Introduction

We welcome this report on the periodic staff discussions with the representatives of the Central African Economic and Monetary Community (CEMAC), made in the context of regional surveillance. My authorities appreciate the useful exchange of views with staff on economic and financial developments in the region. They view the report as a good supplement to the Article IV Consultation report on the respective countries forming the CEMAC. This informative document highlights recent developments within the region and the main regional policy issues. The staff’s comprehensive paper also underscores progress made to enhance macro-economic convergence, improve the supervision of the banking sector, and promote intra-regional trade. The report also makes useful contributions to the discussions on the management of oil revenues, the need to reduce exposure to the volatility of oil prices, and the diversification of the production base, important issues to the CEMAC, as almost all the members are oil-exporting countries. Overall, the staff’s contributions and proposals come at an important period where CEMAC is engaged in deepening regional integration through trade liberalization, the harmonization of taxation, the facilitation of movements of persons and inputs to production, the enhancement of multilateral surveillance and the implementation of sectoral reforms.

Institutional Background

The treaty establishing the CEMAC entered into force in August 1999. All the six countries forming that regional arrangement belong to CFA Franc Zone. Their currency peg thus shifted from the French Franc to the Euro in January 1999. The CEMAC framework entrusts the regional central bank (BEAC) with monetary policy and the banking commission (COBAC) with the supervision of the banking system. The CEMAC treaty pursues many objectives including: (i) monetary cooperation among member countries; (ii) a single domestic market and a full-fledged customs union; (iii) harmonization of legal and regulatory mechanisms; (iv) convergence of fiscal policies; and (v) common sectoral policies. In addition, in order to strengthen the statistical apparatus to improve the multilateral surveillance of economic policies in the CEMAC, efforts are made to strengthen AFRISTAT.

Recent Economic Developments of CEMAC Countries and Prospects for 2002

In the context of high oil prices, CEMAC’s economic performance improved in 2001. Real GDP in the region grew by 5.4 percent, higher than in the rest of sub-Saharan Africa, following 3 percent growth in 2000. However, growth performance was uneven, weaker in Cameroon, Chad and Equatorial Guinea but lower in Central African Republic and Gabon. Despite an expansion in government expenditures, the fiscal positions remain strong. Inflationary pressures increased due to excess demand.

Economic prospects for 2002 remain favorable. Real GDP is expected to grow by about 5 percent, with inflation expected to be contained. The trade surplus is expected to remain strong at 8.5 percent of GDP, although lower than last year.

Managing Oil Revenues

The BEAC has set up two funds, one to help achieve the short-term stabilization of oil receipts and another to accumulate long-term savings for future generations. Staff has highlighted the difficulties related to the management of the Fund and has drawn attention to the types of assets that the funds would hold as well as their rate of return and their effect on a country’s overall budgetary position. However, it should be noted that while the authorities are broadly in agreement with the principles setting up those funds, in practice it is much more complex. There are first of all difficulties at the national level for the setting up of those funds, due to the enormous pressures to meet immediate pressing social and infrastructural needs. There is also the problem of the financial framework which should be strengthened so as to ensure the effectiveness of such funds. Issues such as rates of return and drawings from the funds need still to be agreed on.

Regional Policy Issues and Coordination

Economic developments and prospects will still depend on the evolution of oil prices. Petroleum accounts for more than two thirds of the CEMAC countries’ exports receipts and about half of their fiscal revenues. An appropriate mix of good macroeconomic management and structural reforms can help CEMAC countries alleviate their vulnerability to oil prices change. From a regional perspective, the coordination of macroeconomic policies among countries sharing a common currency is key to reaping the full benefits of the monetary community. For this purpose, my authorities recognize the need to strengthen regional surveillance over macroeconomic policies and to conduct a prudent regional monetary policy to maintain macroeconomic stability. They are also aware that strong policy actions and initiatives are crucial to deepen regional integration within the region. Recent developments, in particular in the areas of macro-surveillance, banking and financial sectors, trade, tax and sectoral policies testify in favor of the authorities’ willingness to push ahead the regional agenda.

Strengthening Regional Surveillance in CEMAC: Designing Convergence Criteria

To improve macroeconomic policies among the members, CEMAC authorities strengthened macroeconomic convergence within the region by adopting convergence criteria. The recent setting up of a new convergence framework covering fiscal balance, inflation rate, public debt and the payment arrears is the recognition that my authorities are determined to maintain macroeconomic stability and preserve the gains in external competitiveness. Progress was made to meet most of the convergence criteria.

Regional Monetary Policy

Monetary policy is geared towards supporting the fixed parity of the CFA franc to the euro, and its convertibility through ensuring price stability and maintaining an appropriate level of of excess liquidity may have fed inflationary pressures. However, we should bear in mind that another objective of the central bank’s policy is to support the economic policies of member countries.

In the context of excess liquidity and the lack of a well-functioning interbank money market, the use of indirect monetary instruments, as tools for liquidity management, can be difficult. Therefore, cognizant of the need to improve the effectiveness of the monetary policy, my authorities have recently undertaken a number of initiatives. Of a particular importance is the financial programming exercise that the BEAC conducts on an annual basis with the view to harmonize the regional objectives and the national economic and financial developments. The practice consists in setting specific targets for credit to each government consistent with a targeted level of net domestic assets and gross foreign assets of the BEAC. While we recognize that there are some limitations to the effectiveness of such exercise as emphasized in the staff’s report, we are of the view that it is a step further to reinforce regional monetary policy.

