Central African Republic: Staff Report for the 2004 Article IV Consultation
Author: International Monetary Fund
Publication Date:
10 Jun 2004
eISBN:
9781451806601
Language:
English
Keywords:
ISCR; CR; government; CAR authorities; C.A.R. authorities; recovery program; salary obligation; wage bill; exchange rate; authorities' conviction; private sector; priority measure; finance statistics; Exports
Download PDF (1.9 MB)

This 2004 Article IV Consultation highlights that the Central African Republic’s period since 2000 has been marked by poor economic performance, owing in large part to military disturbances, but also to weak administration and poor program implementation. The conflict that ended in March 2003 shattered the Central African Republic's economy. Real GDP contracted by 7 percent in 2003, with the formal sector of the economy in a particularly dire state. The deficit in the overall budget balance including grants widened by about 2 percent of GDP in 2003.

Abstract

This 2004 Article IV Consultation highlights that the Central African Republic’s period since 2000 has been marked by poor economic performance, owing in large part to military disturbances, but also to weak administration and poor program implementation. The conflict that ended in March 2003 shattered the Central African Republic's economy. Real GDP contracted by 7 percent in 2003, with the formal sector of the economy in a particularly dire state. The deficit in the overall budget balance including grants widened by about 2 percent of GDP in 2003.

I. Background

1. The landlocked Central African Republic (C.A.R.) is one of the poorest countries in the world. Despite a rich endowment in natural resources and arable land, political instability since independence has undermined economic development and led to a steady erosion in living standards. Since the mid-1990s, the political situation in the C.A.R. has been marked by recurrent military disturbances, often accompanied by substantial pillaging. These events, following years of decay, have led to a destruction of the country’s capital stock, an unraveling of public administration and collapse of the formal private sector, and a growing impoverishment of the population. Despite periodic efforts at reform, the instability has likewise undercut the C.A.R.’s efforts to mobilize support from the international community, including the Fund (Box 1).

uA01fig01

Per Capita Real GDP in 1990 Prices, 1970–2003

(In thousands of CFA francs)

Citation: IMF Staff Country Reports 2004, 159; 10.5089/9781451806601.002.A001

Source: IMF staff estimates.

2. The instability has been fueled by a vicious cycle of weak governance, poor revenue mobilization, and resulting wage arrears to civil servants and military personnel. These problems became increasingly pronounced in the last few years: starting with an attempted coup in May 2001, active military opposition to the government increased, as did the associated property destruction, looting, and displacement of the civilian population. The period from an attempted coup in October 2002 to the coup d’état in March 2003 was marked by a further escalation of the conflict, with at least one-third of the country a battle zone. This period was accompanied by sizable human casualties, substantial destruction, and a collapse of public administration in most areas of the country.

3. Since the March 2003 coup, the political situation has been generally calm. Greater political stability was furthered by a national forum in September and October that discussed proposals for resolving the country’s political difficulties. The new transitional government appointed in December 2003 is more technocratic in the economic and financial areas than the one it replaced. The electoral season will begin in earnest later this year, with a constitutional referendum in October 2004, to be followed by legislative and presidential elections in January 2005.

Discussions with the Fund, 2000–03

Subsequent to the 2000 Article IV consultation, discussions between the C.A.R. authorities and Fund staff aimed at getting the authorities’ program back on track. The Executive Board approved a second annual arrangement under the existing Poverty Reduction and Growth Facility (PRGF) on January 10, 2001 (12/28/00). However, the program again went off track, and a six-month staff-monitored program (SMP) was then put in place for the period October 2001–March 2002 (11/26/01). The first quarterly review of the SMP was completed in May 2002 (5/22/02). Implementation improved in the second quarter (January–March 2002), and the continued satisfactory performance beyond the period of the SMP provided a good basis for a possible three-year successor program. However, difficulties in finalizing an arrears settlement with the C.A.R.’s multilateral creditors, followed by the attempted coup in October 2002, prevented the staff from proceeding further with presenting the authorities’ request for a three-year PRGF arrangement.

