Central African Economic and Monetary Community: Recent Developments and Regional Policy Issues
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International Monetary Fund
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Publication Date:
24 Sep 2002
eISBN:
9781451806496
Language:
English
Keywords:
ISCR; CR; CEMAC country; CEMAC authorities; exports receipt; CEMAC framework; CEMAC treaty; excess demand; central bank; oil revenue; CFA franc; export receipt
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This paper examines recent developments and regional policy issues for the Central African Economic and Monetary Community (CEMAC). The CEMAC region benefited in 2000–01 from favorable world oil prices. This helped to improve the public finances and to strengthen the reserve position of the Central Bank of Central African States. But inflation increased to 4 percent in 2001, owing to pressures from high domestic demand growth, which rose by 12 percent in real terms, and was fed by growth in credit to governments. Prospects for 2002 are for continued strong growth in domestic demand.

Abstract

This paper examines recent developments and regional policy issues for the Central African Economic and Monetary Community (CEMAC). The CEMAC region benefited in 2000–01 from favorable world oil prices. This helped to improve the public finances and to strengthen the reserve position of the Central Bank of Central African States. But inflation increased to 4 percent in 2001, owing to pressures from high domestic demand growth, which rose by 12 percent in real terms, and was fed by growth in credit to governments. Prospects for 2002 are for continued strong growth in domestic demand.

I. Introduction

1. This paper reports on the staff's discussions with senior officials of the Central Bank of Central African States (BEAC), the Regional Banking Commission (COBAC), and the Executive Secretariat of the Central African Economic and Monetary Community (CEMAC) that were held in Yaoundé (Cameroon) during March 19–22, 2002. 1 It provides a regional dimension to the Executive Board’s discussions of Article IV consultations with the six member countries of the CEMAC: Cameroon, the Central African Republic, Chad, the Republic of Congo, Equatorial Guinea, and Gabon.

2. The Executive Board discussed the regional dimension of Article IV consultations with the six member countries of the CEMAC in May 2001 (SM/01/111, 4/17/01). Directors noted that in 2000 sharp increases in export earnings and government revenue in the oil- producing member countries had led to a large reduction in fiscal and external imbalances, as well as to a strong recovery in the BEAC’s international reserves. They observed, however, that an acceleration of the pace of economic integration would enhance CEMAC credibility, and encouraged the authorities to establish a solid framework for close coordination of fiscal and structural policies. Directors also urged the BEAC to improve the conduct of monetary policy, and to take steps to strengthen the functioning of the regional interbank money market. At the same time, they expressed concern about the continuing fragility of the banking sector, and underscored the importance of strengthening COBAC and keeping it free from political interference.

3. This paper is organized as follows. Section II summarizes recent economic developments and prospects. Section III discusses regional integration and multilateral surveillance, in particular issues arising in the context of managing oil revenues, monetary policy, and financial sector reform. The main conclusions drawn by the staff are summarized in section IV.

II. Recent Economic Developments and Prospects

A. Developments in 2001

4. Oil market developments continued to dominate the short-term economic performance of the region. In the wake of high oil prices for most of the year, domestic consumption and investment expanded strongly, supported by an accommodating monetary policy. As a consequence, consumer prices rose by almost 4 percent, and the CEMAC’s external balance deteriorated (Table 1 and Figure 1). Real GDP in the region grew by 5.4 percent, higher than in the rest of sub-Saharan Africa (Table 2), following 3 percent growth in 2000. This translated into healthy growth of 2.7 percent in real GDP per capita in 2001. Regional growth was broadly based, but strongest in Cameroon, Chad, and Equatorial Guinea (Table 3). Both oil and non-oil GDP increased by 5.4 percent; the former in particular continued to expand rapidly in Equatorial Guinea. Petroleum constitutes more than two thirds of the CEMAC-countries’ export receipts and about half of their fiscal revenues (Table 4), and in Chad and the Republic of Congo, non-oil GDP growth reflects almost entirely investments in the petroleum sector, and thus is closely linked to future oil GDP. However, Cameroon, the largest CEMAC economy, recorded broad based, private sector driven non-oil growth of 5.5 percent.2

Table 1.

CEMAC: Selected Economic and Financial Indicators, 1997–2002

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Sources: IMF, World Economic Outlook database, January 2002; and staff estimates and projections.

Excluding grants and foreign financed investment and interest payments.

Excluding grants and foreign financed investment.

Figure 1.
Figure 1.

CEMAC: Selected Macroeconomic Indicators, 1990–2002 1/

Citation: IMF Staff Country Reports 2002, 203; 10.5089/9781451806496.002.A001

Sources: IMF, World Economic Outlook database, December 2001; and staff estimates and projections.1/ Cameroon, Gabon, and Republic of Congo are the largest economies in the zone.
Table 2.

Sub-Saharan Africa: Cross-Group Comparisons, 1997–2002

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Sources: IMF, World Economic Outlook database, January 2002; and staff estimates and projections.

West African Economic and Monetary Union.

Sub-Saharan Africa, excluding Eritrea, Liberia, and Somalia.

Gross official reserves as a percentage of base money.

Table 3.

CEMAC: National Accounts, 1997–2002

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Sources: IMF, World Economic Outlook database, January 2002; and staff estimates and projections.

Fiscal year July 1–June 30.

Table 4.

CEMAC: Relative Size of the CEMAC Economies and Importance of the Oil Sector, 1997–2002

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Sources: IMF, World Economic Outlook database, January 2002; and staff estimates and projections.

5. Although the fiscal position remained strong in 2001, expenditures tended to be procyclical, with total government revenue increasing from 22.4 to 24 percent of GDP and total government expenditure rising from 19.6 percent to 21.2 percent of GDP (Table 5). After a strong increase in oil receipts in 2000, most of the revenue growth in 2001 was due to improved non-oil revenue collections in all CEMAC countries. The overall fiscal balance remained roughly constant at about 2¾ percent of GDP, as the increase in the primary surplus to 11 percent of GDP was offset by higher interest payments.

Table 5.

CEMAC: Fiscal Balances, 1997–2002

(In percent of GDP)

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Sources: IMF, World Economic Outlook database, January 2002; and staff estimates and projections.

Fiscal year July 1–June 30.

Overall budget balance excluding grants and foreign financed investment.

6. The expansion of net bank credit to the government was equivalent to almost 12 percent of beginning-of-period broad money during 2001. This credit growth was fed by statutory advances from the BEAC to the national treasuries in Cameroon, Gabon, and the Republic of Congo, the permissible level of which increased automatically as a result of a rise in their fiscal oil revenues in 2000.3 Moreover, the Gabonese and Congolese governments drew down deposits with commercial banks that they had built up in the previous year (Tables 6–8). Governments used these additional resources to reduce domestic and external arrears (Cameroon, Gabon, Congo), service larger-than-usual external debt payments (Gabon), and finance the cost of bank restructuring (Congo). As credit to the private sector expanded during 2001 by almost 10.7 percent (6.2 percent as a percentage of beginning-of-period broad money), in particular in Equatorial Guinea, Chad, Gabon and Cameroon, net domestic assets rose by 31 percent (18.6 percent as a percentage of beginning-of-period broad money).

Table 6.

CEMAC: Monetary Survey, 1997–2001

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Sources: BEAC; and staff estimates.

The special deposit system was replaced by the auctioning of BEAC certificates in February 1996.

Table 7.

CEMAC: Summary Accounts of the Central Bank, 1997–2001

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Sources: Bank of Central African States (BEAC); and staff estimates.

Gross foreign reserves, including gold, foreign currency reserves, IMF reserve position, and balance of the operations account at the French Treasury.

Includes cash in vault and deposits of commercial banks with the BEAC.

Table 8.

CEMAC: Summary Accounts of the Commercial Banks, 1997–2001

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Sources: Bank of Central African States (BEAC); and staff estimates.

