Chapter 2. Improving Surveillance Across the CEMAC Region

Bernardin Akitoby, and Sharmini Coorey
Published Date:
August 2012
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Robert York, Plamen Iossifov, Noriaki Kinoshita, Misa Takebe and Zaijin Zhan 

This chapter considers the design of the fiscal criteria for surveillance in the Central African Economic and Monetary Community (CEMAC) with a view to ensuring they are consistent with internal and external sustainability.1 Sustainability is important within a monetary union because fiscal policy is the primary instrument through which national governments can influence macroeconomic performance. This chapter comments on the way in which surveillance might be improved by broadening the region’s current convergence criteria through alternative fiscal indicators and perhaps reserve coverage targets. As it stands, the CEMAC Commission’s focus on a narrow set of convergence criteria could give a misleading assessment of macroeconomic policy developments from both the short- and long-term perspectives.2

The chapter starts with an overview of the CEMAC structure in the first section. The second section assesses fiscal performance based on an alternative set of indicators that could be used by the CEMAC Commission to provide better insights into policy developments and to sharpen surveillance. The importance of external viability, which is critical to safeguarding the fixed exchange rate regime, is discussed in the third section, along with how better monitoring of fiscal and foreign reserves developments could help in this regard. The final section summarizes the results and offers policy implications.

Background and Features

The CEMAC is a customs and monetary union of Cameroon, the Central African Republic, Chad, the Republic of Congo (Congo), Equatorial Guinea, and Gabon. The union was established in 1994 as part of a long process of economic integration in Central Africa, which is still in progress. The CEMAC’s objectives are to create a common market based on the free movement of goods and services, capital, and labor; and to harmonize business laws and coordinate economic policies. CEMAC members use a common currency, the Coopération Financière en Afrique Centrale (CFA) franc (CFAF), which is pegged to the euro at CFAF 656 per euro. The CFAF is issued by the regional central bank (the Bank of Central African States, or BEAC).

Monetary Policy

The objective of monetary policy in the CEMAC is to guarantee the stability of the CFAF. The BEAC is entrusted with issuing the currency, formulating and conducting monetary and exchange rate policies, pooling and managing foreign exchange reserves (supported by a requirement that all export receipts be surrendered to the central bank), and keeping the region’s payment systems functioning well. Monetary policy is formulated by a committee that also manages the pooled foreign exchange reserves.

Under the 1972 Convention on Monetary Cooperation between BEAC member states and France, France guarantees the convertibility of the CFAF at a given parity vis-à-vis the French franc and, since 1999, the euro. The parity rate can be changed after mutual consultation. In practice, CFAF convertibility is ensured through an operations account at the French Treasury with an unlimited overdraft, through which the BEAC effectuates most of its international payments. The BEAC is obligated to place in this account up to 50 percent of its foreign assets, net of the counterpart in foreign assets of government deposits of more than one year with the BEAC (i.e., Funds for Future Generations, which are remunerated accounts held in the BEAC) and the BEAC reserve position at the IMF. Capital mobility is, in principle, free within the CEMAC and between the CEMAC and France, but in practice it is limited by administrative hurdles.

Given the overriding objective of exchange rate stability, the BEAC has adopted two monetary targets: low inflation and maintenance of an adequate foreign currency cover of the monetary base. For the region as a whole, the floor on net international reserves (NIR) coverage of the monetary base is set at 20 percent. If the floor is breached for three consecutive months, emergency measures are triggered (BEAC Statutes, Article 11). The BEAC also strives to keep the annual inflation rate below 3 percent.

The instruments the BEAC uses to implement its monetary policy comprise country-specific ceilings on BEAC government credits, quantitative targets on BEAC refinancing of commercial banks, and required reserve ratios. The BEAC statutes limit (but do not prohibit) inflationary monetary financing of fiscal deficits of CEMAC members.3 In addition, the Monetary Policy Committee sets country-specific required reserve ratios and quarterly targets on BEAC refinancing of commercial banks, to maintain the NIR coverage of base money in each CEMAC member within a desired range (between 75 and 100 percent). The consistency of the monetary policy instruments with BEAC monetary targets is ensured by a monetary programming exercise. However, because of excess liquidity in the banking system, existing instruments have not been effective in limiting money growth. The BEAC has thus been forced to rely, in part, on changes in the interest rates of its lending and deposit facilities to influence monetary outcomes. The continued use of country-specific monetary instruments reflects the reality that the product and factor markets of CEMAC members are not well integrated (Masson and Patillo, 2005).

Fiscal Policy

Fiscal policies and public debt management are prerogatives of national governments. All six CEMAC members are exporters of nonrenewable resources (oil and diamonds) and primary commodities (logs and timber), and are at different stages of development and depletion of their resource endowments. The budgets of the oil exporters—Cameroon, Chad, Congo, Equatorial Guinea, and Gabon—are heavily influenced by oil revenue, which has characteristics similar to foreign grants, in that it should be considered transitory in formulating government policies for both the short and long terms. The countries’ budget balances swing widely with the volatility in world oil (and commodity and mineral) prices, which creates challenges for the smooth execution and planning of the budget. Several consequences follow from this: large swings in fiscal policy tend to be destabilizing, fiscal policies across CEMAC tend to have a procyclical bias, and focusing on the fiscal balance gives a misleading view of the fiscal stance. As a result of the stickiness of government spending, downturns in world oil prices have in the past also resulted in excessive government indebtedness to foreign investors, domestic banks, and suppliers. Moreover, government spending financed by oil revenue is inherently unsustainable in the long run because nonrenewable natural resources are exhaustible. The budget of the Central African Republic exhibits similar dynamics, with diamonds and external grants assuming the role of oil.

Policy Coordination and Surveillance

The need for fiscal and monetary policy coordination in the CEMAC arises from the possibility of monetary financing of fiscal deficits and the impact of fiscal policies on the region’s competitiveness. From a theoretical point of view, the findings of the optimum currency area literature highlight the need for fiscal rules for monetary union members when fiscal policies follow political cycles and are not subject to the discipline imposed by sound debt markets (Tavlas, 1993; and McKinnon, 2004). Moreover, under the fixed exchange rate regime of a common currency, the impact of expansionary fiscal policies on domestic prices is a concern because of the potential for overvaluation of the real effective exchange rate and, over the long run, risks to the peg itself.

