III. Regional Integration: The Case of the Central African Republic22
47. The Central African Republic (C.A.R.) is a member of the Central African Economic and Monetary Community (CEMAC), a regional trade and monetary agreement that also comprises Cameroon, Chad, the Republic of Congo, Equatorial Guinea, and Gabon. The treaty establishing the CEMAC was signed on March 16, 1994, and the CEMAC was based on the institution of the Central African Economic Union (UEAC) and the Central African Monetary Union (UMAC). The CEMAC was meant to continue and reinforce the Central African Economic and Customs Union (UDEAC), established in 1964.
48. The main statutory objective of the CEMAC is to strengthen and fully implement the customs union among its member countries. In this vein, the treaty establishing the CEMAC introduced some major trade reforms aimed at reducing the level of external protection of the customs union and promoting members’ national markets by creating a regional common market.
49. In addition to regional integration among member countries, the CEMAC aims to ensure the economic stability required to sustain the fixed exchange rate of the common currency. To this end, in 2001 the Council of Ministers of the CEMAC, following the example of the European Union, adopted a set of four macroeconomic convergence criteria member countries had to comply with.23
50. This chapter analyses the regional integration efforts of the Central African Republic in the context of the CEMAC, focusing on the regional trade integration dimension of the agreement. Thus, the first section of the paper presents an overview of the CEMAC customs union reform. The second section investigates the status of the implementation of the CEMAC trade reform in the Central African Republic. Finally, the last section evaluates the impact of the regional trade reform on the C.A.R.’s trade performance, based on trade developments in the C.A.R. during the period 1994–2002.
B. The CEMAC Customs Union Reform: An Overview
51. The institution of the CEMAC introduced major trade reforms to reduce the level of external protection of the customs union and to establish a regional common market where goods and services, people, and capital may circulate without restrictions. Furthermore in order to support the implementation of the envisaged common market and promote its functioning, a complementary fiscal reform was introduced to harmonize member countries’ domestic tax regimes.
52. The CEMAC reform, aimed at greater openness to trade, the creation of a single market, and the harmonization of domestic tax regimes, relied on several key factors. On the side of regional trade integration, the reform was based on the introduction of a common external tariff (CET), the implementation of a generalized preferential tariff (GPT), and the elimination of quantitative restrictions to trade. On the complementary fiscal side, the reform relied on the implementation of a common value-added tax (VAT).24
53. First, in order to fully implement the custom union, a CET was adopted at the CEMAC level and applied on imports from third countries.25 In order to enhance the transparency of the tariff, four different rates were introduced to be applied on four different categories of imported goods. Since then, the rates of the CET have been revised downward several times by the CEMAC authorities to promote greater openness to trade. Currently, the custom duty rates applied on imports from third countries are fixed at 5 percent for essential goods, 10 percent for raw materials and capital goods, 20 percent for intermediate goods, and 30 percent for consumer goods. The CEMAC authorities decided that the CET had to be applied on the c.i.f. values of imported goods, in order to reflect the transportation costs incurred in the import process. This practice was preferred to the use of f.o.b. values of imported goods, in order not to penalize the landlocked member countries of the customs union, notably the C.A.R. and Chad.
54. Secondly, the GPT was introduced in order to gradually move toward the creation of a single market. The introduction of the GPT was intended to reduce the level of protection of the members’ domestic market against goods produced in CEMAC countries, in order to encourage intrazone trade. In fact, the GPT was envisaged to substitute for all other intrazone tariff barriers. The GPT was designated to be levied on imported goods originated in the CEMAC zone, and its rate was fixed at 20 percent of the CET that would have been applied to the category of the considered product. However, the GPT was conceived of as a temporary trade measure aiming to smooth the transition toward the removal of all tariff barriers on intrazone trade exchanges. CEMAC member countries were expected to gradually reduce the rate of the GPT and to definitely eliminate it by January 1998.
55. As a further step, the reform established that all quantitative restrictions had to be dismantled.26 In order to facilitate the adjustment of firms operating in industries that used to be protected through quantitative restrictions, an ad valorem temporary surcharge was introduced to complement the CET. The temporary surcharge could be levied on imports from any origin, including intra-CEMAC imports, but it could be applied only to those categories of goods that were previously subject to quantitative restrictions. Since the temporary surcharge was meant to protect the national domestic markets, each CEMAC country could autonomously choose its rate, up to a maximum of 30 percent. Similar to the implementation of the GPT, the temporary surcharge was intended to be a temporary trade measure, and member countries were expected to definitely remove it by June 2000.
56. To support the implementation of the common market, the need for the harmonization of members’ domestic tax regimes was envisaged, and a common VAT was introduced. The VAT substituted for all indirect domestic taxes levied and was meant to be levied on economic activities involving production, import, or provision of services, while all export activities were exempted. Member countries were left with the choice of the turnover threshold, starting from which the VAT should have been applied, and with the choice of rate, within a range of 15–18 percent.27 However, to avoid any form of discrimination between imports and local products, exemptions to the VAT were decided at the CEMAC level.28 In this vein, a list of VAT-exempted products and activities was defined, and member countries were expected not to provide any further exemptions beyond the CEMAC list.