7. The surge in demand, financed by rapid credit growth, contributed to a substantial deterioration in the CEMAC’s external position. Imports as a share of GDP increased by almost 5 percentage points, while the export share fell by 1 ½ percentage points as a result of weaker prices for oil and wood than in 2000 (Table 1). As a consequence, both the trade and the current account balances worsened, thus contributing to a loss in the BEAC’s international reserves, with the currency cover ratio falling from 77 percent at end-March to 65 percent at end-December (Figure 2 and Table 7). Excess demand led to high inflation in some member countries, notably Chad and Equatorial Guinea, and the zone-wide consumer price index rose by 3.9 percent in 2001. This contributed to an appreciation of 5.9 percent in the real effective exchange rate, in spite of a depreciation of the CFA Franc against the US Dollar (Figure 3 and Table 9). Moreover, the modest fall in petroleum prices during the last four months of the year, albeit from a high level, resulted in a 2.2 percent deterioration in the terms of trade for the whole year (Figure 4 and Table 10).

Figure 2.
Figure 2.

CEMAC: Currency Cover Ratio, 1995–2001 1/

(In percent)

Citation: IMF Staff Country Reports 2002, 203; 10.5089/9781451806496.002.A001

1/ Data as of October 2001; gross official reserves as a percentage of base money.
Figure 3.
Figure 3.

CEMAC: Nominal and Real Effective Exchange Rates and U.S. dollar Exchange Rate, January 1994–December 2001

Citation: IMF Staff Country Reports 2002, 203; 10.5089/9781451806496.002.A001

Sources: IMF, Information Notice System; and Bank of Central African States.
Table 9.

CEMAC: Nominal and Real Effective Exchange Rates, 1996–2001

(Annual percentage changes)

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Sources: Information Notice System; and staff estimates, as of October 2001.
Figure 4.
Figure 4.

CEMAC: Terms of Trade and Petroleum Prices, 1992–2001

Citation: IMF Staff Country Reports 2002, 203; 10.5089/9781451806496.002.A001

1/ Average petroleum spot price of U.K., Dubai, and West Texas crude in U.S. dollars (WEO).2/ Cameroon, Republic of Congo, Equatorial Guinea, and Gabon.3/ Chad and Central African Republic.
Table 10.

CEMAC: Terms of Trade, 1996–2001

(Annual percentage changes)

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Sources: IMF, World Economic Outlook database, January 2002; and staff estimates and projections.

8. In spite of the commercial banks’ excess liquidity and falling international reserves, the BEAC lowered its bank refinancing rate by half a percentage point to 6.5 percent in September 2001, while the interest rate on short term (28-day) deposits was lowered by 20 basis points to 3.46 percent in January 2002 (Table 6). The BEAC thereby followed developments in Europe, where interest rates had fallen by almost one percentage point in 2001, squeezing the BEAC’s profit margin on commercial bank deposits in the process (Figure 5).4 In the absence of the instruments necessary to use open market operations to mop up liquidity, the BEAC introduced statutory reserve requirements in September, stipulating that one percent of sight deposits and Yi percent of savings deposits be held in an account with the BEAC and earn an interest rate of 1.6 percent. Between September and December, the remuneration rate was reduced to 1.1 percent, and at end-December, the reserve requirement ratios were further increased to 2.5 and 1.5 percent, respectively. The BEAC has indicated that it intends to continue employing reserve requirement ratios as the main tool of liquidity management.

Figure 5.
Figure 5.

CEMAC: French Money Market Rate and BEAC Discount and Deposit Rates, January 1994–December 2001

(In percent)

Citation: IMF Staff Country Reports 2002, 203; 10.5089/9781451806496.002.A001

Sources: IMF, Information Notice System; and Bank of Central African States.

B. Prospects for 2002

9. Under the assumption of an annual average oil price of US$ 20 per barrel-which, in view of recent developments, looks rather low - real GDP is projected to grow by about 5 percent in 2002. Oil production should continue to increase in Equatorial Guinea but contract in Cameroon, Gabon and the Republic of Congo. Non-oil GDP is projected to expand by about 5½ percent, led by a continuing investment-driven recovery in Gabon from the sharp recession in 1999, large investments in the petroleum sector in Chad, and a continuation of the broad-based expansion that Cameroon has experienced since 1995. Construction of the Doba-Kribi pipeline will continue to stimulate activity in Chad and Cameroon. As a result of persistently high inflation rates in Equatorial Guinea and Chad as well as a temporary spike in Congo due to the liberalization of oil prices, inflation could increase to 4½ percent on average in 2002, and 5½ percent during the year, in particular if monetary policy continues to be accommodating. Both external and fiscal balances are projected to deteriorate. The trade balance is projected to worsen from 10.7 percent to 8.5 percent of GDP, while the effect on the current account may be mitigated by lower income repatriations by foreign oil producers (Table 11). To the extent that fiscal discipline would loosen, even sharper imbalances could emerge, though higher than assumed oil prices could lead to a better outcome.

Table 11.

CEMAC: Balance of Payments, 1997–2002 1/ 2/

(In billions of CFA francs)

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Sources: IMF, World Economic Outlook database, January 2002; and staff estimates and projections.

The computation does not take into account intrazone economic transactions.

Cameroon’s balance of payment is aggregated on the basis of its fiscal year- July to June- and not on the basis of the calendar year, as for the other CEMAC countries.

Includes reserve position in the Fund (accumulation -).

III. Main Policy Issues and Report of the Discussions

A. Regional Surveillance over Macroeconomic Policies

10. Regional surveillance in the CEMAC area has been noticeably reinforced over the years. Until 2000, it consisted mainly of an ex-post report on economic developments. Starting in 2000, the surveillance became more normative. Each member state prepared reports on a semi-annual basis that were reviewed by the convergence council and endorsed by the Council of Ministers. At end-2001, a new framework was introduced that includes three-year forward looking convergence programs, an annual report on the convergence strategy prepared by the CEMAC secretariat, and the adoption of convergence criteria. Starting in July 2002, the CEMAC will evaluate for each member country the degree to which it respected four convergence criteria in the previous year: a non-negative basic fiscal balance (excluding grants and externally financed investment expenditures); consumer price inflation of no more than 3 percent; a level of external and domestic public debt of no more than 70 percent of GDP; and the non-accumulation of external or domestic payments arrears. Staff expressed the view that the new criteria were broadly appropriate, except for the fiscal deficit criterion since it does not account for the size and volatility of oil revenues (see section III.B below).

11. Applying the new criteria to the most recent data suggests that the major oil exporters have easily met the deficit criterion in the past year, but that inflation is in excess of the target in CAR, Chad, and Equatorial Guinea, while high external debt continues to be a problem for Cameroon, the CAR, Chad, and Congo (Tables 12 and 13). While welcoming the progress made in meeting some of the criteria, the staff cautioned that excess demand pressures leading to higher inflation needed to be addressed. In addition, in light of high levels of external debt, the projected deterioration of the external position was cause for concern.

Table 12.

CEMAC: Compliance with Convergence Criteria, 1997–2002 1/

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Sources: IMF, World Economic Outlook database, January 2002; and staff estimates and projections.

Revised set of criteria as valid from 2002 onwards.

Overall budget balance excluding grants and foreign financed investment.

External debt only. The CEMAC’s convergence criterion also includes domestic debt, on which the WEO datab; provides insufficient information.

External and domestic arrears.

Table 13.

CEMAC: External Debt, 1997–2002

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Sources: IMF, World Economic Outlook database, January 2002; and staff estimates and projections.

12. Though conventional measures of the zone’s external competitiveness seem to be adequate at present, some countries in the region have the symptoms of “Dutch disease” in that their exports consist almost solely of oil, and the nonoil production sector is small. To date, the gains in competitiveness from the 1994 devaluation seem to have been maintained in Cameroon, the only country having substantial non-commodity exports, with only a modest recent appreciation of the real exchange rate. However, price increases have been markedly higher in some other economies (in particular, Equatorial Guinea and Chad), and official reserves have declined. Moreover, in this context, a possible appreciation of the Euro against the US dollar could harm the competitiveness of the region and pose difficult challenges for the conduct of macroeconomic policy. The staff believes that excess demand pressures need to be contained by more restrictive monetary and fiscal policies. However, the authorities were of the view that the uptick of inflation in 2001 was due to a number of sectoral bottlenecks or weather-related supply shocks, which should not be repeated in 2002.