Recognizing the need to coordinate fiscal and monetary policy, in 1994 CEMAC members adopted a regional surveillance framework. The overriding objective of surveillance, which is conducted by the CEMAC Commission, is to prevent the occurrence of excessive fiscal deficits. A budget deficit is deemed excessive if it—particularly its financing—is incompatible with the objectives of monetary policy, such as the NIR coverage of base money (BEAC Statutes, Article 55). In 2001, the CEMAC refined the framework by adopting quantitative convergence criteria, and members were to comply with most of the criteria by end-2007. (The inflation criterion entered into force immediately; see Box 2.1.)

The four main convergence criteria are complemented by several secondary criteria, as listed in Box 2.1, that aim to better capture policy efforts toward convergence by removing the effect of exogenous factors. Countries not in compliance with the four main criteria are required to adopt three-year adjustment programs to achieve convergence. However, this requirement has not been enforced in practice, and there are no sanctions for noncompliance.

The adoption in 2008 of a new supplementary criterion on the basic non-oil fiscal balance was an important step in improving regional surveillance. Targeting a measure of fiscal deficits that abstracts from volatile and temporary oil revenue could improve the sustainability of fiscal policies and the CFAF peg. Such a measure should ideally exclude from its definition net interest payments (which are exogenous to current fiscal policy), and its target should be country-specific.

Box 2.1Central African Economic and Monetary Community (CEMAC) Convergence Criteria

The four main convergence criteria adopted by the CEMAC in 2001 are as follows:

  • Basic fiscal balance as a share of nominal GDP0 percent. The basic fiscal balance is the difference between total revenue net of grants and total expenditure net of foreign-financed capital spending. In the 2008 evaluation of progress toward convergence, the CEMAC Commission used two supplementary criteria: (i) basic structural fiscal balance as a share of nominal GDP ≥ 0 percent—derived from the main criterion by replacing actual oil revenue with the three-year moving average; and (ii) the basic non-oil fiscal balance (as a share of non-oil GDP) ≥ 0.
  • Average annual inflation3 percent. This criterion is complemented by the adjusted indicator of the average annual underlying inflation of ≤ 3 percent, which is obtained by stripping the overall consumer price index (CPI) of its most volatile component, the food subindex.
  • Stock of domestic and external debt as a share of nominal GDP70 percent.
  • Nonaccumulation of domestic and external payment arrears.

In the 2008 evaluation of progress made toward convergence, the CEMAC Commission used the following secondary surveillance criteria, compliance with which is not obligatory:

  • Ratio of net international reserves to monetary base ≥ 20 percent.
  • Primary fiscal balance as share of nominal GDP ≥ 0 percent.
  • Non-oil fiscal revenue as share of nominal GDP ≥ 17 percent.
  • Ratio between the change in the public wage bill and the change in revenue ≤ 1 percent.
  • Current account balance net of grants as share of nominal GDP ≥ 0 percent.

Improving the Measures of Fiscal Surveillance

A government’s fiscal policy reflects a mix of objectives, among them control of aggregate demand, stabilization of public debt, and improvement of economic efficiency. Fiscal policy affects these objectives differently and to assess its impact a range of fiscal indicators is essential. Any single indicator—or criterion—is unlikely to comprehensively describe the impact of policy on the relevant objective. As noted by Blanchard (1990), the assessment of several aspects of fiscal policy would benefit from indicators that could provide insights into sustainability, the impact on aggregate demand, and microeconomic efficiency.

Given these different facets of fiscal policy, there must be a trade-off in the selection of appropriate fiscal indicators between economic arguments on the one hand and ease of estimation and understanding on the other. In establishing criteria against which fiscal policy indicators could be judged, a few guiding principles must be kept in mind, such as the simplest possible formulation, positive rather than normative rules, comparable definitions and concepts across countries, and as few projections as feasible.

This section considers a range of fiscal indicators, as well as the existing convergence criteria, with a view to clarifying the depiction of fiscal developments in the CEMAC region, and thereby improving fiscal policy surveillance and analysis. Attention is restricted to the indicators monitoring changes in fiscal policy and fiscal sustainability, the two areas emphasized by the CEMAC convergence criteria. The analysis first tries to interpret recent fiscal developments in the context of CEMAC’s convergence criteria, which proves difficult when world oil prices are relatively high. It then considers the usefulness of measures of the fiscal stance and the fiscal impulse in assessing policy changes and of two measures that could help shed light on sustainability. The range of fiscal indicators has been narrowed to those considered below, bearing in mind the principles that characterize a good indicator and the questions at hand.

CEMAC Convergence Criteria

It has long been recognized that CEMAC’s convergence criteria may not provide an appropriate framework for fiscal policy surveillance, although the adoption of the non-oil basic fiscal balance as an additional criterion is a step in the right direction. The reason seems straightforward: with five of the six CEMAC members being oil producers, volatility in world oil prices and production could easily mask changes in fiscal policy. In the recent environment of oil-related surpluses, the traditional fiscal convergence criteria (basic fiscal balance, as defined in Box 2.1) and the complementary adjustment criteria (basic structural fiscal balance and, for oil producers the non-oil basic fiscal balance) could be giving a misleading signal of the “true” fiscal stance. For example, a temporary increase in oil-related revenue can lead to an expansionary fiscal policy that would not raise any alarms from the regional surveillance standpoint, if the increase in spending is smaller than the increase in revenue, even if this increased spending is not sustainable. Although the introduction of the non-oil basic fiscal balance as an adjustment criterion offers some improvement, the target (≥ 0) must take into account country-specific considerations about long-term fiscal sustainability, and the factors that influence it, to be relevant and effective.

