My Central African Authorities are thankful to the Executive Board, Management and staff for their continued support which has been invaluable in the efforts to improve the economy following the major crisis that the country experienced in the recent past. Indeed, under three Rapid Credit Facility (RCF) the CAR was able to meet urgent balance of payments needs, restore macroeconomic stability and rebuild to a certain extend administrative capacity.
I. Recent Developments
Real GDP growth has progressed from 1 percent in 2014 to 4.8 percent in 2015, supported by agriculture, trade, services and construction sector. In the short term, economic prospects are favorable and growth is projected at 5.2 percent in 2016. Inflation decreased to 4.5 percent in 2015 following a peak at 11.6 percent in 2014, after the main access to sea (the Bangui- Douala corridor) has been made secure and supply conditions improved. Following the collapse in domestic revenue (from 11.5 percent of GDP in 2012 to 4.5 percent in 2014) and in exports of diamonds and forestry products, respectively, the fiscal and current accounts deficits widened.
External financial support enabled the authorities to meet the most urgent financial needs such as wages and the clearance of some arrears. At the same time, the authorities implemented important reform measures in the fiscal sector which have helped to mobilize revenue and control expenditure.
Democratic elections were held in early 2016 and led to the inauguration of a new government which is committed to the promotion of national reconciliation, the transformation of the economy, and the creation of employment opportunities. The authorities are also committed to good governance and better economic management, and wish to build on the progress achieved under the RCF. In this regard, they have developed an ambitious economic program with the assistance of development partners and the IMF staff, and for which they are requesting Fund’s support under a three-year arrangement under the Extended Credit Facility(ECF).
The Medium Term Program, 2016–2019
The authorities recognize the critical importance of political and social stability as a basis for economic development. They are, therefore, working diligently with all stakeholders to consolidate the security situation, promote national reconciliation and social peace and build human and administrative capacities. The program also aims at restoring and building basic infrastructure and utilities. Improving social conditions with better access to health and education is also critical to reduce widespread poverty and promote human development.
Real GDP is projected to grow at an average of 5.5 percent over the medium term, helped by improved security situation and recovery in all the sectors of the economy, and the resumption of public and private investment. Average inflation is projected to be about 3 percent. The domestic primary deficit should decline from 3.3 percent of GDP in 2016 to 0.9 percent in 2019. Despite the reduction in the wage bill from 6 percent of GDP in 2015 to 5.3 percent in 2016, public spending is expected to increase by 2.2 percentage points of GDP owing to an increase in capital and social spending. The current account deficit is projected to increase due to sizable reconstructions needs.
Economic and financial policies for 2016–19:
The authorities will pursue policies aimed at ensuring fiscal sustainability while accumulating buffers. The government’s strategy is focused on revenue mobilization and addressing challenges associated with improving public financial management.
Measures to increase revenues in 2016 include:
i) a new price structure for oil products based on international prices
ii) tightening inspection and control on exported forestry products and;
iii) strict application of the banking agreement on revenue collection to ensure traceability
With the view to raise domestic revenue from 7.1 percent of GDP in 2015 to 10.1 percent in GDP by 2019, the authorities will implement a medium term action plan prepared in collaboration with a FAD TA mission and that aims at:
i) broadening the tax base and simplifying tax procedures, including improving management of the VAT system and the base for assessing export taxes;
ii) strengthening tax and customs administration, including introducing pre-completed tax returns for real estate; revision of fiscal exemptions agreements;
iii) harmonization of the General Investment Code by implementing the CEMAC directives on VAT and duties; and;
(iv) streamlining and enhancing management of tax exemptions.
The authorities will also keep a firm control over spending. Measures are being taken to control the wage bill and to clean the roster of the civil service, and ensure timely retirement of eligible civil servants. On the other hand, the authorities expect that the fiscal measures they are taking will enable them to increase spending on goods and services and domestically financed capital spending.