B. Managing Oil Revenues

13. Oil receipts constitute a significant part of fiscal revenue in four out of six CEMAC member countries. A fifth country, Chad, will begin producing oil in 2004. Two main challenges for the management of public finances arise in this context. First, as international oil prices are highly volatile, oil receipts are subject to large fluctuations outside the control of the government. Second, oil reserves are exhaustible and will be depleted at some point. This suggests, in particular for countries with declining oil production, the need for a very cautious fiscal stance, and to save some of today’s oil receipts for future consumption.

14. In view of these features, the treatment of fiscal policy within CEMAC’s macroeconomic surveillance exercise appears inadequate. The CEMAC’s fiscal target is a basic balance that is at least zero (see section A). In case a country misses that target, the CEMAC Executive Secretariat reports the deviation to the council of ministers. The council can refrain from publicly criticizing the country’s performance, however, if the slippage has been caused by factors outside the control of the government, such as low oil prices. This procedure contains the risk that in times of depressed oil prices, slippages are accepted as being the result of exceptional circumstances, while in times of high oil prices, tendencies toward fiscal profligacy are not constrained. The magnitude of oil revenues (Table 4) is such that for CEMAC as a whole, if the oil price in 2001 had been US$5.00/barrel lower, government oil revenues would have been 2.7 percent of GDP below those actually observed, while for several countries in the region, the shortfall as a ratio to GDP would have been substantially greater than this.

15. There was wide agreement between the mission and the staffs of both the CEMAC Executive Secretariat and the BEAC that the CEMAC’s fiscal surveillance criterion should be changed to avoid such inconsistencies. While the discussions did not cover specific proposals, the mission suggested that an appropriate modification could reflect the following elements: first, to obtain a more reliable idea of the countries’ short- to medium-term fiscal stance, the fiscal balance could be calculated on the basis of a long-term average oil price rather than current prices. Second, to the extent that long-term sustainable management of oil wealth is considered an objective of fiscal policy, the fiscal target should also reflect the need to set some of today’s oil receipts aside for future consumption. As Box 1 illustrates, the fiscal policy stance of some oil producing countries looks less favorable in recent years once these aspects are taken into account.

16. The mission also discussed with the authorities options to improve the management of oil wealth. They indicated that to this end the BEAC had, in 2001, established the legal framework for two funds, one to help achieve the short-term stabilization of oil receipts and another to accumulate long-term savings for future generations.5 In doing so, the BEAC was also attempting to induce countries to pool their oil revenues and hold them with the BEAC or the French Treasury, as with other foreign currency assets. Thus far, however, no country had placed any resources in either fund, which the BEAC staff felt could be partly due to the novelty of these instruments. However, more important reasons seem to be countries’ reluctance to lose control over their accumulated oil revenues, and their concern about the low rate of return offered by the BEAC.6

17. In particular, there appear to be unresolved issues concerning the management and types of assets that the funds would hold and their rate of return, and these could hinder the attractiveness of the funds. In particular, the rules of the Union Monétaire de l’Afrique Centrale (UMAC) require that foreign assets be kept partly with the BEAC (35 percent), and partly with the latter’s operations account with the French Treasury (65 percent).7 If the funds’ assets are classified as foreign exchange reserves, they presumably should be held in short-term, liquid assets, while an investment fund with a horizon of several decades might well hold longer-term assets that included equities as well as bonds with the objective of earning a higher average return. The authorities explained that in any case the statutes of the BEAC needed to be modified to reflect current reserve management practices. However, it was not clear how to reconcile long-term investment objectives with the pooling of reserves, since the obligation to pool reserves was not consistent with a separate investment of foreign exchange owned by a country’s fund for future generations. At present, the reserve cover ratio at 65 percent is well over the statutory minimum (20 percent), suggesting that if countries did accumulate oil revenues in the form of funds, the latter could be invested with a longer-term horizon.

18. Apart from these issues, there are other key questions concerning the effect of a fund on a country’s overall budgetary position, including the extent to which rules placing constraints on its spending of oil revenues (and investment returns) embodied in the funds can be effective. These questions, identified in studies of the experiences of other countries with savings funds for non-renewable resources,8 are based on the following observations:

  • Because money is fungible, establishing a separate fund may not increase total government (or national) saving, if government spending rises in the regular budget. Of course, government spending may be constrained by financing availability, but a country with a large investment fund is likely to be well received by potential lenders. Thus, the very existence of a large fund could in fact create additional spending pressure on politicians.

  • If oil revenue funds are poorly integrated with the budget they can lead to a loss of fiscal control. For instance, if the expenditures of the fund are earmarked for specific social programs or infrastructure investments, they may parallel or duplicate those in the budget, leading to inefficiency and waste. Unless effective controls are in place, the funds may also provide additional opportunities for corruption and rent-seeking.

  • Country experiences with oil funds have been mixed.9 While in some countries with a prior tradition of strong fiscal management, the funds served their intended purpose of helping to insulate the country from the boom/bust cycles associated with oil revenues; in others with inadequate controls or insufficient fiscal discipline, oil revenues and overall government spending rose in parallel and the funds failed in their insulation objective. Moreover, in several countries, subsequent changes in legislation or poor management led to assets being diverted from their originally intended use. In the light of the above concerns, the funds for future generations if not set up properly may be a hindrance, not a help, in addressing the problems created by volatile and nonrenewable oil revenues.

19. The above considerations underlie several suggestions relating to the establishment and management of oil funds by the countries of the CEMAC.

  • The convergence criterion for the basic budgetary balance should be augmented by a criterion for the sustainable, non-oil budget position. Countries with oil revenues can afford to spend more year-by-year, but only to the extent that investing their oil revenues provides a permanent flow of income. The present value of future oil revenue, multiplied by an estimate of a normal rate of return on investment, provides a measure of permanent income, which can be used with non-oil revenues to finance sustainable spending.10

  • Stabilization funds can be exhausted by a sustained period of low prices; use of such funds could be complemented by greater use of hedging instruments to guarantee the value of future oil receipts.

  • Those countries that have already decided to set up funds should seek to ensure that the funds’ investments yield a risk-adjusted return that is adequate when compared to international benchmarks.

  • For countries where the requisite fiscal discipline does not yet exist, establishment of a fund may provide some presumption that national saving will increase. But safeguards are essential to ensure that investments are sound and to prevent misuse of the resources. This may well include management of the funds by investment professionals outside the country, as well as some role for the BEAC to ensure compliance of national governments with safeguards. However, the BEAC needs to make its management of the funds and the returns offered on them attractive to member countries.

C. Regional Monetary Policy

20. The overriding objective of the regional central bank, the BEAC, is to ensure the stability of the common currency. A supplementary objective is to support the economic policies of member countries.11 The context for the monetary union arrangement leaves little scope for an independent monetary policy, however, because the CFA franc has been pegged to the euro since its creation on January 1, 1999, as the common currency for 11 (now 12) of the 15 EU countries, and the successor to the French franc12. Since capital flows to the euro area are in principle free of controls, the CEMAC is in a quasi-monetary union with the euro area, and the actions of the European Central Bank largely determine the stance of monetary policy in the region. In practice, however, mobility of capital between the two regions is not perfect, since transferring funds is not costless. Moreover, if there are doubts about the maintenance of the parity (as there were briefly in the public’s mind at the time of the euro ’s introduction), there might be a currency risk premium embodied in CFA franc interest rates (as well as a premium for other risks). As a result, the BEAC’s interest rates do not always move simultaneously or one-for-one with euro area rates, though they tend to follow the same pattern (Figure 4). In practice, there is no scope for maintaining CEMAC interest rates below those in the euro-zone in order to support other objectives of regional monetary policy, though the (positive) differential can in the short run be influenced by the BEAC. Via effective use of this instrument, the BEAC could affect domestic credit expansion and the level of foreign exchange reserves.

21. In September 2001, the BEAC simultaneously lowered interest rates on banks’ deposits with the central bank, and introduced required reserve ratios. The BEAC authorities explained to the mission that this move was intended to reflect the situation of falling interest rates in the euro zone, and excess liquidity on the part of the banks in the region which the BEAC needed to mop up. Given the extent of this excess liquidity, it was difficult for the BEAC to follow a restrictive monetary policy stance using its traditional instruments. In the staff’s view, the resulting monetary policy was still too expansionary, leading to growth of the banking system’s net domestic credit to the economy by 17 percent in 2001. This helped fuel an increase in real domestic demand, which rose by 10.7 percent, far in excess of the rate of growth of real GDP.