The difficulty in assessing CEMAC countries’ fiscal policy based on the existing convergence criteria has become increasingly evident with wide swings in world oil prices since 2004. The weakness in world prices in the latter part of the 1990s and the run-up in prices since early in the first decade of the 2000s had a profound, but perhaps predictable, impact on the fiscal position of all CEMAC countries, including the Central African Republic, which does not produce oil. Table 2.1 shows that the fiscal convergence criteria were missed by all or a majority of countries in 1998–2000, but only the Central African Republic, which did not directly benefit from the recent oil price hikes, has experienced a deficit since 2004 (when Chad joined the ranks of oil producers). Compared with the basic fiscal balance criteria, the overperformance was substantial, ranging from a basic fiscal surplus of 2.8 percent of GDP for Congo to 1.5 percent of GDP for Cameroon in 2008. Moreover, the fiscal surpluses as defined by the convergence criteria are misleading because (i) they masked very expansionary fiscal policy in the short term and (ii) they did not address the medium-term sustainability issues in oil-producing countries (both discussed below).

Table 2.1CEMAC: Fiscal Convergence Criteria, 1998–2008
Basic Fiscal Balance1 (percent of nominal GDP) ≥ 0
Central African Republic−8.7−8.6−6.5−4.1−4.2−4.4−5.2−8.2−4.0−2.5−3.0
Congo, Republic of−19.9−
Equatorial Guinea−7.7−0.2−2.514.416.911.812.320.623.517.815.3
Supplementary Criterion I: Basic Structural Fiscal Balance2 (percent of nominal GDP) ≥ 0
Central African Republic−9.4−9.6−6.8−4.4−5.7−2.6−4.2−8.6−5.4−3.9−4.0
Congo, Republic of−13.1−8.5−
Equatorial Guinea−14.7−3.5−8.64.511.
Supplementary Criterion II: Non-Oil Basic Fiscal Balance (percent of non-oil GDP) ≥ 0
Central African Republic
Congo, Republic of−50.3−53.2−54.7−33.6−39.5−39.4−39.1−44.2−66.1−62.9−53.3
Equatorial Guinea−73.5−52.6−85.1−35.6−24.1−47.7−68.5−63.9−66.1−61.4−75.7
Sources: Country authorities; and authors’ estimates and projections.Note: … = Not applicable. The grey area indicates a period in which the criteria were not met.

Defined as the difference between total revenue (less grants) and total expenditure (less foreign-financed capital outlays).

Defined as the difference between total revenue (less grants), with current oil-revenue replaced by its three-year moving average and total expenditure (less foreign-financed outlays). For the Central African Republic, the three-year moving average is based on total revenue for comparison.

Sources: Country authorities; and authors’ estimates and projections.Note: … = Not applicable. The grey area indicates a period in which the criteria were not met.

Defined as the difference between total revenue (less grants) and total expenditure (less foreign-financed capital outlays).

Defined as the difference between total revenue (less grants), with current oil-revenue replaced by its three-year moving average and total expenditure (less foreign-financed outlays). For the Central African Republic, the three-year moving average is based on total revenue for comparison.

A similar picture emerges for the basic structural fiscal balance (the first adjustment criterion), defined similarly to the basic fiscal balance but replacing current oil revenue with its three-year moving average. Except for Chad and the Central African Republic, all countries met this criterion because of high world oil prices over a relatively long period. In contrast, none of the oil producers met the second adjustment criterion of the non-oil basic fiscal balance during the period 1998–2008.

Fiscal Stance and Fiscal Impulse

For improving fiscal surveillance in the CEMAC context, this analysis considers measures of the fiscal stance and the fiscal impulse that the IMF has used for its multilateral surveillance for the past several decades. The rationale for these measures is that the budget balance may be a misleading indicator of the thrust of policy because it is not clear whether changes in the actual balance are the cause or the result of economic activity. Ideally, an indicator would help distinguish between certain cyclical factors that may have a temporary effect on the budget balance and the effects of changes in the fiscal position due to policy or structural changes that may have a more lasting impact. Reflecting this need, the fiscal stance and fiscal impulse indicators attempt to measure the total stimulus to aggregate demand arising from fiscal policy from whatever source, whether discretionary or otherwise, during a given period (Heller, Haas, and Mansur, 1986).4 The indicators capture any change in the actual budget balance that is not transitory in a cyclical sense.

Conceptually, the fiscal stance is the deviation of the budget balance from a “cyclically neutral budget balance.” The cyclically neutral budget balance is derived by (i) choosing a reference year in which actual and potential output are judged to be relatively similar; and (ii) projecting revenue and expenditure in the current year based on the assumption of unitary elasticities of revenue and expenditure with regard to actual and potential GDP, so as to account for the contribution to the fiscal stimulus of discretionary actions and the automatic stabilizers. The fiscal impulse defined here is simply the change in the fiscal stance from the previous year, which reflects the change in the government budget balance resulting only from changes in government expenditure and tax policies. The fiscal impulse indicator is useful for at least two purposes: monitoring the performance of fiscal authorities and making international comparisons of fiscal policy changes (Schinasi and Lutz, 1991).

Because interest rates are not generally under the direct control of fiscal authorities, this analysis has been refined to focus on the primary fiscal balance; consequently, budgetary changes attributable to movements in debt payments are not viewed as discretionary or as imparting a fiscal thrust. For comparability between countries, this analysis has calculated the fiscal stance and fiscal impulse measures based on a common base year (2001) and estimated potential output using a Hodrick-Prescott filter with historical data and projections for the period 1965–2014 (IMF, 2009). These assumptions could, of course, be refined to reflect country-specific factors and more sophisticated modeling strategies (in particular, for potential output), although a parsimonious approach is sufficient to shed light on the issues of interest here.

The measure of the fiscal stance suggests that the general thrust of fiscal policies in three of the six CEMAC member countries was expansionary from 2000 through 2008 (Table 2.2). This is a somewhat different message than provided by the overall fiscal balance (the region’s main fiscal indicator) alone, which shows fiscal surpluses in all oil-producing countries. Measured by the fiscal stance, fiscal policy in the Central African Republic and more recently in Chad and Congo has been contractionary. This probably reflects the Central African Republic’s difficult financial environment and small resource envelope; for Chad and Congo, increased oil production widened primary surpluses. For all three, the point is further stressed by their contractionary (negative) fiscal impulse through most of the latter part of the period. The fiscal stance indicator suggests that the CEMAC region as a whole had a roughly neutral fiscal balance in 2008 after adjustments for cyclical factors, with a negative fiscal impulse indicating some policy tightening since 2007. It could be argued, however, that the apparent fiscal tightening in CEMAC oil-producing countries was misleading and largely caused by booming oil revenue (see below).