Following the attempted coup and the derailment of program discussions, the authorities agreed to proceed with a stand-alone Article IV consultation, but this was precluded by the March 2003 coup d’état. Technical discussions on recent economic and financial developments were held in Paris over the period October 30–November 7, 2003

4. The security situation, supported by the stationing of several hundred troops each from France and the countries of the Central African Economic and Monetary Community (CEMAC), has likewise improved markedly since the March coup. The strengthening regional security environment has also played a role, notably as regards the advancement of the peace process in the Democratic Republic of the Congo (DRC). However, many rural areas continue to be plagued by banditry, and the authorities have had some difficulty controlling the affiliated forces that helped bring them to power. The authorities, with the support of donors, are putting together a major demobilization and reintegration program, although this effort is only just getting under way.

5. These political and military developments have had a dire impact on social conditions, which, on the basis of anecdotal information, worsened further during the October 2002–March 2003 period. Public health and education services in particular have suffered, and are only starting to return in many areas of the country. The incidence of HIV/AIDS continues to rise, and according to recent surveys may now be more than 15 percent in the adult population. The northern regions were particularly hard hit, suffering from military occupation and isolation during the conflict, as well as destruction of medical and educational infrastructure. There has also been a worrisome reappearance in these areas of certain epidemics such as measles.

Social Indicators, 1970–2001

article image
Source: World Bank, World Development Indicators, 2003.

II. Recent Economic and Financial Developments

6. The period since 2000 has been marked by poor economic performance owing in large part to the military disturbances, but also to labor strikes, corruption, and poor program implementation.1 Real GDP growth slowed to about ½ of 1 percent on average during 2000–02, in contrast to average growth of about 3½ percent during 1998–99 (Table 1). Although the external current account deficit remained largely unchanged, both exports and imports contracted sharply. The fall in exports was due mainly to sharp world price downturns in 2000–01, followed by a decline in the volume of diamonds, as well as a collapse in cash crop exports; the fall in imports was primarily related to the drop in public investment. The real effective exchange rate appreciated by about 1½ percent during 2000–02 (period average), reflecting a small upward trend in the nominal exchange rate.

Key Macroeconomic Indicators. 2000–03

article image
Sources: C.A.R. authorities; and Fund staff estimates and projections.
uA01fig02

Terms of trade, 2000–03

(U.S. dollar basis: in annual percent change)

Citation: IMF Staff Country Reports 2004, 159; 10.5089/9781451806601.002.A001

Sources: C.A.R. authorities; and Fund staff estimates.
Table 1.

Central African Republic: Selected Economic and Financial Indicators, 2000–06

article image
Sources: C.A.R. authorities; and Fund staff estimates and projections.

In percent of broad money at beginning of the period.

Excludes interest payments and foreign-financed investment.

Excludes foreign-financed investment.

In percent of exports of goods and services.

Position at end-2003 reflects the accumulation of external arrears during the course of 2003.

7. The conflict that ended in March 2003 shattered the C.A.R.’s economy. Real GDP contracted by 7 percent in 2003, with cash—or nonsubsistence—activities performing even more poorly. The formal sector of the economy is in a particularly dire state: with the exception of a brewery, a cigarette plant, and a few sawmills, there are no private formal sector manufacturing enterprises still functioning. Cotton production has largely ceased. Output in the subsistence and livestock sectors, for which data are very thin, appears to have been stagnant.

Real Growth in Subsistence GDP, 2001–03

(In annual percent change)

article image
Source: IMF staff estimates.

Subsistence is calculated as the sum of noncommercialized subsistence agriculture, fishing, and hunting.

8. Exports and imports fell dramatically in 2003, although the drop in exports was in part due to the suspension of mining and forestry permits following the March coup, as the authorities attempted to clean up activity in these sectors. The weakened trade balance and a low level of international assistance led to a further deterioration of the overall balance of payments, despite the C.A.R. making almost no payments on its external debt. Monetary aggregates—with the exception of net credit to government—also fell. Average inflation in 2003 increased and was slightly higher than in most other CEMAC countries, largely owing to higher food prices resulting from transport disruptions. The real effective exchange rate is estimated to have appreciated by about 5 percent in 2003, reflecting mainly the appreciation of the euro, to which the CFA franc is pegged.

uA01fig03

Effective Exchange Rate Developments, January 1993, December 2003 (Index 1990=100)

Citation: IMF Staff Country Reports 2004, 159; 10.5089/9781451806601.002.A001

Source: IMF, Information Notice System (INS).

