Front Matter Page
African Department
Authorized for distribution by John Wakeman-Linn
Contents
Executive Summary
I. Introduction
II. Institutional Background and Features
A. Macroeconomic Policies in the CEMAC Region
B. Policy Coordination and Surveillance
III. Improving the Measures of Fiscal Surveillance
A. Fiscal Policy Objectives and Indicators
B. Indicators of Policy Stance and Policy Change
C. Indicators of Sustainability
D. Implications for Fiscal Surveillance
IV. External Shocks and the Convergence Criteria
A. External Shocks and Growth
B. The Efficacy of Fiscal Policies in Mitigating Shocks
C. Implications for Regional Surveillance
V. External Stability Considerations and Regional Surveillance
A. Consistency of the CEMAC Fiscal Convergence Criteria with External Stability
B. The Desirability of a Foreign Reserves Target
C. Long-run Considerations in Regional Surveillance
VI. Summary and Policy Implications
Boxes
1. Brief Economic History of the Central African CFA Zone
2. Overview of the Optimum Currency Area Literature
3. BEAC Monetary Programming
4. Characteristics of Oil Revenue in the CEMAC
5. CEMAC Convergence Criteria
6. Fiscal Stance and Fiscal Impulse
7. The Primary Gap Measure
8. Constant Fiscal Expenditure Rule for Oil Producing Countries
9. Measuring the Impact of Exogenous Shocks on the Non-oil Economy
10. Measuring the Impact of Counter-Cyclical Fiscal Policies on the Non-oil Economy
Tables
1. CEMAC Fiscal Developments and the Fiscal Convergence Criteria, 1998–2008
2. A Comparison of CEMAC Fiscal Indicators, 2000–08 (in percent of GDP)
3. A Comparison of CEMAC Fiscal Indicators, 2000–08 (in percent of non-oil GDP)
4. Primary Gap Measures Across the CEMAC, 1998–2008
5. CEMAC Long-term Macroeconomic Assumptions
6. CEMAC Average Sustainable Non-oil Primary Deficit Under Different Fiscal ules, 2009–48
7. Real Non-oil GDP Growth in CEMAC Countries, 1980–2008
8. Correlation of Real GDP Growth Among CEMAC Countries, 1980–2008
9. Triggers of Recessions in CEMAC Countries, selected periods
10. Correlation Between Non-oil Real GDP and External Factors, 1980–2008
11. Correlation Between GDP, Public Expenditure, and Non-oil Revenue
12. Average Share of Non-oil Revenue and Expenditure in Non-oil GDP, 1980–2008
13. Variance Decomposition of Real GDP by Types of Shocks
14. CEMAC Share of Oil Revenue in Total Revenue and Correlation Between Fiscal and External Balances
15. CEMAC Currency Coverage Ratio, 2000–08
16. CEMAC Gross Official Reserves, 2000–08
Figures
1. CEMAC Real and Fiscal Developments, 1969–2008
2. CEMAC Terms of Trade and Balance of Payments Developments, 1969–2008
3. CEMAC Net International Reserve Coverage of Imports, 1995–2008
4. CEMAC Fiscal Policy and Procyclicality vis-à -vis Oil Revenue, 1980–2008
5. Nominal and Real Crude Oil (Spot) Prices, 1970–2014
6. CEMAC Non-oil Real GDP Growth and the Fiscal Impulse, 1995–2008
7. CEMAC External Debt and the Primary Gap, 1998–2008
8. CEMAC Sustainable Non-oil Primary Deficit Under Different Fiscal Rules, 2009–13
9. CEMAC Sensitivity of the Sustainable Non-oil Primary Deficit to Oil Prices Under a Permanent Income Hypothesis, 2009–13
10. Terms of Trade and Real Effective Exchange Rates, 1980–2008
11. Impulse Response of Output to a One Standard Deviation Change in Terms f Trade and Real Effective Exchange Rate Shocks
12. Impulse Response of Output to a One Standard Deviation Change in Revenue nd Spending Shocks
13. CEMAC Overall Fiscal Balance and External Current Account Balance, 1996–2008
14. CEMAC Countries Overall Fiscal Balance and External Current Account alance, 1996–2008
15. CEMAC Foreign Assets of BEAC and Government Deposits at BEAC, 995–2008
Appendix: Linkages Between Fiscal and Monetary Policies in a Non-Renewable Resource Producer under a Fixed Exchange Rate
References
Executive Summary
In this paper, we consider the design of the surveillance, and, in particular, the fiscal criteria in the Central African Economic and Monetary Community (CEMAC) with a view to ensuring they are consistent with internal and external sustainability. This consistency is important within a monetary union because fiscal policy is the primary instrument through which national governments can influence macroeconomic performance. We comment on how surveillance might be improved by broadening the region’s current criteria through alternative fiscal indicators, some focus on the scope and nature of external shocks, and attention to the consistency of policies in assessing the viability of the union and its fixed exchange rate regime.
In taking a broad approach to regional surveillance, we find that the CEMAC’s convergence criteria are rather limited and provide an incomplete picture of the policies and other forces acting, and offer little insight on whether policies are consistent with goals of the monetary union. To be more effective, the CEMAC’s surveillance agenda could be sharpened in a number of ways.
We would argue that fiscal surveillance at both the regional and country level should not rely entirely on the current convergence criteria. Instead, the fiscal indicators excluding oil revenue, such as the non-oil fiscal stance, non-oil fiscal impulse, and non-oil primary balance, should receive central attention. In this regard, we welcome the CEMAC Commissions’ introduction of an adjustment criterion on the non-oil basic fiscal balance but to make it effective, this criterion would need to be refined. Ideally, each economy’s cyclical position should be considered as well, although we recognize the practical difficulties in applying cyclical adjustments in a transparent and uniform way across all member countries. With five of the six countries being oil-producers long-term fiscal sustainability should also be of concern, which could be monitored through analysis based on simple fiscal rules.
CEMAC countries have been faced with external shocks that have been shown to have a significant and variable impact across member countries, which complicate economic and especially fiscal policies. Indeed, the current fiscal convergence criteria do not address the procyclical nature of CEMAC fiscal polices, which can exaggerate the impact of external shocks. Since discretionary fiscal policy is demonstrated to have the ability to mitigate the impact of external shocks across the region, it is important to take this factor into account when assessing and formulating the relevant convergence criteria.
Also, CEMAC’s surveillance agenda will need to consider the impact of fiscal policy on external stability, in light of the fixed exchange rate regime. Here, building sufficient reserve coverage is important and in periods of high world oil prices when there is a windfall of oil revenue. When setting a desirable 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 cover structural aspects of fiscal policy so that tax and spending system would be supportive of capital accumulation and productivity gains in reproducible sectors.
Ultimately, the external viability of the monetary union and its fixed exchange rate depends on the strength of fiscal policies and structural reform to build vibrant and viable non-oil sectors in the member countries. Only in this way will the union generate enough foreign exchange to finance the imports needed to maintain moderate levels of growth and real income.