Measures are also being undertaken to enhance public financial management. They include pursuing strict treasury management and strengthening the fiscal policy framework through a comprehensive action plan prepared with support from the Fund and other partners.
Management of domestic payments arrears:
To achieve fiscal consolidation and restore creditors’ confidence, the authorities are committed to clear domestic payments arrears including commercial arrears and cross-debts, and creditors of which BEAC and commercial banks. In this process the government plan to complete an audit and have the claims validated by end-June 2017.The settlement of validated domestic payments arrears is planned for July 2017. Commercial, wages and pension arrears dating back to 2013–14 will be resolved in 2016 and 2017 respectively.
The authorities will also take steps to strengthen public debt management and implement a prudent borrowing policy. To that end, authorities agree that grants should be the main source of external financing. Regarding external arrears, authorities have undertaken discussions with creditors with view to find an agreeable solution.
Capacity building framework
Authorities concur that the success of their program depends also on a timely coordinated Technical Assistance and an efficient use of it. They have put in place an institutional framework to rebuild capacity, coordinate TA and monitor reforms.
II. Structural Reforms
Banking and financial sector reforms:
The contribution of the financial sector to CAR economy is low due to the banking system weaknesses. To reverse this trend, a series of measures approved by the National Credit Council are underway and whose objectives are to:
i) Explain the government’s medium-term strategy to enhance the country’s economic profile
ii) Organize training seminars to increase banks’, businesses’ and the general public’s knowledge of the financial sector
iii) Protect the integrity of the banking system and monitor risk management and lending practices in order to deal with potential risks (in this context, COBAC is requested to send a banking supervision mission)
iv) Create an action plan for the establishment of commercial and property registries; and
v) Authorize more banks to engage in mobile banking activities.
The authorities plan to improve credit supply by establishing a credit bureau to reduce the information asymmetry and support small and medium-sized enterprises and commercial banks. They are also examining the feasibility of creating a guarantee fund for financing these small and medium-size enterprises.
Development strategy and structural reforms:
To implement a successful development strategy, the authorities are committed to establish a favorable environment for private sector by initiating structural and institutional reforms to promote its development. In this regard a Joint Business Improvement Framework (CMAA) to promote and enhance the government-private sector dialogue will be implemented as well as a one-stop shop to facilitate administrative procedures for investors. In addition, two laws to revitalize telecommunications activities are in preparation and the government intend to update the investment charter, the mining code, the telecommunications code and enhance the regulation of the forestry sector.
Over the medium-term, the government strategy will be focused on:
- Developing food, cash and exports crops.
- Promoting agro-forestry and downstream operations to create value added and jobs.
- Developing mining activities in a formalized context to make these activities more attractive to large operators.
- Repairing and restoring highways, rural roads, dry ports and provincial airports.
- Expanding transportation and telecommunications infrastructure.
- Developing energy capacities.
The disruption of the social fabric resulting from the crises calls for appropriate measures to enhance the resilience of the population. A successful Disarmament-Demobilization-Reintegration (DDR) process combined with the return of refugees and displaced persons is a major step in this sense. Furthermore, the country’s social policy is centered on re-launching of activities in essential social sectors, improving civil protection, restoring and reorganizing the public administration throughout the national territory. The specific objectives of this policy are:
i) The restoration of social cohesion and reduction of tensions in the community to support the local economic recovery and the creation of temporary jobs, primarily for young people.
ii) Access to safe drinking water, sanitation and hygiene.
iii) The rehabilitation of the education sector to ensure full education coverage and complete high-quality education, including access to all levels for all children.
iv) New impetus to the health care system, including the strengthening of the fight against HIV/AIDS.
Our Central African authorities would like to express their good appreciation of the relation with the Fund and welcomed Staff’s recommendations. They are strongly committed to pursue reforms with Fund’s assistance and would appreciate the support of Directors to their request for a Three-Year Arrangement Under the Extended Credit Facility (ECF) in support of their medium-term economic reform program.