9. Public finances are in a very distressed position, and the overall budget deficit (on a commitment basis, and including grants) widened by about 2 percent of GDP in 2003 (Table 2). Revenue fell by more than 30 percent in nominal terms, from almost 11 percent of GDP in 2002 to about 7½ percent in 2003, due in part to the economic downturn and a collapse of the private formal sector.2 In addition, the looting and dislocations from the conflict disrupted the activities of tax agencies, as did an increase in fraud and continued rampant corruption.

Table 2.

Central African Republic: Central Government Operations, 2000–06

article image
Sources: C.A.R. authorities; and Fund staff estimates and projections.

Excludes interest payments and foreign-financed investment.

Excludes foreign-financed investment.

10. As a result, the authorities were not able to implement their budget for 2003. Current primary expenditures were about 20 percent lower than initially budgeted, domestically financed capital expenditure was sharply curtailed, by about 40 percent compared to the budget, and the authorities were unable to service their debt to most external creditors. Moreover, given the lack of an adequate system for the monitoring of expenditures, there is uncertainty whether some of the payments made in 2003 effectively corresponded to expenditure commitments in the 2003 budget. This is especially the case with regard to payments for goods and services, where it appears both that suppliers have been paid for services corresponding to expenditure commitments of previous budgets, and that unbudgeted expenditures, in particular related to security, have been made. Because of the presence of a sizable stock of domestic arrears (Box 2), many suppliers provide goods only after payment in full or even settlement of existing arrears. Mostly as a result of the conflict, externally financed investment expenditure represented less than a third of its level in 2002.

11. The government continued accumulating domestic arrears, notably on civil servant salaries, a key source of political instability in the recent past. In spite of the government’s declared objective to ensure the regular payment of salaries starting in April 2003, the government had, as of January 2004, failed to pay November and December wages. Government overdrafts from the commercial banks are subject to real interest rates of about 15 percent—very high by CEMAC standards—and the BEAC now applies penalty rates since the C.A.R. has exceeded its limit on statutory advances.

12. In this context, the financial system has been drained of liquidity, to the extent that banks have had difficulties executing in a timely fashion payment orders on behalf of their depositors. To help the liquidity situation, the BEAC in May 2003 temporarily suspended reserve requirements for C.A.R. banks. Furthermore, the deadline for repayment by the banks of part of the credit under the aborted 2001–02 cotton campaign, which was refinanced by the central bank (and guaranteed by the government), has repeatedly been extended. Reflecting its very weak portfolio, one of the three banks, the Banque Internationale pour la Centrafrique (BICA), currently has negative equity.

13. Administrative capacity has suffered enormously from the political instability, most notably from the destruction during October 2002–March 2003, further undermining the authorities’ ability to provide public services. Administrative buildings, in particular of the tax agencies, were sacked in both Bangui and the provinces, while public officials fled from many conflict areas, further damaging the productivity of most government institutions. According to the authorities’ estimates, the events led to a loss by the Ministry of Equipment and Transport alone of machines and equipment amounting to about 2 percent of GDP. The private sector was directly affected as well: a survey by the Tax Directorate of 158 enterprises operating in Bangui before the March events showed that 23 had been entirely looted and 36 partially looted, leading to a significant decline in tax receipts. A number of the looted enterprises have ceased their activities. The Customs Directorate indicated that, in addition to the loss of equipment, the conflict had led to a marked slowdown in trade flows, an increase in fraud, and thus a reduction in customs receipts.

Domestic Arrears

According to the authorities, the stock of domestic arrears at end- December 2003 amounted to CFAF 215 billion (31 percent of GDP), divided among the categories shown below. The amounts are preliminary estimates, and for certain categories, the totals could be much higher.

Domestic Arrears, as of December 31, 2003

(In billions of CFA francs, unless otherwise indicated)

article image
Sources: C.A.R. authorities; and staff estimates.

This figure does not contain the amount of overdrafts exceeding the agreed levels.

Arrears to suppliers of goods and services represent the largest share. These arrears weigh heavily on firms and the financial sector, with the public utilities particularly hard hit. Owing to corruption, weaknesses in public expenditure management, and looting of treasury offices, there is significant uncertainty as to the amount of these arrears.