In addition, two major reforms are also underway to enhance the effectiveness of monetary policy. First, in September 2001, the BEAC introduced a non-zero reserves requirements at a level equal to 2.5 percent of sight deposits and 1.5 percent of term deposits. The use of this instrument may help to mop up existing banks’ excess liquidity. However, like the staff, we see a need for an operational money market for an efficient management of liquidity. Indeed, my authorities are cognizant that the more active use by banks of the interbank market is key for the effectiveness of the regional monetary policy. Second, the planned elimination of the BEAC’s monetary financing of government deficits is also an important step for strengthening monetary policy within the region. However, CEMAC’s authorities are in agreement with the staff that to facilitate the conduct and the effectiveness of monetary, there is a need to develop markets for treasury bills and bonds issued by member governments. In this regard, a regional securities market on which stocks and bonds would be traded would help achieve this objective.

Foreign Exchange Management and External Competitiveness

As noted above a primary goal of the CEMAC is to ensure the maintenance of the parity with the euro. Policies have been geared towards that objective, as well as to ensure that the CFAF maintained its external competitiveness, through appropriate monetary policy. In this regard, the authorities are also taking steps to dampen excess demand in the region. My authorities have also set inflation rate target as a key convergence criteria to prevent such developments. By doing so, they have shown their commitment to price stability and are ready to take additional measures, if needed.

Financial System and Banking Sector Issues

A major characteristic of CEMAC’s financial system is the predominance of banks. As of end-December 2001, the banking system in the CEMAC zone was comprised of 32 banks. From a regional perspective, intra-regional transfers between banks from a country to another have the advantages of smoothing the effects of seasonal fluctuations and to facilitate the implementation of the regional monetary policy. However, the low level of interbank activity does not provide an effective channel for such inter-bank transactions. In this regard, my authorities have undertaken a number of initiatives to improve the effectiveness of the interbank market, including the issuance of tradable government bonds, the payment system reform project, a single regional licensing system. They are cognizant that these initiatives need some time to produce tangible results.

The strength of the banking sector continued to improve as reflected by the degree of banks’ compliance with key financial ratios in 2001. The banking sector enjoyed positive developments, including the arrival of new private shareholders and the restoration of profitability of the system.

Banking Supervision and the Legal Environment for Banking Activity

The banking commission, or COBAC, is in charge of financial supervision within the community. As mentioned by the staff, COBAC has gained credibility in the region. A noticeable progress has been achieved in the reform of the banking sector. COBAC is also in compliance with the “Core Principles for Effective Banking Supervision”.

With regard to the staffing issue, my authorities agree that insufficient staffing may be a constraint to the effectiveness of supervision. As indicated in the staff report, CEMAC’s authorities are willing to address this issue through training programs. In addition, a recruitment program has started in January 2002 to provide the banking commission with additional staffing.

The OHADA treaty aiming at harmonizing legislation and business law in the CFA zone is implemented in most of the countries.

With regard to the issue of saisie-attribution, CEMAC authorities recognize the importance of this issue for the soundness of the financial system in the region. It is important to note that it was the BEAC that first drew attention to this problem. Progress is being made to address the issue. The BEAC agreed on the need to protect the assets of the national branches. It is committed to protect banks from abusive requests. In this regard, the BEAC has taken steps to introduce a new provision in the agreements signed with member states that define the BEAC’s immunity status and to protect it against arbitrary seizure.

Money Laundering

On December 14, 2000, the Head of States amended the CEMAC treaty to create an action group to combat money laundering and terrorism activities financing. The action group established its headquarters in Bangui (Central African Republic). A regional law on combating money laundering and terrorism should be passed before the end of the year 2002. Under the articles of this law, a national unit on intelligence and financial information will be created in each member country. The Director will be appointed at the next summit.

Trade Policy

Since the 1994 devaluation, CEMAC has made progress toward regional integration, in establishing a common trade policy and opening up trade among its members. A common external tariff (CET) was established in 1994. With the view to reduce external protection, simplify the tariff system, and promote regional integration, all intrazone tariff and nontariff trade barriers for locally produced primary products were removed. A preferential tariff was adopted in 1994 to facilitate intracommunity trade. While we share staff’s view that CEMAC should push ahead for the elimination of remaining protectionist measures, it is important to note that my authorities have already undertaken steps in that direction. Indeed, an action plan is underway to bring member states into conformity with the CET regulations. We also recognize that there is a need to reduce the scope of exemptions and introducing gradually further tax and trade reforms so as to strengthen regional integration within CEMAC’s countries.

Tax Harmonization

In this area, CEMAC has made important progress. The tax harmonization process has proceeded gradually with the introduction of a single VAT rate in five member states. The authorities are also working to establish a common tax base for petroleum taxation, and a common tourism and forestry taxation.

Conclusion and Challenges Ahead

As the bulk of the CEMAC countries’ revenue comes from a few commodities, namely, oil, timber and cotton, those countries remain therefore vulnerable to external shocks. In spite of the exposure to adverse exogenous factors, CEMAC countries have registered significant economic progress since the 1994 devaluation. However, the authorities are fully aware that key challenges lie ahead in particular in the areas of the management of oil revenues and the diversification of the economies away from their strong dependence on oil revenues. Broadening the sources of growth and competitiveness will be key to fight poverty within the region.