope	Issues Covered
06/2011	11–12-2001	Code of good governance and transparency in the management of public resources	Key principles to ensure transparency, good governance, and participation of civil society in the areas of fiscal policy, and budget formulation and execution
01/2011	19–12-2001	The framework for budget law preparation and implementation	General rules on the nature, coverage, presentation, preparation, and adoption of the budget law
02/2011		General rules in the area of public accounting	Operational and procedural framework underpinning budget execution and controls
03/2011		Structure of the State’s accounts and of its balance sheet	General rules defining the object of the state’s public accounting plan, and the rules of its production so as to track status and evolution of the state’s assets and liabilities
04/2011		The nomenclature and presentation of budget operation	Key principles related to the presentation of operations of the general budget, annexed budgets, and special accounts of the treasury
05/2011		Statistics presentation of the financial operation of the state	Defines principles (concepts and methodologies) for the production of statistics on budget executions (follows GFSM international statistical standards)

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^{Table 5.1}

CEMAC: Key Directives on Public Financial Management

CEMAC PFM Directive Number	Adoption Date	Scope	Issues Covered
06/2011	11–12-2001	Code of good governance and transparency in the management of public resources	Key principles to ensure transparency, good governance, and participation of civil society in the areas of fiscal policy, and budget formulation and execution
01/2011	19–12-2001	The framework for budget law preparation and implementation	General rules on the nature, coverage, presentation, preparation, and adoption of the budget law
02/2011		General rules in the area of public accounting	Operational and procedural framework underpinning budget execution and controls
03/2011		Structure of the State’s accounts and of its balance sheet	General rules defining the object of the state’s public accounting plan, and the rules of its production so as to track status and evolution of the state’s assets and liabilities
04/2011		The nomenclature and presentation of budget operation	Key principles related to the presentation of operations of the general budget, annexed budgets, and special accounts of the treasury
05/2011		Statistics presentation of the financial operation of the state	Defines principles (concepts and methodologies) for the production of statistics on budget executions (follows GFSM international statistical standards)

A key role is played by the foundational CEMAC regulation on transparency and good governance (directive 06/2011). This regulation serves as the general framework for all the other directives, and lays the groundwork in terms of (1) attribution and responsibilities of each public institution, (2) the economic context in which fiscal policy decisions are embedded, (3) the elaboration and presentation of the budget law, (4) the activities related to revenue collection and expenditure, (5) the information to be provided to the public, and (6) a participative process, with involvement by civil society, in defining key policy decisions. By design, this regulation provides a strong basis in terms of governance. It also establishes clear-cut responsibilities and strong requirements for transparency to support an environment that limits the potential for corruption.

However, the actual implementation of this key directive remains problematic. First, regional coverage is partial, as Equatorial Guinea, a top oil producer in the region, has not transposed this central directive. In addition, some crucial principles of this directive are not actually implemented in countries that have adopted it. Fiscal reporting on natural resources management is a case in point. While the directive requires the publication of financial operations concluded by the public sector, contracts with the oil sector are not made available to the public in a full and transparent manner. Public procurement is another example. The directive stresses that regulations on public procurement must comply with international standards. Based on these standards, open competition should be used as the preferred or default method of procurement and a complaints review mechanism should be in place. This is not systematically observed in practice and creates vulnerabilities to corruption in public investment management.

CEMAC: Status of Transposition of Directives on Public Financial Management (December 2020)

Source: CEMAC Commission and (IMF) Fiscal Affair Department.Note: Degree of transposition of the six PFM Directives into national legislation is reflected. “Not implemented indicates” that no initiative was taken so far by the authority to provide the CEMAC Commission with a draft national law to transpose a given CEMAC Directive. In progress means that a draft law was prepared by the national authorities and sent to the CEMAC Commission, but the comments of the latter have not been incoprporated as yet in a revised national law. Enacted indicate that the national law to transpose a given CEMAC direxctives has been approved. This last step, in itself, does not guarantee effective implementation of a Directives unless the concerned public administrations adapt their procedural approach, internal IT systems, and mode of cooperation with other public entities in accordance with the spirit of the CEMAC Directive.