22. To ensure consistency between the regional objectives and national economic and financial developments the BEAC conducts an annual financial programming exercise. This exercise sets specific targets for credit to each government consistent with a targeted level of net domestic assets and gross foreign assets of the BEAC. The BEAC constructs the region’s monetary program using country-by-country projections; officials explained to the staff that this was necessary to ensure consistency with IMF-supported programs (most of the countries in the region either have such programs or are in the process of reaching understandings with the Fund). The demand for money is projected to grow roughly in line with nominal income, and a ceiling for domestic credit is calculated given a specific target for foreign assets.

23. However, in the staffs view, the monetary programming exercise and the rules for access to central bank credit by governments do not provide sufficiently flexible monetary policy instruments. The amount that governments can draw is not influenced by the overall credit ceiling derived from the exercise but is determined instead according to the BEAC’s statutes by a fixed formula, namely 20 percent of the country’s tax revenues in the previous year. Thus, setting a total credit ceiling implies a notional limit for the extension of credit to the private sector. However, in practice BEAC officials made clear that refinancing ceilings on the banks are not binding, since they did not want to force a one-to-one crowding out of the private sector in response to government access to central bank credit. The staff observed that in these circumstances the policy instruments of the BEAC are not sufficiently effective. The lack of a well-functioning interbank money market limits the possibility of using indirect instruments of monetary policy, in particular open-market operations, to affect bank liquidity of the region (see below).

24. There are two reforms underway that would help to improve the effectiveness of monetary policy. First, the introduction of non-zero reserve requirements in September, 2001—initially at a level equal to 1.5 percent of sight deposits and 0.5 percent of term deposits, and increased in December, 2001, to 2.5 percent and 1.5 percent, respectively—is intended to help mop up banks’ excess liquidity, and the authorities indicated that to this end they expected to increase the reserve ratios further. When this occurs, the BEAC would be able, by changing the terms at which banks obtain refinancing from the central bank, to affect the level of interest rates, which is difficult to do at present. A further positive outcome could be the more active use by banks of the interbank market, since not all of them would be in a situation of excess liquidity at any given period. However, some problems would remain: the difficulty in assessing counterparty risk no doubt explains some of the current reluctance of banks to lend to other banks, while it would be desirable to increase the remuneration on required reserves so that they would not constitute an onerous tax on banks, as the region’s banking systems remain vulnerable following their recent emergence from crisis.

25. A second reform is the planned elimination of the BEAC’s monetary financing of government deficits. The elimination is scheduled to take 10 years, with a one-tenth reduction in the refinancing ceilings occurring each year, starting January 1, 2003. While the envisaged elimination of monetary financing is a positive step, the authorities agreed with the mission that proper preparation will be required. In particular, it will be important to design country-based government securities issuance programs which when implemented will ensure better-developed markets for treasury bills and bonds issued by member governments, which will in turn facilitate the conduct of monetary policy.13 The project to establish, in Libreville, Gabon, a regional securities market on which stocks and bonds would be traded would help achieve this objective, though staff noted that Cameroon’s decision to proceed with is own securities exchange in Douala risked fragmenting an already small market. A new-issue calendar would facilitate orderly market access by governments.

Staff emphasized that it would be important to strengthen regional surveillance over government deficits in order to enhance market discipline, and expressed concern about the existence of a guarantee of government debt by the BEAC, even if limited in scope, since it could lead to confusion among investors and free-riding on the part of governments. Technical and legal issues needing to be addressed include the taxation of interest income, the holding of bonds by non-residents, the reinforcement of debt management capabilities of governments, and the use of government bonds as collateral and in repurchase operations. The elimination of monetary financing of deficits should also be accompanied by a reconsideration of the monetary programming exercise, and a more determined attempt to limit credit expansion of the banking system.

26. Staff argued that though the time remaining to prepare the reform seemed short, the actual transition phase seemed long. The BEAC authorities explained that they were planning to hold a seminar (at which they wished the Fund to participate) to study these issues, as well as related training courses. They fully agreed with the staff that adequate preparation was essential before the elimination of monetary financing could be put in place. They also noted that if the reform proceeded smoothly, it could be completed before the 10 years of the planned transition period had elapsed; the initial BEAC guarantee of government securities (up to the amount of the refinancing ceiling that had been eliminated) would apply only for a three-year period.

27. The mission also discussed with the BEAC authorities how transparency could be enhanced, including greater communication vis-à-vis the public regarding the rationale for monetary policy actions. The staff observed that the policy moves taken in September 2001 (described above) as well as the reform of the foreign exchange controls (see paragraph below) might have been more effective if more information had been provided to the public and the banks. The authorities stressed that their policy was to strongly favor transparency and that efforts in this direction would be intensified as needed to ensure a full understanding on the part of all interested parties.

D. Financial System Issues and Regional Integration

The interbank market and its role in the implementation of the regional monetary policy

28. The financial system of the CEMAC zone is still dominated by banks, which highlights the pivotal role that they could play in transferring liquidity from one country to another, thereby smoothing the effects of seasonal fluctuations, for instance on crop financing. The effectiveness of the BEAC’s monetary policy would also be greatly facilitated by intra-regional transfers which would reduce the need for the BEAC to mop up liquidity in some countries while injecting liquidity in others.

29. Despite some progress the inter-bank market does not yet provide an effective channel for such inter-bank transactions. As illustrated in Table 14, the volume of liquidity traded between banks was equivalent to only 15 percent of BEAC interventions to absorb or inject liquidity in 2000–2001. Both rates and volumes traded show erratic movements, suggesting thinness of the market. Furthermore, although roughly 60 percent of transactions in 2001 involved banks in different countries, incomplete regional integration of the money market was evidenced by a preponderance of transactions between banks in Cameroon, Gabon, and more recently Equatorial Guinea.

Table 14.

CEMAC: Money Market Volumes, 1999–2001

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Source: BEAC.

30. There are several reasons for the low level of interbank activity. First, there is an absence of usable collateral to guarantee the trades. Although banks have the opportunity to obtain certificates of deposit from the BEAC, they are not used as collateral as they are not dematerialized or tradable, and there is no agreement on their use in repurchase agreements. Second, transfers resulting from these trades are executed through the BEAC network and may incur unpredictable delays in settlement, which could act as a deterrent to short maturity lending. Finally, in the absence of collateral, unaffiliated banks are reluctant to lend to one another because of credit-worthiness concerns. As a result, trades are more likely to take place between banks belonging to the same group.

31. The BEAC officials observed that several factors may improve the effectiveness of the interbank market in the future.

  • The phasing out of government financing by the BEAC and the related issuance of tradable government bonds or bills could provide the market with some tradable collateral.

  • The payment system reform project undertaken by the BEAC with IMF and World Bank support is making good progress. The design phase of the project is now finished and the implementation phase is due to begin very soon.

  • The adoption by the banks’ supervisory authority—COBAC—of a single regional licensing system (agrément unique) is likely to facilitate cross border transfers of liquidity through branches of the same institutions. In this context, the mission observed that a simplification of the complex procedures that are required currently for a bank to open a branch in a country different from its headquarters—which require approval by the Minister of Finance of the host country and require branches to hold their own minimum capital—could help accelerate the process.

  • The COBAC’s intention to make available to all banks its ratings reports will likely boost market development through better knowledge by banks of their potential counterparts.14 The mission agreed that making ratings public would be helpful, but to ensure a regularly updated rating system would likely require more frequent on-site bank examinations than have occurred to date.

32. While welcoming the above initiatives, the mission noted that most of them would take quite some time to produce tangible results and suggested that other steps could be taken in the short term to tighten liquidity. First, the BEAC could raise the ratio of required reserves to absorb global excess liquidity, and increase the spread between its deposit and lending rates to make it less attractive for banks to borrow from or deposit with the BEAC. Second, technical measures such as asking banks to display electronically their borrowing and lending rates for different maturities would improve the dissemination of real time information. Third, consideration should be given to issuance of central bank paper which could be used as collateral. Finally, maintaining a sound banking system will be essential to establish confidence among market participants. This aspect is treated below.