Table 2.2Comparison of CEMAC Fiscal Indicators, 2000–08(percent of GDP)
Basic fiscal balance2.
Primary balance5.
Primary fiscal stance0.−
Primary fiscal impulse−2.2−−3.2−
Central African Republic
Basic fiscal balance−6.5−4.1−4.2−4.4−5.2−8.2−4.0−2.5−3.0
Primary balance−4.8−2.7−2.6−3.2−4.0−7.3−3.1−1.4−1.1
Primary fiscal stance2.20.0−0.3−0.9−0.23.1−0.9−2.6−3.7
Primary fiscal impulse−2.3−2.2−0.3−−4.1−1.6−1.1
Basic fiscal balance−3.1−2.4−3.2−3.4−
Primary balance−2.0−1.6−2.3−
Primary fiscal stance0.−0.8−4.0−4.8−5.7
Primary fiscal impulse0.2−−1.3−1.1−3.2−0.8−0.9
Congo, Republic of
Basic fiscal balance1.−6.8
Primary balance8.−0.8−1.513.9−9.9
Primary fiscal stance−−0.5−3.7−13.9−14.3−8.1−24.0
Primary fiscal impulse−−6.3−3.2−10.2−0.36.1−15.9
Equatorial Guinea
Basic fiscal balance−2.514.416.911.812.3−0.6−3.517.815.3
Primary balance−2.114.917.211.912.3−0.7−3.517.915.3
Primary fiscal stance13.30.0−−4.8−8.6−1.61.4
Primary fiscal impulse1.5−13.3−−8.7−
Basic fiscal balance13.97.76.810.88.09.610.29.412.2
Primary balance19.816.511.214.812.012.412.511.514.0
Primary fiscal stance−
Primary fiscal impulse−−3.42.8−0.2−0.31.6−2.5
Basic fiscal balance4.
Primary balance9.
Primary fiscal stance−−1.61.7−0.2
Primary fiscal impulse−−1.51.3−2.4−1.83.2−1.9
Sources: Country authorities; and authors’ estimates and projections.Note: CEMAC = Central African Economic and Monetary Community. The basic fiscal balance is defined according to the convergence criteria; primary balance is equal to the sum of basic fiscal balance and interest payments. The primary fiscal stance and primary fiscal impulse are described in detail in the text.
Sources: Country authorities; and authors’ estimates and projections.Note: CEMAC = Central African Economic and Monetary Community. The basic fiscal balance is defined according to the convergence criteria; primary balance is equal to the sum of basic fiscal balance and interest payments. The primary fiscal stance and primary fiscal impulse are described in detail in the text.

Fiscal Stance and Fiscal Impulse, excluding Oil revenue

Following Barnett and Ossowski (2003), this analysis suggests that oil-producing CEMAC member countries should put more surveillance emphasis on the non-oil primary balance for a number of reasons: (i) in the management of oil resources, oil wealth defined by the discounted present value of future oil revenue is the key variable of interest, so fiscal proceeds from oil should be viewed as financing rather than income; (ii) the overall fiscal balance and the primary fiscal balance (including oil) are affected by oil price volatility, which is outside the control of the fiscal authorities, and movements in these indicators from changes in oil revenue do not directly affect domestic demand; (iii) it provides a measure of fiscal vulnerability and sustainability; and (iv) it is a better measure of the fiscal impulse consistent with medium-term sustainability.

The measure of the fiscal stance excluding oil revenue presents an even more expansionary picture (Table 2.3). When oil revenue is stripped from the calculation, the thrust of fiscal policies in all of the oil producers seems strongly expansionary during 2005–08 (except for Gabon), including in Chad and Congo, whose fiscal stances were misjudged to be contractionary when oil revenue was included (see the preceding section). Consistent with the assessment for individual countries, the CEMAC members as a group have pursued expansionary fiscal policies since 2000, and the degree of expansion steadily increased in the last five years of the period. Consequently, relying on the convergence criteria (basic fiscal balance), or fiscal stance and fiscal impulse (including oil revenue), alone could provide a misleading signal about the direction of fiscal policies. When world oil prices peaked in 2008, only Congo started to reverse its fiscal stance as indicated by the negative fiscal impulse in Table 2.3.