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CEMAC: Status of Transposition of Directives on Public Financial Management (December 2020)

Source: CEMAC Commission and (IMF) Fiscal Affair Department.Note: Degree of transposition of the six PFM Directives into national legislation is reflected. “Not implemented indicates” that no initiative was taken so far by the authority to provide the CEMAC Commission with a draft national law to transpose a given CEMAC Directive. In progress means that a draft law was prepared by the national authorities and sent to the CEMAC Commission, but the comments of the latter have not been incoprporated as yet in a revised national law. Enacted indicate that the national law to transpose a given CEMAC direxctives has been approved. This last step, in itself, does not guarantee effective implementation of a Directives unless the concerned public administrations adapt their procedural approach, internal IT systems, and mode of cooperation with other public entities in accordance with the spirit of the CEMAC Directive.

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CEMAC: Status of Transposition of Directives on Public Financial Management (December 2020)

Source: CEMAC Commission and (IMF) Fiscal Affair Department.Note: Degree of transposition of the six PFM Directives into national legislation is reflected. “Not implemented indicates” that no initiative was taken so far by the authority to provide the CEMAC Commission with a draft national law to transpose a given CEMAC Directive. In progress means that a draft law was prepared by the national authorities and sent to the CEMAC Commission, but the comments of the latter have not been incoprporated as yet in a revised national law. Enacted indicate that the national law to transpose a given CEMAC direxctives has been approved. This last step, in itself, does not guarantee effective implementation of a Directives unless the concerned public administrations adapt their procedural approach, internal IT systems, and mode of cooperation with other public entities in accordance with the spirit of the CEMAC Directive.

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The limited implementation of the CEMAC directive on the budget law also increases the risks of exposure to corruption in several PFM areas. First, transactions to and from SOEs, including SOEs that are part of profit-sharing agreements in the extractive sector, are not systematically covered by central governments’ fiscal reporting. This weakens the scope of internal and external controls in this key area. It also adds to the difficulty of tracking the flow of foreign exchange back to the CEMAC which relates to the activity of SOEs, a monitoring capacity that is a key pillar for supporting external stability. Second, tax exemptions and tax expenditures are rarely detailed and assessed in the budget documentation, or they are maintained for several years but without a clear legal basis or economic justification. This may create governance problems and even provide an opportunity for favoritism. Third, the consolidation and the full operationalization of the treasury single account (TSA) still need to be completed. The TSA is not used extensively by most governments, in particular with regard to the domiciliation of the state’s share in the extractive industry, as well as for some external financing. In such cases, holdings related to the central government are even kept in foreign accounts. While the directive prohibits the deposit of public funds in commercial banks, maintaining fragmented banking arrangements outside of the TSA reduces the ministry of finance’s or treasury department’s oversight of all government cash flows and weakens budget control and monitoring. This practice directly creates the potential for weak governance.

Finally, the implementation of the CEMAC Directive on Public Accounting also needs to be completed to strengthen expenditure controls and reduce fiscal risks. Challenges in this area are of two types. First, in practice, expenditure controls are neither effective nor streamlined in most CEMAC countries, and exceptions to the regular expenditure procedures defined by the directive have multiplied. This creates incentives for expenses that are executed outside the normal spending chain, delinking budget execution from the resource envelope available and approved in the budget law. In turn, this contributes to the emergence of a large stock of arrears that plague the region, in particular when the resource envelope is reduced by a decline in world commodity prices. Second, ex post, it also severely weakens the legislative input to budget orientation and fiscal policy. Assessments of governance in the management of public funds based on an analysis of the status of implementation of CEMAC directives closely match assessments based on the Public Expenditure and Financial Accountability framework (PEFA) and highlight several governance problems. Work is conducted occasionally, including by the IMF, to assess public financial management performance, as part of the PEFA framework.¹ It identifies 94 characteristics (dimensions) across 31 key components of public financial management (indicators) in 7 broad areas of activity (pillars). Based on a selection of specific indicators more closely related to measures of governance in the management of public resources, the CEMAC countries for which the information is available (Cameroon, Central African Republic, Gabon, Republic of Congo) are in most cases below the average for sub-Saharan countries, and these two groups—the four CEMAC countries for which information is available, and all of sub-Saharan Africa—are below the average for the rest of the world. Such assessment is consistent whether one looks at the more recent or the pre-2013 PEFA indicators.