Financial system soundness and regional integration

33. As of end-December, 2001, the banking system in the CEMAC zone was comprised of 32 active banks, including one recently created bank which has not yet started operations. The banking system of the zone holds aggregate assets of CFA 2,500 billion (about $3 billion), of which CFA 1,500 billion (about $1.8 billion) is in the form of loans.

34. The mission noted that the soundness of the banking system, measured by the degree of banks’ compliance with key financial ratios, was better than at the time of last year’s consultation (Table 15). However, important weaknesses remain, while the overall situation varies significantly across countries, pointing to a low level of integration. While the number of banks violating the solvency ratio has decreased from 11 to 7, their market share is still significant: 25 percent in Chad, 36 percent in the CAR, and 57 percent in the Congo. Moreover, 7 banks (3 in Cameroon, 2 in Congo and 1 each in CAR and Chad) do not yet meet the minimum capital requirement.15 (In Congo and CAR the banks involved represent, respectively, 57 percent and 36 percent of total deposits). Finally, 10 banks did not comply with the risk concentration ratio at end-2001.

Table 15.

CEMAC: Summary of Violations of Main Prudential Ratios, 2000–01

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Sources: COBAC and staff calculations.

Number of banks in violation in the country.

Percentage of deposits represented by the number of banks in violation in the country.

Percentage of total deposits represented by the number of banks in violation in the region.

35. Thus, while risks remain, there have been some positive developments. The arrival of new private shareholders has allowed the public sector to dispose of its majority shareholdings although there continues to be government participation in some banks. Profitability has been restored throughout the system, with banks in Cameroon and Gabon displaying the highest profit (by far). The spread between deposit and lending rates, which averages 11.6 percent, remains high, varying from 8.6 percent in CAR to 15.3 percent in Chad (Figure 6). The rate of non-performing loans also continues to be high, and the provisions made (less than 80 percent) absorb a significant part of the spread (Table 16 and Figure 7), as operating costs have been kept under control.

Figure 6.
Figure 6.

CEMAC: Analysis of Spreads in the Banking System, 1997–2000

Citation: IMF Staff Country Reports 2002, 203; 10.5089/9781451806496.002.A001

Source: BEAC.1/ Lending rate minus cost of resources.
Table 16.

CEMAC: Quality of Loan Portfolio, 1999–2001

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Sources: COBAC and staff calculations.

In percent of gross loans.

In percent of nonperforming loans.

Figure 7.
Figure 7.

CEMAC: Evolution of Net Profit and Net Banking Product, 1998–2001

(in billions of CFA francs)

Citation: IMF Staff Country Reports 2002, 203; 10.5089/9781451806496.002.A001

Source: COB AC.1/ Result of banking operations less cost of resources.2/ Net banking product less provisions and operating costs.

36. Overall, 16 banks received a COBAC Sysco rating of “good” or above, 11 banks were considered to be in a “fragile” or “critical” condition, while 5 banks were not rated because they were created too recently (Table 17). The banks regarded as being in fragile or critical condition were located in 4 countries: Cameroon (3 banks out of 10), CAR (2 out of 3), Chad (4 out of 6) and Congo (2 out of 4).

Table 17.

CEMAC: Bank Ratings, 2001

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Source: COBAC.

Ratings: l=strong (69.9 to 100 points); 2=good (39.2 to 69.8 points); 3A=fragile (34.4 to 39.1 points); 3B=moderately fragile (8.9 to 34.3 points); 3C=highly fragile (−6.0 to 8.8 points); 4A=critical (−15.6 to −6.1); 4B=highly critical (−15.6 to −6.1 points); 4C=irreparable (−100 to −55.4).

Nonrated banks.

37. In the view of the staff, strengthening banking supervision further is essential to improve compliance with key financial ratios and to maintain the progress already made in putting the banking system on a sound footing; this implies allocating more resources to the COBAC, and adapting international prudential norms to the regional context. The COBAC has a recognized successful track record in analyzing banking sector problems and taking corrective measures as needed. Following the 2000 Cameroon FSAP, the COBAC has proposed new draft regulations and made other changes to adapt its supervisory practices (Box 2).

38. The updated assessment of the COBAC’s compliance with the “Core Principles for Effective Banking Supervision” undertaken in conjunction with the FSAP for Gabon confirmed a high degree of professionalism and a significant degree of compliance with the Core Principles. Notwithstanding the overall positive assessment, the review noted some concerns:

  • A major problem, impacting on its ability to comply with a number of core principles, relates to insufficient staffing of the COBAC. In the past, the lack of staff has contributed to weaknesses in off-site supervision and, unless adequately addressed, other improvements in the regulatory framework are not likely to lead to the desired outcome. In the absence of a global increase in resources for the COBAC, any improvements in off-site supervision might be achieved at the cost of less stringent on-site control.

  • There is currently no specific control over market and foreign exchange risks, though regulation of foreign exchange positions is planned for 2002.

  • The required solvency ratio will increase in steps during 2002–04 from 5 to 8 percent, but even the new ratio will not make any allowance for operational risks. Such risks, for example those due to lack of internal controls and poor corporate governance, or the non-diversified production structures of the region’s economies, are prevalent and would suggest higher capital requirements than the minimum suggested by the Basel Committee.

39. The issue of COBAC resources thus needs to be resolved. Though by statute the BEAC is required to finance the COBAC, current administrative arrangements do not seem to work well. The Governor of the BEAC noted that a training program was underway that should allow transfer of more competent staff to the COBAC by end-2002; this should satisfy some of its needs. The mission suggested that a more formal procedure whereby the COBAC would present its budget directly to BEAC’s board could be more effective. Moreover, in case of refusal by the BEAC’s board to grant COBAC the resources it deemed appropriate, the COBAC should have a way to appeal to the Council of Ministers.

Legal environment for banking activity

40. Harmonization of the legal environment as provided for by the OHADA treaty16 is essential to foster regional integration and to ensure financial sector soundness. Although the OHADA treaty harmonizes legislation, actual implementation varies from country to country. In particular, a major problem involves the OHADA provisions for third-party attachment of funds by judicial order (saisie-attribution), particularly as they have been implemented in Cameroon.17 In that country, shortcomings in the national legislation implementing the OHADA Uniform Act, as well as improper legal handling, have opened the door to the use of the saisie-attribution procedure of as a way of extorting money from innocent parties. Although the OHADA treaty applies to 14 countries, most cases of abusive attachment of commercial banks’ assets have occurred in Cameroon, where it has attained such proportions as to present a potential problem for the health of the banking system.18

41. The Cameroonian authorities have committed themselves to addressing the issue, and good progress has already been made in Cameroon in several areas. However, the role of the BEAC has also come under scrutiny, since it was invariably the tiers saisi (the institution where funds of the commercial banks have been seized). The BEAC has attempted to address the immunity status of its national branches by standardizing the agreements signed with member states that define the BEAC’s diplomatic status with respect to the enforcement of national laws19. The proposed new agreement incorporates provisions to better protect banks’ deposits with BEAC from seizure; Article 4, paragraph 4 of the new text stipulates that banks’ funds can only be seized when a final judgment has been made on the substance of the matter at issue. The new agreement has now been approved by four out of the six CEMAC countries, and is pending in Cameroon.

42. Given the importance of the issue for the soundness of the financial system in the region’s largest economy, the mission devoted considerable attention to the topic of saisie-attribution in its discussions with the regional authorities. Progress is being made in addressing the loopholes that permit ad hoc seizure of banks’ assets, but in the staffs view, some details of the proposed solutions need to be examined further.

  • It is still not clear whether the abuse is attributable to the nature of the saisie- attribution or whether it results from a more general problem of judicial governance in Cameroon. This makes the initiatives of the Cameroon government to address the problem all the more important.

  • While it would be desirable for the BEAC to be able to protect banks from abusive requests, the new agreement could extend this protection from seizure to other cases where it might not be desirable. In particular, there is the danger that money could not be promptly seized from BEAC in other cases where time20 is the essence of efficiency, such as money laundering cases.

Money laundering

43. The authorities explained that there is no national legislation dealing with anti- money-laundering (AML). The BEAC has recently taken the initiative in this domain, and the problem will be dealt with at the regional level in order to enhance integration and efficiency. Draft legislation is being prepared, and an anti-money-laundering task force (GABAC21) has been created. GABAC is administratively under the responsibility of the CEMAC Secretariat but its financing has yet to be arranged.