Salary arrears include amounts from 1992, 1993, 2001, 2002, and 2003, and total more than two years of the wage bill. Lack of harmonization between the payroll office and the civil service ministry results in uncertainty about the size of the civil service and difficulties in eliminating “ghost workers.” A census of civil servants, organizational and functional audits of the main ministries, and the introduction of a harmonized file for civil servants would help rationalize wage management.

Arrears to the private and parapublic sector pension agency (OCSS) mainly reflect unpaid social security contributions of the government and municipalities for noncivil servant public employees (e.g., consultants and day laborers), as well as advances of the OCSS to the government and parastatals, unpaid rent to the OCSS, and frozen assets of the OCSS at the treasury. As a result, the OCSS is about two years in arrears on pension payments to the retirees in its system.

Arrears to the BEAC reflect amounts overdue on statutory advances, consolidated loans, and exceptional advances from the Mission of the United Nations in the Democratic Republic of the Congo (MONUC). Arrears to the banking system consist mainly of overdue loans to public enterprises guaranteed by the government.

Domestic arrears were audited in late 2002 by an auditor financed by the European Union (EU). One conclusion of the audit was that many arrears, particularly for goods and services, may not be verifiable, due to the weak management and recording of public expenditure.

14. Regarding foreign assistance, many donors pulled out of the C.A.R. in the wake of the conflict. Since then, donors’ support has been limited. However, China, France, and the C.A.R.’s CEMAC neighbors provided some budgetary support during 2003, and France and the European Union (EU) are now providing technical assistance. A number of UN agencies are engaged in providing humanitarian assistance and support to the social sectors in the C.A.R. The World Bank has restarted its analytical and advisory work, but because of the C.A.R.’s outstanding arrears to the Bank, has very little ongoing project activity (Appendix III). Several international nongovernmental organizations are also present.

III. Policy Discussions

15. The discussions took place as the C.A.R. embarked upon an immensely difficult reconstruction phase, faced with the challenge of reversing the declining output, poor fiscal performance, corruption, and accumulation of arrears that had plagued the country for a number of years. The authorities underlined that, since coming to power in March 2003, their priorities had been to restore security to the country, undertake the electoral process, and address the pressing economic and financial situation. They emphasized that significant progress had been made in improving security and furthering a peaceful political transition, but recognized that the economy remained in a dismal state and public finances had deteriorated sharply in 2003. For 2004, they emphasized that their attention would turn firmly toward redressing the pressing economic and financial problems.

16. A central theme of the discussions was the authorities’ conviction that a return of international assistance, including Fund financial support, was necessary to improve the economic situation.3 In their view, Fund support—and budgetary assistance conditional on an IMF-financed program-—is needed to help return the state to a better functioning level, thereby ensuring the provision of public services, improvements in tax collection, and stronger economic management. Fund support would also, the authorities stressed, foster expectations of a more robust financial environment, thereby promoting private sector investment. In this context, the authorities requested that the C.A.R. be considered at an early date for support under the Fund’s post-conflict emergency assistance (PCEA) policy.4

17. The staff recognized the pressing economic and social challenges, but underlined that Fund financial support would be ineffective in the absence of concerted action by the authorities to redress the current economic difficulties. The staff also stressed that it was crucial that the authorities demonstrate some capacity to implement economic reforms and attack corruption, so as to send a signal to the C.A.R.’s external partners. The C.A.R.’s credibility on economic reform is low, given the past history, and even though the country is emerging from a period of conflict with a new government, the credibility problem remains. In this spirit, the authorities and the mission agreed on a set of quantitative targets and priority measures that would serve as the basis for evaluating the authorities’ ability to implement economic reforms and attack corruption (Appendix I).

18. In this context, the discussions focused on the following:

  • macroeconomic prospects in the period ahead;

  • measures in the fiscal area that would help stabilize the public finance situation and allow some provision of public services;

  • steps to improve governance and fight corruption; and

  • technical assistance needs.

A. Macroeconomic Outlook

19. The authorities and staff agreed that only a mild pickup in real GDP was expected in 2004. A small increase in subsistence agricultural output is projected as security gradually returns to rural areas, accompanied by increased production in the mining and forestry sectors as activity recovers to a normal level. However, the widespread destruction to the capital stock and institutional base, as well as continued political uncertainty and security problems, limits the room for any strong supply response in the short term. Inflation will likely be muted in 2004, given the higher expected output of food products and more normal transport conditions.