The Way Forward

The CEMAC Commission is working on several fronts to address weaknesses in PFM. First, its core mandate to oversee the full and effective implementation of CEMAC directives translates into ongoing interaction with member countries to facilitate full transposition into national legislation and assess how work practices comply with the directives. A specific area is the gradual implementation of budget according to program classification (for example, Gabon and Cameroon, and, partially, Republic of Congo and Chad), an approach that benefits from guidance from the CEMAC Commission. Second, the CEMAC regional surveillance framework provides a basis for relating outcomes in budget execution to the degree of implementation of CEMAC directives.

However, strengthening PFM remains imperative in order to enhance governance and reduce the potential for corruption in the CEMAC. Progress in this area requires steps on different fronts:

• Strengthen the capacity of the CEMAC Commission to monitor and ensure the proper implementation of the CEMAC directives. The CEMAC Commission faces a daunting task, with very limited resources, in covering a wide array of issues ranging from internal market regulation, to international treaties, to harmonized budget preparation and execution. It is critical to assign dedicated resources to a CEMAC Commission unit tasked with assessing PFM progress on a regular basis. Ideally, such a unit would issue periodic reports on the status of implementation, describing gaps and actions in countries. Strong collaboration with donors will be key to achieving this. Such an approach has been implemented successfully in the WAEMU. In principle, it is advisable that the entity in charge of overseeing the treaty establishing an economic union (“commission” in the case of the European Union, CEMAC, and the WAEMU) be provided with clear jurisdiction to determine whether national law is compliant with community directives. Moreover, ideally this verification process would be formalized through an annual peer-review process.

• Ensure the transmission of petroleum contracts to a centralized unit within the CEMAC Commission. Such contracts are often kept confidential to regional institutions. The specific tax agreements embedded in these contracts are known to be often in derogation of the CEMAC framework, thereby reducing the tax base. Moreover, the exact terms of the benefit to the state from participating in profit-sharing agreements (via SoEs) or concessions are not known, as they originate in complex formulas described in confidential contracts dependent on oil volume, prices, and the investment cycle. As a welcome step to strengthen governance in this area, the CEMAC Commission will ask national authorities to share such contracts and use this information to enhance understanding of the revenue accruing from them.²

• Require CEMAC member countries to finalize their convergence reports. These reports would describe the convergence path over three years with regard to those convergence criteria not met. In this respect, they are a potentially useful instrument for relating full implementation of CEMAC directives (for example, in the area of tax regime) to the expected flow of resources, thereby enhancing accountability and scrutiny on the adoption of sustainable fiscal policy. To date, these reports have not been completed.

• Coordinate with BEAC to develop and operationalize treasury single accounts (TSAs) in CEMAC member countries. Both BEAC and national treasuries need to interact and to develop shared practices and procedures to maintain the TSA in an operational manner. Developing TSAs requires adapting institutional arrangements between BEAC and treasuries to clearly define responsibilities, policies (including on the rates of interest paid on the TSA balance), and requirements for information exchange. Upgrades of IT systems and procedures used by the BEAC are also a prerequisite to ensure active and timely cash management.

• Enhance transparency, an essential step. There is a lack of transparency in terms of disclosure of contracts in the extractive sectors and proper recording in budget documents of transactions at the subnational level and with regard to state-owned enterprises. Budget documents are often incomplete, for instance with regard to providing information on tax exemptions, their economic rationale, and their estimated costs. Enhancing transparency could initially start with a regular report, disseminated to the public, on the various budget documents and background reports that are expected, according to CEMAC regulations, to be made available to the public.