57. Finally, in order to safeguard the budgetary needs of the CEMAC countries, the fiscal reform strengthened the use of the ad valorem excise tax. Thus, at the CEMAC level, a harmonized list of products eligible for the application of the excise tax was defined, and member countries were left with the choice of its rate, up to a maximum of 25 percent.29
C. The Implementation of the CEMAC Reform in the C.A.R.: An assessment
58. The C.A.R. has made important progress in the implementation of regional trade and fiscal reforms. While delays have arisen, as in most of the other CEMAC countries, in the implementation of the regional reform programs, currently the C.A.R.’s trade policies and practices, to a large extent, respect CEMAC regulations.
|Common External Tariff||Applied||5%, 10%, 20%, 30%|
|Generalized Preferential Tariff||Eliminated||0%|
59. First, the C.A.R. is fully compliant with the implementation of the rate structure of the CET, and no additional surcharges are imposed on imports from third countries (see table above).30 However, distortions are reported in the process of classification and attribution of the imported goods into the four customs duty categories. In fact, discriminatory practices are applied against imports from third countries by attributing imported goods to categories for which a higher duty rate applies. These practices are reported to arise with products that, because of the nature of their uses, could be classified in alternative customs duties categories. As an example, sugar imports are attributed to the category of consumption goods rather than raw materials and are, then, levied at a 30 percent custom duty rate, the highest rate established by CEMAC regulations.
60. In conformity with CEMAC regulations, in the C.A.R. customs duties are levied on the c.i.f. value of the imported products. However customs fraud is still a major problem in the C.A.R., and protracted negotiations with customs officers are reported to be common. In order to reduce the incidence of customs fraud, the CAR’s government has recently invested a private agency, named the “Bureau Veritas” (BIVAC), with a mandate to verify the declared value of imports and to evaluate its conformity with the prices usually applied on the international markets.31 The threshold for inspectable imported products is currently fixed at CFAF 1 million (about US$ 1,700).
61. In addition, the C.A.R. has effectively implemented the elimination of quantitative restrictions and the related compensatory temporary surcharge. hi conformity with the CEMAC’s requirements, the C.A.R. has dismantled most of its nontariff barriers to trade. However, a significant quantitative restriction is still enforced in the form of prior authorization required for sugar imports. The C.A.R. has definitely eliminated the ad valorem temporary surcharge it had introduced to protect local products during the process of elimination of quantitative restrictions. In the C.A.R., the temporary surcharge used to be levied on imports of any origin, and its rate was 30 percent, the highest admitted by CEMAC regulations.
62. Furthermore, the C.A.R. is compliant with the implementation of the single-market regulations, such that imports from CEMAC member countries are duty free. In fact, over the years, the C.A.R. has gradually reduced the GPT that was imposed on intra-CEMAC imports, and recently the GPT was eliminated, as established by CEMAC requirements. Thus, currently, the C.A.R. does not impose any tariff barrier on imports of goods that, on the basis of CEMAC’s “rules of origin,” are provided with a CEMAC certificate.
63. The CEMAC’s rules of origin are the overall body of regulations that are used to determine the origin of a good, and whether it was made in the CEMAC zone. Given the preferential nature of the CEMAC trade agreement, rules of origin play a crucial role, since levied customs duties vary according to the origin of the imported product. CEMAC’s rules of origin mainly distinguish between primary and manufacturing products. On the one hand, a primary product is considered to have a CEMAC origin if it has been produced in any of the CEMAC member countries. On the other hand, rules of origin for manufacturing products rely on ad valorem criteria, based on the raw material used in the production of the good or, alternatively, on the value-added incorporated in the product. Thus, a manufacturing product is provided with a CEMAC certificate if at least 50 percent of the incorporated raw material is of CEMAC origin or, alternatively, if at least 40 percent of the value added of the good has originated in other CEMAC member countries.32
64. The C.A.R. suffers from substantial tariff revenue losses implied by the extensive fraud in the attribution of certificates of CEMAC origin. It is reported that imported goods enter the C.A.R.’s territory with certificates that attest to their CEMAC origin and, as a consequence, free of duty, while they are not compliant with the CEMAC rules of origin, and should be subjected to the existing customs duties. This fraudulent practice in the attribution of certificates of CEMAC origin is reported to be frequent on goods imported from Cameroon.
65. The fraud in the attribution of the CEMAC certificates of origin lies in the generalized corruption of customs union officials, as well as in an inherent weaknesses at the CEMAC institutional level. While, on the one hand, CEMAC rules of origin have been defined at the regional level, on the other hand, a centralized institution charged with the attribution of certificates of CEMAC origin has not been created. Thus, the attribution of certificates of CEMAC origin is left to the discretion of customs union officials of the place of production, a practice that leads to the poor implementation of the CEMAC’s rule of origin and to widespread diffusion of fraudulent behavior.