20. The external current account is expected to improve in 2004, owing in large part to the significant rebound in mining and forestry exports (Table 3). Moreover, cotton exports should resume, reflecting the export of inventories from previous harvests. Imports, notably those related to the public investment program, are expected to rise moderately as international assistance picks up gradually in 2004. The terms of trade are projected to improve, owing primarily to the anticipated rise in the world price of diamonds, hardwood, and sawn wood.

Comparison of Scenarios, 2004–06

article image
Sources: C.A.R. authorities: and Fund staff estimates and projections.
Table 3.

Central African Republic: Balance of Payments, 2000–08

article image
Sources: C.A.R. authorities; and Fund staff estimates and projections.

Based on definitions consistent with the IMF’s Balance of Payments Manual (5th ed).

Includes debt relief under the 1998 Paris Club rescheduling agreement, as Well as agreements reached with other creditors in 1999.

21. Over the medium term, on the assumption that the political transition proceeds smoothly and macroeconomic management improves, real GDP growth is expected to pick up to an annual rate of about 4 percent. Savings and investment are anticipated to recover, while foreign assistance is projected to rise more rapidly in 2005, which should lead to a boost in public investment, particularly in infrastructure. Capacity constraints in the agriculture and natural resources sectors will limit growth, while the poor state of the capital stock will dampen the supply response in manufacturing. The balance of payments should improve as exports grow and foreign assistance picks up. Imports are also expected to rise considerably, in line with the increase in donor-financed investment projects.

22. The key risks concern the maintenance of political stability and the ability of the authorities to implement sufficiently strong policies. The staff discussed with the authorities a low-case scenario under which the authorities would not be successful in implementing corrective measures, with the result that in 2004, revenue would be 10 percent lower than under the baseline scenario, and expenditures would be 13 percent higher (in line with the initial draft budget prepared before the discussions). As a result, the public finance situation would continue to deteriorate and domestic arrears would accumulate rapidly (there is no accumulation of domestic arrears in the baseline scenario). Because of these arrears and the uncertainty concerning the payment of wages, the expected pick-up in private consumption would not materialize; the growing uncertainty would prevent the return of activity in the mining and forestry sectors to pre-crisis levels. The lack of external support would imply a lower level of externally financed capital expenditures. There is no assumption about budgetary support in either scenario, but the residual financing need would be about 3 percent of GDP higher under the pessimistic scenario. Real GDP growth, although positive, would be on the order of 1 percent (as opposed to 2.5 percent in the baseline scenario). Both imports and exports would fall, as would the level of international reserves. More importantly, over the medium term, real GDP would remain stagnant, with a fall in per capita income, and the financial position of the state would deteriorate further. Social conditions would inevitably worsen. The authorities and staff agreed that such a scenario would not be conducive to national political consensus and the consolidation of peace and security.

Figure 1.
Figure 1.

Alternative Macroeconomic Scenarios, 2003–06

Citation: IMF Staff Country Reports 2004, 159; 10.5089/9781451806601.002.A001

B. Fiscal Policies

23. The authorities agreed that progress in redressing fiscal imbalances was central to restoring macroeconomic stability and reestablishing a functioning state. Action is urgent, given the worsening revenue performance in late 2003 and the bleak prospects for international assistance in the coming months.

24. The authorities’ draft 2004 budget, expected to be adopted in March, envisions an improvement of about 2 percent of GDP in the overall balance, an adjustment based equally on stronger revenue and restrained spending. The authorities considered that the revenue projections were ambitious but realistic, reflecting their intention to combat fraud, strengthen administrative capacity, and bring economic activities back into the formal tax net. The expected resumption of normal activity in the mining and forestry sectors will also boost revenue. The authorities indicated that they intended to strengthen customs posts at the key entry and transit points into the country, improve controls of value-added tax (VAT) declarations, pursue more frequent audits of businesses benefiting from preferential small business taxation, and reduce exemptions.

uA01fig04

Revenue and Expenditures, 2000–04

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 159; 10.5089/9781451806601.002.A001

Sources: C.A.R. authorities; and Fund staff estimates.