Background

The regime for AML/CFT can be a powerful tool for supporting efforts to deter, prevent, detect, investigate, and prosecute acts of corruption. The Financial Action Task Force (FATF), the international standard-setter for AML/CFT, calls for the mobilization of the framework for AML to help detect and trace the laundering of proceeds of corruption and assist in the investigation and prosecution of bribery.³ Specific elements of the framework for AML/CFT are particularly relevant: implementation of enhanced due diligence requirements for (high-risk) domestic politically exposed persons, including the identification of PEPs who are the beneficial owners of legal entities, and reporting to the authorities by financial institutions of transactions when such institutions suspect or have reason to suspect that the subject funds are the proceeds of criminal activity, including corruption.

The regionalization of the framework for AML/CFT within the CEMAC is a welcome effort to create economies of scale and ensure a level playing field within the community. A regulation regarding AML/CFT was adopted in 2003, subsequently revised in 2010, and replaced in 2016. The current CEMAC regulation is of direct and immediate application to all the member countries. Other steps have also been taken at the regional institutional level with the establishment of the Task Force on Money Laundering in Central Africa (Groupe d’Action contre le Blanchiment d’Argent en Afrique Centrale)—a specialized organ of the CEMAC whose purpose is to assist its members in the fight against money laundering and terrorist financing (ML/TF). The GABAC was recognized as a FATFstyle regional body in 2015—and a supervisory function for AML/CFT was created within the Central African Banking Commission (COBAC). Notwithstanding the regionalization effort, some important functions—such as law enforcement and the receipt, analysis, and dissemination of financial intelligence—remain at the national level.

While the regional framework for AML/CFT was strengthened with the adoption of the 2016 CEMAC regulation, there is significant scope to improve compliance with the FATF standards and increase effectiveness. Assessment of the CEMAC member countries’ compliance with the 2003 FATF recommendations found strategic weaknesses in the 2003 and 2010 CEMAC regulations, with most assessment criteria being evaluated as noncompliant or partially compliant in the related areas.

Overall, CEMAC countries were found to be noncompliant or partially compliant with most of the FATF recommendations (that is, the FATF or “international” standard). The assessment reports highlighted the finding that neither the legal nor the regulatory frameworks were aligned with the international standard. For instance, it found strategic deficiencies with respect to financial institutions’ preventive-measures obligations that are relevant to the fight against corruption, namely, provisions related to the identification of customers who are PEPs, the reporting of suspicious transactions, and the transparency of beneficial ownership of legal persons. The assessments also noted that while frameworks for sanctions had been formally established in case of breach of the obligations related to AML/ CFT, implementation of those sanctions was difficult to assess. The 2012 FATF standard introduced new requirements, including with respect to anticorruption measures and an emphasis on the effectiveness of regime for the AML/CFT in mitigating identified ML/TF risks. The first round of assessments (that is, “mutual evaluations”) of CEMAC countries against the current standard is ongoing and is scheduled to be completed by 2023. These assessments will highlight pending shortcomings of the 2016 CEMAC regulation and deficiencies in the implementation and effectiveness of both the national and regional frameworks.

Banking supervision, a key component of the regime for AML/CFT, is a COBAC responsibility. While the onus of meeting the international standard for AML/CFT technically remains with national authorities, individual CEMAC countries depend, in certain respects, on the actions and efforts of regional bodies. In particular, the COBAC is responsible for ensuring the strength of the regulatory framework and the proper implementation of preventive measures by credit institutions. The COBAC has carried out off-site and on-site examinations of credit institutions and has issued formal warnings and imposed administrative sanctions on institutions and their directors when important breaches have been uncovered. The COBAC is in the process of strengthening its implementation of the risk-based approach to the supervision of activities related to AML/CFT and is increasing its capacity to carry out these activities.