Table 2.3Comparison of CEMAC Fiscal Indicators, 2000–08(percent of non-oil GDP)
Non-oil basic fiscal balance−5.2−1.6−4.3−3.1−4.1−1.6−1.6−2.7−7.1
Non-oil primary balance−0.91.6−1.5−0.7−2.00.0−0.6−2.2−6.7
Non-oil primary fiscal stance2.
Non-oil primary fiscal impulse−0.8−2.43.2−0.71.4−
Non-oil basic fiscal balance−3.1−2.4−3.3−3.9−5.1−6.7−15.8−22.7−29.0
Non-oil primary balance−2.0−1.7−2.4−3.2−4.3−6.0−15.0−22.0−28.4
Non-oil primary fiscal stance−−0.7−7.1
Non-oil primary fiscal impulse0.
Congo, Republic of
Non-oil basic fiscal balance−54.7−33.6−39.5−39.4−39.1−44.2−66.1−62.9−53.3
Non-oil primary balance−34.6−32.8−38.0−27.8−27.1−30.5−52.0−55.7−43.7
Non-oil primary fiscal stance−−3.2−4.3−1.2−0.2−4.111.7
Non-oil primary fiscal impulse13.22.67.0−10.2−1.23.1−1.43.9−12.4
Equatorial Guinea
Non-oil basic fiscal balance−85.1−35.6−24.1−47.7−68.5−63.9−66.1−61.4−75.7
Non-oil primary balance−83.1−33.2−23.0−47.3−68.2−63.7−66.0−61.3−75.6
Non-oil primary fiscal stance40.20.0−12.36.3−9.8−6.233.640.155.5
Non-oil primary fiscal impulse40.9240.2212.318.623.423.67.46.515.4
Non-oil basic fiscal balance−16.8−24.3−18.5−9.9−15.4−21.3−20.8−15.8−17.9
Non-oil primary balance−5.4−9.1−11.0−3.0−8.2−15.4−16.0−11.6−14.3
Non-oil primary fiscal stance−−7.3−
Non-oil primary fiscal impulse2.−3.62.7
Non-oil basic fiscal balance−12.3−9.0−9.8−8.6−11.5−12.1−15.8−17.1−22.4
Non-oil primary balance−6.1−4.3−6.7−5.1−8.1−9.1−13.3−15.4−20.7
Non-oil primary fiscal stance1.
Non-oil primary fiscal impulse1.7−1.32.4−
Sources: Country authorities; and authors’ estimates and projections.Note: CEMAC = Central African Economic and Monetary Community. The non-oil basic fiscal balance is defined as the difference between total non-oil revenue (less grants) and total expenditure (less foreign-financed capital outlays); the non-oil primary balance is equal to the sum of non-oil basic fiscal balance and interest payments. The non-oil primary fiscal stance and non-oil primary fiscal impulse are described in detail in the text.
Sources: Country authorities; and authors’ estimates and projections.Note: CEMAC = Central African Economic and Monetary Community. The non-oil basic fiscal balance is defined as the difference between total non-oil revenue (less grants) and total expenditure (less foreign-financed capital outlays); the non-oil primary balance is equal to the sum of non-oil basic fiscal balance and interest payments. The non-oil primary fiscal stance and non-oil primary fiscal impulse are described in detail in the text.

The measure of the non-oil fiscal impulse also demonstrates the procyclical nature of fiscal policies across most of the CEMAC countries. The estimated fiscal impulses are shown in Figure 2.1, along with the growth of non-oil real GDP. This juxtaposition is revealing; in many cases, the fiscal impulse moves more or less in line with the GDP growth rate.

Figure 2.1CEMAC Non-oil Real GDP Growth and the Fiscal Impluse, 1995–2008

Sources: Country authorities; and authors’ calculations.

Although the fiscal stance and fiscal impulse are quantitatively easy to calculate, they are not free from criticism. Some authors question the justification for an indicator that is not model based (see Blanchard, 1990; and Buiter, 1983) and ask why actual growth in government expenditure should be tested against potential output while actual growth in revenue is tested against actual output. In response, some authors have tried to provide a theoretical or model-based foundation for the fiscal impulse measure and suggested other technical improvements (see, e.g., Heller, Haas, and Mansur, 1986; Schinasi and Lutz, 1991; and Chand, 1992).

Indicators of Sustainability

The CEMAC’s surveillance should also monitor countries’ fiscal sustainability and have indicators that could answer questions like the following: Can a country continue with its current fiscal policy, or will it have to increase tax rates, decrease spending, or consider more drastic measures to decrease its debt burden?

Gap-based measures

Blanchard (1990) suggests a simple indicator of sustainability, the primary gap. The primary gap is defined here as the change in the primary fiscal deficit needed to stabilize the debt ratio at its current level, given the current fiscal policy stance. Regardless of whether the government has built in future policy tightening (if the tax gap is negative) or loosening (if it is positive), the primary gap signals the need for a change in current policy settings. As Blanchard notes, this indicator is somewhat primitive because it does not take into account predictable changes in economic circumstances and economic policies. It is a static and backward-looking indicator, with the narrow goal of stabilizing the current debt ratio, which itself may not be sustainable or optimal to start with. The application of this indicator in the CEMAC region faces an additional problem in that it ignores the exhaustibility of oil reserves. Nonetheless, the primary gap indicator has the advantage of being easily understood, and its estimation does not rely on forecasts or other extensive information.

The results of this estimate of the primary gap for the six CEMAC members are plotted against external debt in Figure 2.2. These estimates are based on external rather than public debt because comprehensive data on public debt were not available. If domestic debt is significant, this estimate of the primary gap would be biased downward.

Figure 2.2External Debt and Primary Gap, 1998–2008

Sources: Country authorities; and authors’ calculations.

Except for the Central African Republic, the estimated primary gaps show that during the years since 1998, fiscal policies have generally moved toward sustainable positions (positive primary gaps)—a view that is at odds with the generally expansionary thrust of policy during most of this period (see section on “Fiscal Stance and Fiscal Impulse,” above).

This result highlights the design weakness in the primary gap measure and the impact of the favorable economic environment during the period. Recall that the primary gap is affected by two elements: actual primary balance and the difference between real growth and the real interest rate. In the early part of the 2000s, the fiscal positions in CEMAC oil-producing countries measured by the primary balance were generally improving because of sharply rising world oil prices, and real GDP growth, boosted by oil production, generally exceeded the real interest rate (the assumed nominal interest rate is 6 percent). These two elements combine to suggest that the primary surpluses being observed should have been more than sufficient to stabilize the external-debt-to-GDP ratio.5 This situation is exceptional, and it demonstrates the dangers in relying on a single short-term static indicator of sustainability. Indeed, the rules-based measures paint a different picture of developments.

Rules-based measures

A number of studies focus on the non-oil primary balance as the relevant indicator of the influence that initial conditions and resource endowments in oil-producing countries have on long-term sustainability in several different models of fiscal rules. Using the approach of York and Zhan (2009), the present analysis considers three models for long-term fiscal sustainability: (i) a conservative bird-in-hand rule, in which government would turn its oil resources into financial assets and commit to spend each year only the projected return on those assets; (ii) a spendthrift balanced-budget rule, in which the government would adopt a balanced budget over the relevant time horizon and use up each year’s (projected) oil revenue in the process; and (iii) a constant-expenditure rule, based on Freidman’s (1957) notion of the permanent-income hypothesis, in which the government would spend only the permanent (annual) income from its oil-generated wealth, thus ensuring sustainability by maintaining a constant real expenditure path beyond the lifetime of oil reserves.6 Compared with the other approaches, the constant-expenditure rule has much to recommend it. By treating oil wealth as the present discounted value of future oil revenue, this approach highlights the importance of long-term sustainability and the challenge for fiscal policy in deciding how to allocate government oil wealth across generations. The bird-in-hand rule is very conservative and is tantamount to assuming that there would be no future oil revenue; at the same time, a balanced-budget rule is like “going on a binge.”