66. Finally, relative to the fiscal aspects of the regional reform, the C.A.R. is compliant with the implementation of the CEMAC’s VAT and its rate structure. In the C.A.R., the VAT is levied on economic activities involving production, imports, and provision of services by legal entities (companies and partnerships), while all export activities are exempted. In the C.A.R., the turnover threshold for the VAT application has been fixed at CFAF 30 million, the applied rate is currently 18 percent, and no use of ad hoc exemption is reported. As required by the CEMAC’s directives, the introduction of the VAT substituted for other indirect taxes previously implemented in the country.33 However, as allowed by CEMAC regulation, the C.A.R. levies an ad valorem excise tax with a 23 percent rate on a set of products included in the CEMAC’s list.34
D. The Effects of the Trade Reform on C.A.R.’s Trade Performance
67. Due to the important progress in the implementation of the CEMAC regulation, the current C.A.R.’s trade regime is quite open. The C.A.R. is currently rated 3 (on a standard 1–10 scale with 10 being the most restrictive) on the Fund’s trade restrictiveness index, based on a moderate tariff level (18 percent unweighted average) and a few non-tariff barriers.35
68. Since 1994, the progressive implementation of the CEMAC trade reform has affected the C.A.R. trade regime in two main respects. On the one hand, the C.A.R. level of external protection has been significantly reduced, following the adoption of the common external tariff and the elimination of most quantitative restrictions. On the other hand, tariff and nontariff barriers on trade with other CEMAC member countries have been eliminated through the participation in the CEMAC common market.
69. The reduction in external trade protection has had a limited positive impact on the C.A.R.’s trade with non-CEMAC countries. The C.A.R. trade with non-CEMAC countries is the main component of C.A.R. overall trade, and it represented, on average, about 93 percent of total trade during 1994-2002. After an initial peak in trade in 1994, in spite of the progressive reduction in the level of external protection, exports and imports as a share of GDP have continuously decreased (see Figure III.1).36 In particular, the C.A.R. economy has become increasingly isolated in recent years, with non-CEMAC exports and imports reaching, respectively, only 14 percent and 10 percent of GDP in 2002.
Figure III.1Central African Republic: Exports and Imports with Non-CEMAC Countries, 1993–2002
Sources: IMF, Direction of Trade Statistics; and staff estimates.
70. Similarly, so far the impact of participation in the common market on C.A.R. trade with CEMAC countries has been limited. During 1994–2002, CAR’s trade with CEMAC countries represented, on average, only 7 percent of its overall trade (see Figure III.3 and III.4). Starting from 1994, both C.A.R. exports and imports to CEMAC as a share of GDP slightly increased, reflecting some positive trade effects of the reduction in intrazone tariff barriers (see Figure III.2).37 However, this moderate positive trend was limited in time. Starting from 1998, C.A.R.’s imports and exports to CEMAC, as a share of GDP, gradually declined, and they reached, respectively, only 1 and 0.1 percent of GDP in 2002.
Figure III.2Central African Republic: Exports and Imports with CEMAC Countries, 1993–2002
Sources: MF, Direction of Trade Statistics, and staff estimates.
Figure III.3Central African Republic: Exports to CEMAC Countries, 1993–2002
Sources: IMF, Direction of Trade Statistics, and staff estimates.
Figure III.4Central African Republic: Imports from CEMAC Countries, 1993–2002
Sources IMF, Direction of Trade Statistics, and staff estimates.
71. Furthermore, the C.A.R. appears to be narrowly integrated at the regional level, as shown by its limited contribution to intra-CEMAC trade. The contribution of C.A.R. to intra-CEMAC overall trade, after an initial rebound, gradually decreased from 14 percent in 1994 to less than 5 percent in 2002 (Figure III.7). In fact, C.A.R. exports and imports with CEMAC countries as a share, respectively, of total intra-CEMAC exports and imports, after a slight initial increase, started to significantly decrease (Figures III.5 and III.6). The share of C.A.R. imports to CEMAC in total intra-CEMAC imports decreased from 25 percent in 1994 to 9 percent in 2002, while the share of C.A.R. exports to CEMAC in total intra-CEMAC exports decreased from 3 percent in 1994 to 0.5 percent in 2002.
Figure III.5Central African Republic: Exports to CEMAC Countries, 1993–2002
Souces: IMF, Direction of Trade Statistics; and staff estimates.
Figure III.6Central African Republic: Imports from CEMAC Countries, 1993–2002
Sources: IMF, Direction of Trade Statistics; and staff estimates.
Figure III.7Central African Republic: Trade with CEMAC Countries, 1993–2002
Sources: IMF, Direction of Trade Statistics; and staff estimates
72. The narrow impact of the CEMAC trade reform on C.A.R.’s trade performance may be explained by the existence of structural barriers to trade in the C.A.R. economy. In fact, the progressive deterioration in the economic and security situation, the inherent political instability, the poor transport infrastructure, and the high incidence of transportation costs, represented significant structural constraints on C.A.R. trade during the period 1994–2002. Thus, in spite of C.A.R.’s efforts to comply with the CEMAC trade reform and its consequent greater openness to trade at the regional and international level, structural constraints on the development of C.A.R. trade have, so far, hindered the emergence of the potential trade-enhancing effects of the reform.