Ensuring that the regime for AML/CFT is effectively implemented through effective risk-based supervision by the COBAC will help support anticorruption efforts across the CEMAC. The COBAC supervisory role is critical in ensuring that credit institutions appropriately implement their obligations relative to AML/CFT in order to prevent and detect the laundering of the proceeds of corruption. This would also support national efforts regarding AML and anti-corruption, notably by ensuring that (national) financial intelligence units receive all appropriate suspicious transaction reports from credit institutions, and that these are fully and correctly completed. Suspicious transaction reports may trigger investigations of acts of corruption and the laundering of their proceeds.

Another key international standard to guide reforms to reduce corruption (hence contributing to AML) is the United Nations Convention against Corruption (or “the Convention”). According the United Nations, “The . . . Convention is the only legally binding universal anti-corruption instrument. The Convention’s far-reaching approach and the mandatory character of many of its provisions make it a unique tool for developing a comprehensive response to a global problem. The Convention covers five principal areas: preventive measures, criminalization and law enforcement, international cooperation, asset recovery, and technical assistance and information exchange. The Convention covers many different forms of corruption, such as bribery, trading in influence, abuse of functions, and various acts of corruption in the private sector.”⁴ It has 187 states parties, including all of the CEMAC member countries. The states parties submit to a voluntary peer-review process. The first cycle of the review process has been completed for nearly the entire membership. It is not completed for three CEMAC member countries (Chad, Equatorial Guinea, Republic of Congo).

The Way Forward

To support efforts to address money laundering and financing of terrorism in the CEMAC, the following measures should be taken:

• Continue to strengthen the regional framework for AML/CFT, in particular those measures relevant to the fight against corruption. The adoption of the 2016 CEMAC regulation was a positive step in bringing the regional framework into closer alignment with the 2012 FATF standards. The CEMAC should address the pending shortcomings to be identified in the current round of assessments related to AML/CFT (that is, “mutual evaluations”) by the GABAC. The COBAC should also swiftly revise its 2005 regulation to implement the 2016 CEMAC regulation.

• Fully implement the risk-based approach to supervision, which will help focus the limited resources of the COBAC in the areas presenting the greatest risks. As called for in the FATF standard, jurisdictions should deepen their understanding of the risks and vulnerabilities related to ML/TF and allocate more resources to high-risk areas. Hence, the COBAC should enhance its understanding of the risks faced by the financial sector, develop comprehensive risk profiles of supervised credit institutions to inform inspections, and adapt the overall supervisory strategy accordingly. This should take into account the particular risks related to the laundering of the proceeds of corruption.

• Strengthen COBAC’s efforts to ensure that high-relevance preventive measures related to AML/CFT for the prevention and detection of the laundering of the proceeds of corruption, are properly implemented by credit institutions. The 2016 CEMAC regulation establishes requirements for preventive measures related to the identification of customers and specific guidelines related to politically exposed persons and beneficial ownership structures. However, implementation by the private sector is a challenge and national financial intelligence units continue to receive a low number of suspicious transaction reports. To address these shortcomings, the COBAC and domestic financial intelligence units should, among others steps, issue comprehensive guidance to the private sector, conduct training, and carry out more targeted supervision efforts (for example, thematic versus full-scope, on-site inspections to address AML/CFT).

• Ensure that proportionate and dissuasive sanctions are imposed on credit institutions in case of breaches of obligations related to AML/CFT and reinforce its cooperation with national authorities to ensure the effectiveness of the regionalized regime for AML/CFT. As per the 2016 CEMAC regulation, the COBAC should communicate any administrative or disciplinary sanction imposed on a credit institution to the relevant national financial intelligence unit and prosecutor. Establishing effective channels of communication and mechanisms for exchanging information between the regional and national levels will be key to strengthening the understanding of risks and to following up on institutions whose implementation of measures for AML/CFT has been found to be deficient.

The CEMAC should also encourage its members to comply with the standard UNCAC peer-review process as part of a broader accountability infrastructure. This peer-review process includes the identification of gaps in the national legislative system to implement the standards. Some of these gaps are directly relevant to CEMAC on matters related to AML/CFT, and to procurement.