44. The mission urged the authorities to have the AML legislation passed as soon as possible and stressed the need for the BEAC to provide GABAC with financial resources and technical assistance so that it can become operational. The scope of the law should ideally also encompass terrorist financing, and it should not leave the BEAC and national treasuries out of its field of application. Financial Intelligence Units (FIUs) should be created at the national level to make GABAC effective in its fight against money laundering.

E. Trade, Tax and Sectoral Policies, and Other Regional Integration Issues

Trade policy

45. A common external tariff was introduced in 1994 with four rates (5, 10, 20, and 30 percent), together with the removal of all intrazone tariff and nontariff trade barriers immediately for locally produced primary products and over a three-year period for eligible industrial products, in order to reduce external protection, simplify the tariff system, and promote regional integration (see Box 3 for a review of progress on regional integration initiatives). However, the tariff reform is imperfectly applied by member states, including through the use of diverging nomenclatures, deviations from the rate structure, and application of a large number of countryBspecific levies and surcharges. Also, most CEMAC countries maintain nontariff barriers covering at least one important sector of the economy. These include state trading monopolies, licensing/document requirements, import and export bans, and quotas. Staff pressed for the elimination of the protectionist policies that are contrary to the goal of establishing an outward looking customs union. The authorities replied that exceptional circumstances (including civil unrest and lack of personnel) in a number of member countries had been the main cause for the delays. The CEMAC secretariat intends to remedy this. With the assistance of development partners,22 a full review of the existing situation is being undertaken, and an action plan is scheduled to be prepared and adopted around mid-2002 to bring member states into conformity with the common external tariff regulations. The CEMAC authorities indicated that they hope to achieve full conformity by year-end 2002. The next step envisaged by the secretariat is to introduce a three-rate tariff structure by eliminating the top rate of 30 percent.

46. As for access to foreign markets, since oil is by far the most important export product in the community, trade barriers in export markets have not been a major issue. However, the prices of certain commodities produced in the community, notably cotton, have remained structurally depressed because of subsidies in industrial countries. Preparations for discussions for an economic partnership with the European Union under the ACP are made in the framework of a group including the six member states of CEMAC and São Tomé and Príncipe. Angola and the Democratic Republic of the Congo have also been invited to join.

47. Concerning intracommunity trade, a preferential tariff (tarif préférentiel généralisé;—TPG) was adopted in 1994 with a uniform rate of 20 percent, lowered to 10 percent in 1996, and further to a zero rate in 2000. However, its application across member states is highly uneven, with most states maintaining tariffs on internal trade. Also, country specific temporary surtaxes on industrial products (up to a maximum of 30 percent) adopted in 1994 for 6 years are still applied by most member states two years after they should have been abolished.

48. Recorded intra-regional trade among countries of the CEMAC is estimated to be about 6 percent of their total trade.23 On top of remaining tariff and non-tariff barriers, trade among CEMAC member countries is also hampered by the large geographical size of the community, low population density, and very poor transportation infrastructure. Nevertheless, opportunities for increasing intra-regional trade exist, and could be facilitated by the appropriate sectoral policies and allocation of production through market signals according to comparative advantage, on top of rapidly harmonizing the tariff dismantling. The political will needs to be created to provide impetus toward increasing trade among member countries, to defend the community well-being against narrower national interests, and to resist pressures for protectionism. In particular, governments need to make further progress in removing remaining quantitative restrictions and surcharges, fully harmonizing the import classifications, ending a general preferential tariff, and eliminating duties on intraregional trade and surcharges imposed by some countries.

49. An important corollary to a customs union is the harmonization and progressive reduction of exemptions, in particular these granted through the various investment or other codes. A regional investment charter has been in place for several years, but it excludes the petroleum, mining, and forestry sectors. Furthermore, the staff noted that its application is highly imperfect, with states maintaining a large number of country-specific exemptions.

Tax harmonization

50. In order not to undermine the benefits of the customs union through fiscal externalities due to diverging direct and indirect tax regulations in member countries, and to improve multilateral surveillance, CEMAC is pursuing its efforts at tax harmonization. The indirect tax harmonization program started in 1996 with the gradual elimination of the turnover tax in member states and its replacement by a harmonized value added tax (VAT). This was completed in 1999.24 VAT harmonization includes a single VAT rate of 18 percent in five member states,25 with limited exemptions agreed at the regional level.26 Direct tax harmonization includes income and corporate taxes.27 Work is ongoing to establish a common tax base for petroleum taxation, and a common tourism and forestry taxation is under study. An attempt by the secretariat to harmonize taxation of the informal sector was not adopted by member states. While welcoming the significant progress so far, staff indicated that further work is needed to finalize the complete implementation of the tax harmonization program, including petroleum taxation, small businesses and informal sector taxation, and tax procedures and methods.

Sectoral policies

51. Staff noted that preparations for regional sectoral policies were off to a slow start; studies aimed at formulating common policies are still embryonic in the areas of energy, transportation, mining, forestry, communications, and the environment. Moreover, structural projects to foster a more balanced development across the union have not yet been started. The staff pointed to the importance of an evenhanded development of the community through a reduction of regional disparities and improved communication links and access; it urged that these problems be given high priority.

52. The promotion of regional competition and the free movement of people and merchandise, together with the right of settlement throughout the region, though explicitly recognized by the treaty, has encountered some delays in implementation. The staff noted that, in practice, cumbersome border controls and police checks have not yet been streamlined, and that certain member states are still discriminating against non-national citizens of the community. The Executive Secretariat’s representatives were generally less apprehensive than the staff and noted the progress in some areas: projects are underway aimed at introducing a regional passport and regional license plates for vehicles, at harmonizing vehicle insurance certificates, and at adopting regional codes for road, river, maritime, and air transport. Moreover, in light of the demise of the regional airline Air Afrique, the CEMAC Heads of State Council decided in December 2001 to create a sub regional airline. Staff urged that the errors of the past not be repeated and that the airline be set up as a private venture, without political interference.

Financing of CEMAC institutions

53. The staff noted that the preparation and execution of CEMAC’s budget is not yet in line with generally accepted accounting and transparency standards, partly due to the absence of an administrative, financial, and accounting procedures manual. Also, budget preparation does not distinguish clearly between allocations for operating outlays and those necessary to fulfill the Commission’s action program.

54. CEMAC’s own resources consist of the Taxe Communautaire d’Intégration (TCI), an import surcharge of one percent levied by member states on all imports from outside the union. Thirty percent of the proceeds of the TCI can be used for the payment of operating expenditures, with the remaining 70 percent set aside into a reserve fund. Concerning the latter, sixty percent should be for structural projects, and the other 40 percent for compensation of fiscal losses sustained by member states due to the lowering of tariffs, or other uses decided upon by the Council of Ministers. This levy should yield about CFAF 14 billion (0.35 percent of regional GDP) annually. However, most member states either do not yet collect the levy, or fail to transfer it to the CEMAC institutions. Hence, operating outlays, amounting to approximately CFAF 3.5 billion annually, are essentially covered by annual equal contributions by member states. So far, there have not been any payments into the reserve fund, no disbursements for structural projects, and the modalities for the payment of compensations for revenue shortfalls due to the reduction in tariffs were not yet defined. Staff urged the authorities to set up the mechanisms for a full collection of the TCI by and from member states, so as to cover the CEMAC institutions’ operating outlays and start on meaningful structural projects for a more evenhanded development of the community. However, greater availability of financing should be accompanied by strict controls over administrative expenditures.

IV. Staff Appraisal

55. Like its West African counterpart in the franc zone (WAEMU), the CEMAC is pursuing an agenda of intensified regional surveillance and integration. New macroeconomic convergence criteria have recently been put in place and new procedures for implementing them introduced, but it is as yet too early to evaluate their effectiveness. The convergence criteria that place ceilings on inflation, public debt, and the accumulation of reserves seem broadly appropriate, and countries need to make greater efforts to meet these objectives. However, the objective of a zero or positive basic fiscal balance does not address the very large influence on fiscal positions of volatile oil revenues. The fiscal criteria thus do not provide an adequate framework for monitoring and evaluating fiscal developments. Since the latter are key to macroeconomic cooperation in the region, it will be necessary to further refine the tools for regional surveillance, in particular by accounting for changes in international oil prices and variations in domestic oil production.