The key long-term assumptions and projections for estimating these rules-based measures include oil (and gas) reserves, world oil prices, real GDP growth, inflation, real interest rates, and population growth (Table 2.4).

Table 2.4CEMAC Long-Term Macroeconomic Assumptions for Applying Rules-Based Measures(Percent, unless otherwise noted)
Non-oil sector real growth rate4
Real interest rate4
Population growth (annual)2.5
Starting balance of oil funds as of end-2008 (US$)0
World oil prices (US$ per barrel)
2015–48Real prices are constant at the 2014 level
Discount to world oil prices10
Consumer Price Inflation in advanced economies
Sources: IMF World Economic Outlook; and authors’ assumptions.Note: CEMAC = Central African Economic and Monetary Community.

Based on the October 2009 IMF World Economic Outlook assumptions.

Sources: IMF World Economic Outlook; and authors’ assumptions.Note: CEMAC = Central African Economic and Monetary Community.

Based on the October 2009 IMF World Economic Outlook assumptions.

Based on a set of homogeneous assumptions for all the countries, the estimate under the baseline yields the following7:

  • As a group, the fiscal stance of the CEMAC countries in 2008 was far from being sustainable into the future, except under the balanced-budget rule, which is a comparatively extreme position and would imply drastic fiscal adjustments down the road when oil reserves are depleted (Figure 2.3 and Table 2.5).
  • Achieving a sustainable non-oil primary deficit (NOPD) for most CEMAC countries would require sizable adjustments, even in the short run. Comparing each country’s actual NOPD for 2008 with estimated sustainable levels for 2009–13 reveals that under a relatively conservative fiscal rule of maintaining constant per capita real oil wealth over time, none of the CEMAC oil-producing countries, either individually or collectively, has a sustainable NOPD. Under the fiscal rule of maintaining constant real oil wealth over time, only Gabon achieves sustainability. Cameroon and Congo are close, but Chad and Equatorial Guinea continue to be relatively far away. Chad’s NOPD was 28½ percent of non-oil GDP for 2008, the estimated sustainable deficit would be 10 percent using a constant real wealth rule based on the permanent income hypothesis, and Equatorial Guinea’s deficit of greater than 75 percent of non-oil GDP is very far from even a generous interpretation of fiscal sustainability (i.e., the balanced-budget rule).
  • Under the two more conservative fiscal rules, constant real per capita oil wealth, in which a government would ensure that current and future generations share oil wealth equally, and the bird-in-hand rule, in which a government spends as if there were no future oil revenue, no CEMAC oil-producing country’s, fiscal position is sustainable, either individually or as a group.
  • The above results are mostly robust with respect to different assumptions about world oil prices (Figure 2.4), even though higher (lower) world oil price assumptions would increase (reduce) the sustainable levels of the NOPD. Even with very optimistic assumptions about oil prices, say, 50 percent higher than the IMF’s October 2009 World Economic Outlook baseline, the NOPD in Cameroon, Chad, and Equatorial Guinea, as well as the CEMAC region as a whole, in 2008 appears unsustainable. With higher oil prices, Congo would cross the sustainable threshold under the fiscal rule of constant oil wealth.

Figure 2.3Sustainability of the Non-Oil Primary Deficit under Different Fiscal Rules, 2009–13

Source: Authors’ calculations.

Note: CEMAC = Central African Economic and Monetary Community, including the Central African Republic; NOPD = non-oil primary deficit.

Table 2.5CEMAC Average Sustainable Non-oil Primary Deficit Under Different Fiscal Rules, 2009–48(percent of Non-oil GDP)
Bird in hand0.
Balanced budget3.
Constant real oil wealth at 2008 levels1.
Constant real per capita oil wealth at 2008 levels0.
Bird in hand2.77.911.710.5
Balanced budget35.626.113.84.9
Constant real oil wealth at 2008 levels20.416.711.37.1
Constant real per capita oil wealth at 2008 levels8.
Bird in hand2.
Balanced budget28.415.24.30.5
Constant real oil wealth at 2008 levels10.
Constant real per capita oil wealth at 2008 levels4.
Congo, Rep. of
Bird in hand7.
Balanced budget100.863.015.60.5
Constant real oil wealth at 2008 levels37.931.121.013.2
Constant real per capita oil wealth at 2008 levels14.913.912.010.0
Equatorial Guinea
Bird in hand4.813.014.19.4
Balanced budget62.732.34.30.4
Constant real oil wealth at 2008 levels20.717.011.57.2
Constant real per capita oil wealth at 2008 levels8.
Bird in hand2.
Balanced budget26.916.59.25.2
Constant real oil wealth at 2008 levels11.
Constant real per capita oil wealth at 2008 levels4.
Source: Authors’ calculations.Note: CEMAC = Central African Economic and Monetary Community.
Source: Authors’ calculations.Note: CEMAC = Central African Economic and Monetary Community.

Figure 2.4CEMAC Sensitivity of the Sustainable Non-Oil Primary Deficit to Oil Prices Under a Permanent Income Hypothesis, 2009–13

Source: Authors’ calculations.

Note: CEMAC = Central African Economic and Monetary Community.

CEMAC includes the data for Central African Republic.

York and Zhan (2009) also demonstrate that these results would not change significantly with different assumptions about real interest rates and the introduction of oil price uncertainty. They also show that the results are unlikely to be affected by different definitions of the level of oil reserves, although a significant expansion would increase the long-term deficit that is consistent with sustainability, other things being equal. Nonetheless, some caveats about the results must be recognized. Allowing for variation, and presumably positive feedback in the growth of the non-oil sector in response to public investment, could materially affect the estimates. To the extent that higher and front-loaded public investment (in health, education, and economic infrastructure) could increase the rate of non-oil sector growth, running an NOPD above the long-term sustainable estimate might be appropriate. This point is emphasized by Collier and others (2009) and by van der Ploeg (Chapter 5 of this volume), who argue that resource-rich developing countries should invest more of their resource rents early on, when such investment is expected to have a high rate of return.