Background

Oil extraction and export play a major role in the economy of most CEMAC countries. Oil accounts for about 20 percent of GDP and covers roughly 75 percent of the region’s exports of goods. Tax and nontax revenues related to oil contribute to more than 40 percent of total revenues. Given the size of this sector and its importance in commanding public resources, good management in the oil sector is key to ensuring good governance in the rest of the economy.

The oil sector is very complex by nature and often stretches the capacity of public administrations to their limits (Box 5.1). The industry is organized basically around two typical arrangements. In a production-sharing agreement (PSA) the state (normally through a state-owned enterprise), and a foreign private company (usually through a resident subsidiary), set up a partnership for the extraction and export of oil, and agree on a profit-sharing scheme. In such a scheme, a certain amount of oil (cost-oil) is used to pay the costs incurred in the exploration and extraction. The next part (profit-oil) is shared between the two parties according to an agreed formula. This agreement takes into consideration the investment cycle and depreciation of the fixed investment as a cost factor. By contrast, in a concession scheme, the operator typically pays a royalty and an income tax for the right to extract and export oil. Sometimes a concession scheme includes sector-specific taxes, such as a resource rent or additional profit taxes. The fiscal terms of concession systems are typically specified in legislation, rather than negotiated on a project-by-project basis.

When countries enter into contractually agreed-upon fiscal terms, it is good practice to set these terms out initially in model contracts (for example, for a production agreement). The model PSA contract should specify which fiscal terms are biddable or subject to negotiation; best practice is to keep the number of fiscal parameters that can vary to a minimum. The general legislative framework for the petroleum sector can either be incorporated into income tax legislation or into stand-alone legislation for more specialized taxes for extractives (that is, via a petroleum code or a mining code). The latter is the model mostly used in the CEMAC.

In both cases—but particularly in the PSA-the quantification of the actual share of the oil accruing to the state requires complex calculations, which depend on the exact amount of oil produced and exported, its selling price, and the imputation of various cost factors. It must be noted that an important share of oil production is sold on futures markets. As a result of the ever-growing complexity of this sector, in practice it takes time and steadfast investments for the state to build full capacity to manage and control such contracts and properly calculate (or audit) its share.

CEMAC: Oil Export and Capital Outflow (1997–2017; data in billions of CFAF)

Source: IMF staff data and calculations, based on countries’ balance-of-payments statistics.Note: The concept of capital flow is defined as the sum of recorded short-term capital outflows and errors and omissions.

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CEMAC: Oil Export and Capital Outflow (1997–2017; data in billions of CFAF)

Source: IMF staff data and calculations, based on countries’ balance-of-payments statistics.Note: The concept of capital flow is defined as the sum of recorded short-term capital outflows and errors and omissions.

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CEMAC: Oil Export and Capital Outflow (1997–2017; data in billions of CFAF)

Source: IMF staff data and calculations, based on countries’ balance-of-payments statistics.Note: The concept of capital flow is defined as the sum of recorded short-term capital outflows and errors and omissions.

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An analysis of available data and studies suggests that oil export data in official statistics are sometime prone to miscalculation (see Figure 5.2):

• First, an analysis of CEMAC balance-of-payments data suggests a strong correlation between recorded oil exports and recorded capital outflows. In other words, the higher the total value of recorded oil exports, the higher the estimated capital outflows. This is probably an indication that part of the counterpart to oil exports is not repatriated into the exporting country and is recorded as capital outflow.

• Second, other studies suggest that the oil export sector is plagued by the phenomenon of underinvoicing. This phenomenon relates to the fact that oil exports as recorded by the exporting countries in several cases are lower than the partner data as recorded by the importing countries, as seen in some cases for the total of exports.⁵

• Third, there is also evidence of very large deposits by CEMAC residents in foreign countries, which are likely not in total compliance with the CEMAC foreign exchange regulation. That regulation requires that holdings by CEMAC residents in foreign banks are kept only for limited amounts and for justifiable reasons, such as to finance anticipated imports or to cover short-term debt service. Data from the BIS suggest that the stock of CEMAC residents’ holdings with foreign banks (about $5 billion as of the end of 2017) are above such notional allowed amount. If this conclusion holds, and given the importance of oil as a primary source of foreign exchange earnings (and based on evidence drawn from the balance-of-payments data), it is possible that part of such holdings is related to proceeds from unrecorded oil exports.