56. During 2000 and 2001, relatively favorable oil prices allowed countries to run procyclical fiscal policies while satisfying or approaching the target of overall balance in the basic fiscal position (excluding grants and investment financed from abroad). However, a more detailed analysis that used an average of oil prices over several years to calculate fiscal receipts from oil would have suggested a deteriorating fiscal stance in several countries. In addition, some countries (in particular, Equatorial Guinea, and in 2004, Chad) will benefit in coming years from increasing oil production as new fields come on stream. Since the capacity to invest these substantial oil revenues domestically is limited and some of it needs to be set aside for future consumption, a way needs to be found to increase national saving in the meantime. An appropriate overall strategy of managing government revenues and expenditures, including adequate controls to contain spending pressures, would be needed to generate the necessary budgetary savings and ensure that it is not offset by deficits elsewhere. Oil revenue funds (which are planned in each of the oil producing countries of the region) could be an effective vehicle for investing these savings, if they are properly managed to ensure sound investments and prevent the misuse of funds. Ways need to be found to introduce proper safeguards and to balance the need for investment abroad of some of these funds, at an adequate return, with the requirement of the monetary union for pooling foreign exchange reserves to meet the need for short-term, liquid assets.

57. While the monetary union linking the six countries of the region has existed for more than 50 years, regional monetary integration is still incomplete as the regional money market is limited in scope, there are obstacles to banks operating in several countries, and the payments system is inefficient. Though there are initiatives underway that aim at addressing these problems, greater efforts need to be made to develop a regional financial infrastructure.

58. The imperfect integration of financial markets in the region also presents problems for the implementation of a regional monetary policy, in that the BEAC needs to mop up liquidity in some countries while increasing it in others. In practice, this has led to a general excess of liquidity. The introduction of required reserves has helped to address this situation, but at their current level, liquidity is still excessive. Higher reserve requirements, accompanied by higher remuneration on the reserves so as not to tax the banks unduly, would be appropriate.

59. The planned elimination of the (automatic) monetary financing of government deficits should also lead to an improvement in monetary policy by making it less procyclical. The elimination of monetary financing will need to be adequately prepared by putting in place supporting policies and regulations. Once they are in place a shorter transition period than the 10 years that are currently contemplated should be considered.

60. As concerns harmonization of structural policies, there has been a major initiative to create a true regional common market by introducing a common external tariff and removing internal barriers to trade and factor mobility. However, progress has been slow: though decisions furthering regional integration exist on paper, the implementation of the agreed measures to achieve this has not been complete or uniform across countries, and barriers to trade and to the mobility of persons and capital remain. It is clear that to make further progress towards regional integration each country needs to find the political will to place regional objectives above narrow national interests and resist calls for protection. In this context, regional institutions should be further strengthened; though the central bank has the authority and means to carry out its mandate, the same is not true of the other regional institutions. In particular, the Executive Secretariat of the CEMAC has been charged with regional surveillance and the oversight of the new money-laundering organization (GABAC), but is understaffed to carry out its missions.

61. Similarly, the banking supervisory agency, the COBAC, needs to be given greater financial resources in order to hire necessary staff. An effective supervisor is needed to prevent further problems of the scale of those that have plagued it over the last decade. A major problem that affects one country, Cameroon, has resulted from the implementation of the saisie-attribution procedure of the harmonized business law. While primarily needing to be addressed through measures taken by the Cameroonian authorities, changes in the immunity status of the BEAC may also be part of the solution. However, any such changes should not prevent the BEAC from contributing fully to other important tasks, for instance in the anti-money-laundering area.

The Effect of Oil Prices and Production on the Basic Fiscal Balance, 1994–20011/

The effect of the volatility of oil prices and the exhaustibility oil production on the fiscal balances of the CEMAC’s oil producing countries is illustrated in the table below. First, panel 1 displays the countries’ basic fiscal balances (i.e., the overall balance excluding grants and foreign financed investment). The CEMAC’s annual macroeconomic surveillance exercise requests a country to achieve a basic balance of at least zero. Years in which a country fell short of this target are shaded. The results seem to indicate a tightening of the fiscal stance from 1998 onwards. It is eye-catching, however, that in 1998, when oil prices stood at a long-term low, all four petroleum producing countries failed to comply with the CEMAC’s target, while in 2000 and 2001, when oil prices were significantly above their long-term average level, all countries complied.

Panel 2 displays “hypothetical” basic balances based on (i) a Brent oil prices of US$19.5 per barrel (the WEO’s current long-term projection) and (ii) the assumption that in the years under consideration, countries receive their average long-term share in the value of total oil production. Once these factors are being controlled for, the fiscal stance in 1998 was about as strict or loose as in 1997 or 1999. Moreover, Cameroon would have failed to achieve the fiscal target for 2000. In general, a tendency towards fiscal tightening from 1998 onwards can still be identified, however.

Panel 3 shows the deviation of the basic balance from a scenario where oil wealth is managed in a sustainable manner, i.e., a sufficient part of oil receipts is saved to keep oil income per capita constant for the (indefinite) future, based on Fund staff projections about future oil receipts and a real discount rate of 5 percent. Thus, in recent years, no countries except Equatorial Guinea spent more of their oil receipts than the maximum consistent with sustainability. In Gabon, the fiscal stance appears to have deteriorated significantly between 1999 and 2001. This conclusion is opposite to that one would have drawn from the CEMAC’s surveillance exercise as displayed in panel 1.

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Sources: WEO, December 2001; and staff calculations and projections.

For details, see Johannes Wiegand (2002), “Fiscal Surveillance Criteria for Oil-Exporting Developing Countries - the Example of the CEMAC”; Policy Note, International Monetary Fund, mimeo.

The Cameroonian fiscal year is not identical with the calendar year, but runs from end-;June to end-June. For this exercise, a fiscal aggregate for Cameroon in 2000, e.g., was thus calculated as the mean of the aggregate’s values in the fiscal years

Assumptions: (i) oil price of 19.5 US dollar per barrel; (ii) government revenue from oil is equal to its long-term average share of the value of petroleum production.

Assumptions: (i) oil wealth per capita is held constant; (ii) real discount rate of 5 percent.

Under the above assumptions, Equatorial Guinea should have started saving part of its oil wealth only in 1999. For 1994 to 1998, the sustainable fiscal balance is therefore identical with the one in block (2.).

COBAC: Recent and Prospective Changes in Prudential Regulations for the Banking System

The COBAC has recently adopted new regulations with respect to the solvency ratio, provisioning, and connected lending. Other regulations are currently under discussion, in particular, regulations with respect to internal control and audit. The main changes that have been implemented or are still forthcoming include:

  • Solvency Ratio (capital adequacy ratio): Starting in 2001, bank assets are divided into groups of 0, 20, 50, 75 and 100 percent of risk weight. Interbank lending will be risk weighted according to the Sysco rating system (see below). Government debt is weighted according to compliance of governments with the four macroeconomic convergence criteria set up under the monetary union. Furthermore, loans to companies that have obtained a classification agreement from BEAC confirming their financial strength are risk weighted at 50 percent. Under the new regulation, the solvency ratio will be increased from five to eight percent in annual steps, starting in 2002.

  • Provisioning rules: Formal rules were introduced in 2000. Only required provisions are tax deductible. There are no provisioning requirements for payments that are up to 90 days late, but accrued interest cannot be recorded as interest income. Provisioning rules for payments that are late by 90 days or more are:

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  • Connected lending, large exposure and coverage of fixed assets: Procedures have been established with respect to the granting of loans to the banks’ shareholders, associates, managers and employees. Total connected lending has been limited (as per 1/1/2002) to 15 percent of capital. The exposure limit has been set to 45 percent of capital for an individual client, and 800 percent of capital for the total of large exposures (loans larger than 15 percent of capital). Banks’ fixed assets cannot exceed eligible capital (fonds propres net).