Implications for Fiscal Surveillance

The CEMAC convergence criterion in the fiscal area—nonnegative basic balance—does not provide an appropriate benchmark against which to assess fiscal policy in each member country and in the region as a whole. It suffers from at least two shortcomings. First, it fails to take into account the cyclical nature of each economy and would make the implementation of countercyclical fiscal policies difficult. Second, it fails to recognize that five of the six CEMAC countries are oil producers and that oil revenue should be treated as financing instead of income, and should therefore be isolated from the fiscal balance for the current period. To improve fiscal surveillance in the CEMAC region, this chapter proposes that the member countries focus more on the fiscal stance and the fiscal impulse, excluding oil revenue, for judging the short-term direction of fiscal policy, and rely on the non-oil primary balance for assessing medium- to long-term fiscal sustainability. The recent adoption of the adjustment criterion on the non-oil basic fiscal balance is a step forward but could be further refined.

External Stability Considerations and Regional Surveillance

This section argues that in light of the fixed exchange rate, the convergence criteria could also be extended to considerations of external stability.

Considering Fiscal policy effects on external Balance

When setting a target for the fiscal criterion, fiscal policy effects on the external balance should be taken into consideration. Member countries do not have the option of nominal exchange rate or monetary policy adjustments to mitigate the impact on the external balance. And only fiscal policy is available (along with structural policies, which have an impact only over a longer time frame) to ensure external stability.

Considerable evidence—including a high correlation coefficient—suggests that the fiscal policy stance affects the external position of the CEMAC (Figure 2.5). This is not surprising given that both the fiscal balance and the external balance are dominated by oil revenue and oil exports. The correlation between the overall fiscal balance and the external current account balance is 0.62, but the correlation between the non-oil fiscal balance and the non-oil current account balance is only 0.30.

Figure 2.5Central African Economic and Monetary Community Overall Fiscal Balance and External Current Account Balance

Sources: Country authorities; and authors’ estimates.

Among the six CEMAC countries, the correlation between the fiscal and external balance is highest in Gabon (0.90) and nonexistent in the Central African Republic. However, the oil-producing countries with higher oil revenue do not necessarily show a higher correlation between fiscal and external balances. The Central African Republic, the sole non-oil economy, shows no correlation between fiscal and external balances: it appears that its fiscal stance has little or no influence on its external balance.

The more important channel through which fiscal policy affects the external position is changes in government deposits. In the CEMAC, official foreign exchange reserves are directly affected by member governments’ decisions about how much to save. This result is clearly indicated in the relation between the foreign assets of the BEAC and member government deposits with the regional central bank (Figure 2.6). Although it is not possible to specify exactly what proportion of government deposits are in foreign exchange, a significant amount of oil receipts are supposedly denominated in foreign currency.

Figure 2.6BEAC: Foreign Assets and Government Deposits, 1995–2008

Source: BEAC; and authors’ estimates.

Note: BEAC = Bank of Central African States; CEMAC = Central African Economic and Monetary Community; CFA = Coopération Financière en Afrique Centrale.

Fiscal policy response to external Shocks

An appropriate fiscal policy response to a deterioration in the terms of trade could be to tighten if the goal is external stability and to loosen if the goal is to stabilize economic activity (and internal balance). In reality, Adedeji and Williams (2007) show that the terms of trade affect the primary fiscal balance in the same direction. In other words, the primary fiscal balance improves when the terms of trade are favorable and deteriorates when they are unfavorable (presumably reflecting the importance of primary commodities, especially oil revenue, across CEMAC countries). Such a fiscal policy reaction may be desirable for stabilizing economic activity in the face of external shocks, although it could complicate efforts to achieve external sustainability, particularly by magnifying the downside risks to the external balance. One way to mitigate the problem is to accumulate a sufficient buffer of foreign reserves when external conditions are favorable.

The Desirability of a Foreign Reserves Target

The BEAC statutes require members to maintain net foreign assets of at least 20 percent of short-term liabilities. This requirement raises two potential problems. The first is whether the ratio of reserves to sight liabilities (the currency cover ratio) is appropriate for assessing external stability. The second is that because the reserve ratio is not a convergence criterion, it could suffer from the free rider problem.

Reserve adequacy can be assessed in several different ways. Based on the size of terms-of-trade shocks and other factors, Deléchat and Martijn (2008) recommend that CEMAC members have a reserve coverage of four months of goods and nonfactor service imports. Relative to these norms, the reserve level for the CEMAC region as a whole may seem adequate, but there is a large disparity among member countries: the reserve coverage in the Central African Republic, Chad, and Gabon has been relatively low while that in Cameroon, Congo, and Equatorial Guinea has been increasing (Table 2.6).

Table 2.6CEMAC: Currency Cover Ratio and Gross Official Reserves, 2000–08
Currency Cover Ratio1 (percent)
Central African Rep.999999978781756268
Congo, Rep. of6335221831779290102
Equatorial Guinea61981021001001001009798
Gross Official Reserves

(months of next year’s projected imports of goods and services)
Central African Rep.
Congo, Rep. of1.
Equatorial Guinea0.
Source: BEAC; and authors’ estimates.Note: CEMAC = Central African Economic and Monetary Community.

Gross operations account official reserves (percentage of base money).

Source: BEAC; and authors’ estimates.Note: CEMAC = Central African Economic and Monetary Community.

Gross operations account official reserves (percentage of base money).