• Fourth, there has been some concern that the increase in oil prices through 2018 did not translate into higher oil tax revenue (and NFA accumulation). In fact, at their extraordinary meeting in November 2018, CEMAC’s heads of state called for stepping up efforts to repatriate export proceeds, in particular by the state-owned enterprises part of PSA, to help strengthen this link.

The complexity of this sector and the vital importance that its governance plays in the CEMAC economic and monetary union calls for strong capacity to assess and monitor the link between oil prices and volumes and oil revenues. It is possible to use spreadsheet modeling techniques to forecast the tax revenue and foreign exchange implications of alternative economic scenarios. Such models require information on the fiscal terms contained in a PSA, as well as projections of the costs of production and the quantity of production from the time of inception of a given petroleum project. This type of analysis is feasible for a limited number of oil fields, where such detailed data may be available. The outcome of a project-by-project analysis of the major petroleum projects in a country cannot be readily extrapolated to the national petroleum sector as a whole, but such an analysis may give useful indications of the order of magnitude of the effects of various economic shocks and could help to identify potential problems in revenue collection and amounts of foreign exchange.

The oil-exporting countries can refer to the Extractive Industries Transparency Initiative, an international standard widely used to enhance and report on governance in this area.⁶ The EITI sets ambitious standards for strong governance and full accountability in extractive industries. There is no formal relationship between the CEMAC Commission (or other regional institutions) and the EITI as membership is held by countries only. However, there is a strong synergy between the (voluntary) EITI requirements and the CEMAC guidelines for PFM (which set specific requirements for CEMAC countries).

In fact, four of the CEMAC countries have a form of engagement with the EITI. Full membership is effective for Cameroon, Chad, and Republic of Congo. Central African Republic was a member but was suspended. Equatorial Guinea and Gabon have committed to submit their EITI applications as part of their engagement under IMF and IMF staff-monitored programs, respectively. Among the corrective actions asked of Cameroon and Republic of Congo as part of the regular validation process to address serious deficiencies are those related to contract transparency, license registration, state participation, and (transparency and reporting on) SOEs transactions.

However, possible membership in the EITI needs to be part of a wider effort to enhance governance in the oil sector. By design, the EITI does not guarantee that the commercial part of a given oil project (the initial physical transaction) is covered in a timely manner. It deals mainly (and above all) with the use of recognized resources. In fact, there have been instances of inefficient governance and of corruption related to the oil trade, even in countries formally part of the EITI (for example, Republic of Congo). Opaque practices can even result from barter transactions (private companies working for oil) or commercial financing (leading to the prior commitment of oil exporters to repay their debt through credits provided by large foreign financial institutions). This complicates the challenge of reconciliation, as part of some transactions may be in the form of barter.

As a result, CEMAC member states must be proactive in ensuring good governance in such a complex sector; the CEMAC legislation provides solid ground on which to build progress (Box 5.1):

• The first task is to ensure that customs are and remain at the center of the declaration of export transactions and that this information is shared with the tax institutions (at the national level) and those charged with the governance of the monetary union (BEAC). The framework of the CEMAC in the field of customs legislation is clear: nothing can leave the region without prior declaration to customs and without their authorization. In other words, the customs authorities of CEMAC member states authorize the transit into and exit out of the community of goods and authorize these operations only after compulsory import and export formalities have been met. There is no exception, based on the law, to the fact that all resident economic agents exporting goods are subject to the obligations mentioned above. To oppose the exercise of customs functions is an offense (Article 62 of the Customs Code or “CC”). Article 2 of the CC provides that customs laws and regulations must be applied without regard to the quality of the persons; goods imported or exported by the state are not subject to any immunity or derogations. As a result, there is no suspension of customs obligations in any way when the economic entity exporting consists of a partnership between a private entity (for example, an oil company, through its resident arm) and a SOE.