CEMAC: Regional Integration Initiatives, Progress Achieved (March 2002)

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1

The mission met with Mr. Nkuété, Executive Secretary of the CEMAC, Messrs. Mamalépot and Andély, Governor and Vice Governor of the BEAC, and Mr. Madji, General Secretary of the COBAC. The staff team consisted of Messrs. Masson, van den Boogaerde, Wiegand (all AFR) and Durand (MAE). Mr. Keller, the Fund Resident Representative in Yaoundé, assisted the mission. Mr. Ryba represented the World Bank in meetings with the COBAC.

2

The overall economic performance of the region is mainly driven by Cameroon and Gabon, which account for 48 percent and 23 percent of the region’s nominal GDP, respectively.

3

At present, a country government may in a given year draw up to 20 percent of the previous year’s fiscal revenue, including oil receipts, as credit from the BEAC.

4

The BEAC earns the European money market rate on most of its reserves.

5

Countries can pay 50 percent of their “excess” oil receipts into the stabilization fund, where excess receipts are defined as revenues that materialize only because the oil price rises above its 5-year average value. Conversely, if the oil price falls below its 5-year average value, countries can draw 50 percent of the resulting revenue shortfall from the stabilization fund. A country’s net balance in the stabilization fund must be positive, however. In the savings fund, countries are supposed to deposit up to 10 percent of their annual oil receipts. The BEAC has offered to pay on both funds the same interest rate it pays on short-term government deposits held at the BEAC. In 2001, this would have implied a nominal interest rate of about 3.5 percent, which is low compared to the rates of return long-term funds can earn in international capital markets.

6

In Chad, national legislation setting up oil funds is inconsistent with the framework set up by the BEAC.

7

Article 11 of the BEAC’s statutes states: “In order to ensure the external convertibility of their currency, the member States agree to pool their external assets in a foreign exchange reserve fund.” Article 11 also imposes restrictions on the form in which reserves can be held by the BEAC, namely, that their maturity cannot exceed 2 years.

8

Jeffrey Davis, Rolando Ossowski, James Daniel, and Steven Barnett, Stabilization and Savings Funds for Nonrenewable Resources, Occasional Paper No. 205 (Washington, DC, International Monetary Fund, 2001), and “Oil Funds: Problems Posing as Solutions?” Finance and Development, December 2001, pp. 56–59.

9

They are surveyed in Davis et al., op. cit.

10

An alternative approach with similar implications would maintain the value of government net wealth (including unexploited oil revenues).

11

Article 1 of the BEAC’s statutes states (when translated into English): “The Bank issues the currency of the Union and guarantees its stability. Without undermining this objective, the Bank provides support to the economic policies within the Union. The mission of the Bank is: to define and conduct the monetary policy for the countries of the Union; to buy and sell foreign currency; to hold and manage the exchange reserves of member countries; to ensure the smooth functioning of the payments system of the Union.”

12

Since the devaluation of January 1994, 100 CFA francs = 1 FF. With the conversion rate of the French franc established at 6.55957 FF = 1 euro, the parity of the CFA franc has become 655.957 CFA francs = 1 euro.

13

The Guidelines for Public Debt Management published jointly by the Fund and the Bank may be helpful in this endeavor.

14

In 2000 COBAC introduced a CAMEL type rating system for commercial banks. Five factors are used in assessing the standing of a credit institution: capital adequacy, liquidity, quality of loan portfolio, management and internal control systems, and profitability. These components are building blocks that, when evaluated in quantitative terms, make it possible to determine the institution’s profile. The weighting of these factors reflects their importance for banking supervision. When a ranking pertains to quantitative data, the score obtained depends upon the gap between the ratio observed and the standard determined by the regulations in force or by sound management practices. For assessing qualitative aspects, a grading scale has been developed whereby quantitative values can be assigned to the on-site assessments of the internal control and management system. Under this new system (the Sysco rating), capital adequacy counts for 30 percent; quality of the portfolio, 20 percent; quality of management and internal control, 20 percent; earnings, 10 percent; and liquidity, 20 percent. Banks are rated into one of four categories: 1) strong, 2) good, 3) fragile, and 4) critical. When all regulatory minimums have been observed and the control mechanism and profitability level are acceptable, the institution receives a rating of 2). In 2001, a bank’s scores were communicated to its management only. In 2002, the scores will be shared amongst all the banks, and in 2003 COBAC intends to make the ratings public.

15

The minimum capital required to open a bank still varies from country to country: it is set at CFA 1 billion in Gabon and Cameroon, CFA 300 million in Equatorial Guinea, CFA 200 million in CAR, and CFA 150 million in Congo.

16

The OHADA (Organization for the Harmonization of Business Law in Africa) treaty, signed on October 17, 1993, was ratified by 14 countries in west and central Africa, aims at harmonizing business law in the franc zone countries

17

Third-party attachment is defined in Article 153 of the OHADA Uniform Act as a procedure whereby “any creditor in possession of a writ of execution showing a debt due for immediate payment may, in order to secure payment of the debt, attach money in the hands of a third party to cover the debts owed by his debtor, subject to the special provisions relating to the attachment of earnings.”

18

There have been 92 cases involving CFA 9 billion in Cameroon (the equivalent of about 5 percent of reserves held by Cameroonian banks with the BEAC at end-2001), 4 cases involving CFA 191 million in Gabon, 3 cases involving CFA 27 million in Chad, and one case involving CFA 42 million in Congo.

19

These agreements are called accords de siège in French. The Governor of the BEAC stressed that the objective was in no way to put the BEAC above national laws, but rather to make precise its role in enforcing them.

20

Obtaining a final judgment in Cameroon may take up to 20 years.

21

Groupe Anti Blanchiment en Afrique Centrale.

22

The European Union, France, the World Bank, and the Fund.

23

Informal cross-border trade is also thought to be important, but hard to estimate.

24

Except for Equatorial Guinea.

25

Equatorial Guinea applies a rate of 12 percent and Cameroon adds an 0.7 percent communal tax to the 18 percent VAT rate.

26

Unfortunately, countries have imposed their own national exemptions.

27

For the latter, the rates range from 25 to 40 percent.

Same Series

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Cover IMF Staff Country Reports
Central African Economic and Monetary Community: Recent Developments and Regional Policy Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 2002: Issue 203
Publisher:
International Monetary Fund
ISBN:
9781451806496
ISSN:
1934-7685
Pages:
64
DOI:
https://doi.org/10.5089/9781451806496.002
  • Figure 1.
    View in gallery
    Figure 1.

    CEMAC: Selected Macroeconomic Indicators, 1990–2002 1/

  • Figure 2.
    View in gallery
    Figure 2.

    CEMAC: Currency Cover Ratio, 1995–2001 1/

    (In percent)

  • Figure 3.
    View in gallery
    Figure 3.

    CEMAC: Nominal and Real Effective Exchange Rates and U.S. dollar Exchange Rate, January 1994–December 2001

  • Figure 4.
    View in gallery
    Figure 4.

    CEMAC: Terms of Trade and Petroleum Prices, 1992–2001

  • Figure 5.
    View in gallery
    Figure 5.

    CEMAC: French Money Market Rate and BEAC Discount and Deposit Rates, January 1994–December 2001

    (In percent)

  • Figure 6.
    View in gallery
    Figure 6.

    CEMAC: Analysis of Spreads in the Banking System, 1997–2000

  • Figure 7.
    View in gallery
    Figure 7.

    CEMAC: Evolution of Net Profit and Net Banking Product, 1998–2001

    (in billions of CFA francs)

Figure 1.

CEMAC: Selected Macroeconomic Indicators, 1990–2002 1/
Figure 2.

CEMAC: Currency Cover Ratio, 1995–2001 1/

(In percent)
Figure 3.

CEMAC: Nominal and Real Effective Exchange Rates and U.S. dollar Exchange Rate, January 1994–December 2001
Figure 4.

CEMAC: Terms of Trade and Petroleum Prices, 1992–2001
Figure 5.

CEMAC: French Money Market Rate and BEAC Discount and Deposit Rates, January 1994–December 2001

(In percent)
Figure 6.

CEMAC: Analysis of Spreads in the Banking System, 1997–2000
Figure 7.

CEMAC: Evolution of Net Profit and Net Banking Product, 1998–2001

(in billions of CFA francs)