One view would be that focusing on CEMAC reserves as a whole is the right approach for encouraging efficient pooling of the countries’ reserves. According to this view, each member’s reserve position would not—on its own—affect the external stability of the CEMAC, highlighting the benefits of pooled reserves. However, this view could pose a “free rider” problem because of the disparities between member countries’ reserve holdings. The size of these holdings is important because (i) there is a significant opportunity cost and (ii) wide disparities could weaken the cohesiveness of the monetary union. Therefore, the CEMAC might consider establishing a minimum reserve level—preferably using import cover—as a convergence criterion. Each member’s efforts toward preserving the external sustainability of the union and protecting its fixed exchange rate regime would be recognized. The adoption of the reserve cover of base money as a secondary criterion in the 2008 convergence evaluation was a positive step.

Summary and Policy Implications

The CEMAC is undertaking a long-term process of regional integration with the intention of creating a common market based on the free movement of goods and services, of capital and labor, and of harmonizing business laws and coordinating economic policies. This worthwhile initiative should yield the benefits generally realized from closer integration in the context of a monetary union with a fixed exchange rate. Progress in moving forward with closer ties, however, has been slow.

With regard to regional surveillance, the CEMAC’s convergence criteria could be usefully expanded given that the criteria currently provide an incomplete picture of whether policies are consistent with preserving the external stability of the monetary union and the fixed exchange rate. The CEMAC’s surveillance agenda could be sharpened in a number of ways. A separate problem facing the CEMAC not addressed in this chapter is the poor enforcement of the current criteria. The new and adjustment indicators proposed here are not expected to resolve this issue, but by making surveillance criteria more effective and relevant—and transparent—they could help to improve the enforceability of these criteria going forward.

The main fiscal convergence criterion for the CEMAC region—a nonnegative basic balance—does not provide a reliable benchmark against which to judge short-term changes in fiscal policy or long-term fiscal sustainability in member countries. This criterion could be strengthened in at least two ways. First, it could recognize member countries’ cyclical fiscal positions and how these positions might affect adherence to the convergence criterion. Second, it could recognize explicitly that the majority of CEMAC countries are oil producers and that income from exhaustible oil resources should be treated as financing instead of revenue, from the point of view of good resource-wealth management. An optimizing resource planner would choose to smooth consumption over time to maximize welfare.

Although the majority of the CEMAC countries met the convergence criterion for the basic fiscal balance and one of the two associated adjustment criteria with comfortable margins, indicators of fiscal stance and fiscal impulse suggest that fiscal policies in all CEMAC countries were strongly expansionary during 2005–08 if cyclical fluctuations and oil revenue are appropriately removed. In addition, from the perspective of long-term sustainability, the majority of member countries’ NOPDs are far higher than the sustainable level under various fiscal rules.

Fiscal surveillance at both the regional and individual-country levels should not rely entirely on the current convergence criteria. Instead, fiscal indicators excluding oil revenue should receive central attention. In this regard, the CEMAC Commission’s introduction of an adjustment criterion for the non-oil basic fiscal balance is welcome. This measure could be complemented by taking into consideration other variables, such as the non-oil fiscal balance, non-oil primary balance, and to the extent that a judgment can be made about the economy’s cyclical position, measures such as the non-oil fiscal stance and the non-oil fiscal impulse. With five of the six countries being oil producers, long-term fiscal sustainability is also a concern, and it could be monitored through analysis based on fiscal rules.

CEMAC’s surveillance agenda will also need to take into account the impact of fiscal policy on external stability, especially under the fixed exchange rate regime. Building sufficient reserve coverage is important, especially in periods of high world oil prices resulting in windfall oil revenue. The existing minimum requirement as a non-obligatory secondary criterion on the currency coverage ratio (20 percent) is likely to be inadequate; this indicator may not be appropriate for defining reserve adequacy in the face of the external shocks buffeting the region. One clear possibility for addressing this concern is to reexamine reserve adequacy based on the ongoing work at the BEAC and to consider a relevant convergence criterion. When setting a reserve target level, consideration could be given to creating space for the fiscal stance to respond to changes in external (as well as domestic) conditions. To address long-term external stability, the regional surveillance exercise could include structural aspects of fiscal policy so that the tax and spending system would support capital accumulation and productivity gains in productive sectors.

Ultimately, the external viability of the monetary union and its fixed exchange rate depends on the strength of its fiscal policies and on structural reform to build vibrant and viable non-oil sectors in the member countries. Only in this way will the union generate sufficient foreign exchange to finance the imports needed to maintain moderate levels of growth and real income.


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This is a shortened version of IMF Working Paper 09/260 published in November 2009. A draft of that paper was presented in a seminar at the CEMAC’s regional central bank in Yaoundé, Cameroon, in September 2009. The authors would like to acknowledge the helpful advice and comments from Sharmini Coorey, John Wakeman-Linn, Tidiane Kinda, Oscar Melhado, and Marcos Poplawski-Ribeiro on that draft; and Paolo Mauro, Mauricio Villafuerte, and Li Zeng on this version. The authors are grateful to Anne Grant for editorial assistance.


The CEMAC Commission is the body responsible for multilateral monitoring and the surveillance system, as well as for the quality and harmonization of the statistics of the member states.


In June 2009, the Monetary Policy Committee decided to freeze the ceilings on statutory advances at 20 percent of CEMAC members’ 2008 domestic ordinary fungible fiscal revenue and to decrease them by 20 percent every year during 2010–15. Outstanding statutory advances in excess of the sliding ceilings must be repaid within 12 months.


Further details on the methodology, construction, and criticisms of the IMF’s fiscal impulse measure can be found in Chand (1992) and Schinasi and Lutz (1991). A different formulation of the fiscal impulse focuses on separating endogenous and exogenous elements of the budget balance, with a view to measuring discretionary changes in fiscal policy, compared with its thrust. This second formulation is used, for example, by the Organization for Economic Cooperation and Development.


The decline in the external-debt-to-GDP ratio in many of the CEMAC countries also reflects various debt rescheduling and relief initiatives, in particular, from the enhanced Heavily Indebted Poor Countries Initiative.


Under the constant-expenditure rule, the analysis also considers the case of maintaining constant real per capita expenditure to demonstrate the impact of treating current and future generations equally.


These results differ from those of IMF country teams, which rely on country-specific assumptions and policy considerations, and possibly use different approaches to long-term sustainability from the approach used here.

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