• The customs legislation also establishes the specific obligation to provide any additional information that the customs authorities may need to verify the plausibility of the customs declaration.

• The customs law and the foreign exchange law also oblige CEMAC residents (including oil companies) always to include the invoice in the customs declaration (as part of this declaration) and to provide information on the expected timing and domiciliation of the oil exports. This is also necessary to comply with specific obligations related to the foreign exchange law.

In fact, CEMAC customs have a weak capacity to cope with this complex sector and have often not proactively applied these regulations (Box 5.1). As a result, customs declarations may be incorrect or incomplete in many cases. The strict monitoring capacity of oil transactions is limited. It is often assumed that, given the presence of the state in several benefit-sharing agreements, customs should not impose an additional burden.

The Way Forward

The CEMAC Commission should work to ensure full implementation of the regional legal framework in this area, including through enhancing its own capacity. Given the lack of concrete implementation in many areas, member states should submit an annual report to the CEMAC Commission on the status of the implementation of the guidelines to support the sound functioning of the customs union.

Control of oil and gas exports should be elevated as a core customs mission (even though customs revenue is not directly collected), and this should be reflected in specific performance indicators and incentives

Membership in the EITI can help enhance reporting requirements and the provision of data that should be published to fully implement the CEMAC directives (in particular on governance). It is important to note that CEMAC guidelines and EITI standards both require full disclosure of and transparency regarding contracts and activity related to the extractive sector and its share in the state.

Fully implementing the foreign-exchange law will also be important. The issue of repatriation highlights an important difficulty that regional authorities need to consider in greater detail: the rule of law when individual members do not respect the regional legal framework. In particular, improvements could cover the banks’ responsibilities in this area and the nature of (mostly ex-post) customs verifications and sanctions for noncompliance. This would need to cover oil traders, and perhaps extend to banks involved in settling the transactions.

Strengthening capacity for real time monitoring of the link between oil exports and evolution of net foreign assets will be helpful. Given the complexity of extractive sectors, but also the importance of good governance to ensure its contribution to the budget, specific capacity to monitor this sector should be built. In particular, it will be important to establish capacity at the regional level (ideally via the BEAC) to assess the link between oil prices and volumes and expected tax revenues. This will be essential in determining whether the tax revenues that enter (and therefore the gross NFA inflows) are justified by the level of prices and output or if other policies are needed to strengthen external stability (including monetary policy at the CEMAC level or fiscal policies at the country level). Discussions with regional institutions suggested that one step in this direction would be revisiting the adequacy of the documentation model to be provided by petroleum companies to customs and the reporting system envisaged with the BEAC.

It will also be vital to establish in the customs administrations of the largest oil exporters a dedicated function or unit endowed with specialty knowledge of the oil sector (at the national level). Such a unit would have intelligence and risk-analysis capabilities and would play a central role in directing, supporting, and monitoring overall customs control activities from field operations (for example, fiscal measurement) to post-clearance audits. In particular, it would define the exact information it would ask oil exporters to fill out or provide upon request in order to monitor and respond to emerging governance risks (for instance, when otherwise available information on oil prices and production does not match that of the customs declaration). In other words, the dedicated unit would need to establish a cartography of the risks of mis- or nonreporting, so as to direct controls to these risks. The dedicated unit would benefit from including representatives of the state-owned oil companies, as SOEs may be in an ideal position to obtain critical data for the analysis of oil and gas contracts.

Finally, tracking and reporting the status of implementation of CEMAC directives will also be critical. The CEMAC Commission should also strengthen the implementation of the transparency provision included in the CEMAC directive on transparency and governance (06/2013). In particular, it needs to urge member countries to provide a complete reconciliation of oil production and export data with the oil tax revenues included in the budget documents. Doing this would lay the groundwork for participation in the EITI membership, which should be encouraged.