25. The staff considered that the budget target was feasible but would require reversing the slide in fiscal management of recent years. In the revenue area, implementation of the authorities’ measures and some return of administrative capacity in the tax agencies—combined with a full year of more stable economic activity—should yield a substantial improvement in revenue performance. As a share of GDP, the target is still below levels achieved in 2000–02. The staff underlined that some of the measures the authorities proposed had been planned for several years, but were never satisfactorily implemented. In particular, improving fiscal performance would require more resolute efforts regarding tax controls, a particular weakness in the past. Also, while recognizing the severe constraints facing the authorities in terms of equipment, the staff noted that, in order to improve tax collection, it would be essential for the Customs and Tax Directorates to systematically share their information on taxpayers via a computerized system.

26. The 2004 draft budget is very tight on spending, with a reduction in nominal terms of 6 percent from the 2003 outturn. The anticipated spending cuts would primarily affect current expenditure on goods and services, as well as domestically-financed capital expenditure. The staff agreed that this effort would be needed not only because of the limited resources available and the absence at this stage of external budgetary support, but also to generate the narrow primary surplus necessary for meeting, at a minimum, the C.A.R.’s interest payments to the domestic banking system and its obligations to the Fund. However, the staff also noted that the expenditure restraint would severely test the authorities’ ability to manage spending. If not handled carefully, the low level of spending could further undermine the functioning of the state, and lead to greater public disaffection.

27. The staff underlined that the spending restraint required in 2004 should not rest on cash rationing by the treasury and the consequent accumulation of arrears, which had been the case until now. Improvements to the public expenditure management system, now in disarray, are urgently needed: expenditure control mechanisms are lax, as recourse to exceptional spending procedures, now the norm, prevents an adequate monitoring of the spending process from the commitment to the payment stages. The mission also emphasized that the nomenclatures of the budget and the treasury should be harmonized as quickly as possible. The authorities were well aware of the problems, but noted the obstacle that many suppliers provide goods and services only on the basis of up-front cash payments. They also stressed that technical assistance in this area would be essential, in light of the complexities of reforming the expenditure management system (Box 3). In the short term, the authorities are putting in place a monthly cash-flow plan and will halt the payment of arrears from the previous budgetary exercise, pending a more systematic examination of the arrears. The authorities noted that some additional effort at verification of arrears of goods and services would be necessary, although this would be very difficult, given the destruction of some treasury offices and the sizable amount of claims supported by fraudulent documentation. Salary arrears would likely be addressed through discussions with the labor unions. The staff encouraged the authorities to initiate discussions with their social partners on salary arrears as soon as possible, and to request support from donors for studies to verify, to the extent possible, the outstanding stock of domestic arrears.

28. The staff stressed that, since April 2003, the public sector wage bill had absorbed more than 90 percent of liquid government revenue and more than 60 percent of total government revenue.5 Such a disproportionate share allocated to wages cripples the functioning of state services and leaves few resources for the priority social sectors; this problem risks becoming even more pronounced in 2004.6 The authorities shared this view, noting that the wage bill was always at risk of running into arrears; when it did, civil servants either did not work or supplemented their income through corruption. The authorities indicated their intention to freeze recruitment—outside the education and health sectors, and for some security functions—and to restrict allowances, before pursuing a thorough civil service reform agenda in the medium term, based on a comprehensive census of civil servants. The short-term measures were expected to reduce the wage bill by about 5 percent from initial projections. As a first step, the authorities in mid-February 2004 reduced the salaries of the ministers and top officials by 30 percent, which will lower the overall wage bill by about 2 percent. They have also submitted a much more far-reaching proposal to the quasi-legislative body, the National Transition Council, whereby all salaries would be reduced by 10–30 percent, depending on the grade.

29. Regarding treasury management, the staff shared the authorities’ concern about the increasing share of illiquid tax receipts, as enterprises were offsetting taxes against payments arrears and tax payments passing through the banking system were being seized by the commercial banks to settle interest arrears on outstanding government debt. Also, a sizable fraction of revenues transiting through the treasury are earmarked for the accounts of specific ministries, including, in particular the mining and forestry ministries. The staff noted that the multiplicity of government accounts in the commercial banks hindered sound cash management. In this regard, the staff welcomed the authorities’ intention to eliminate most of the earmarked accounts and to ensure that all related revenues would effectively be placed in a unified account at the treasury. The staff noted that the reporting of advance tax payments had improved considerably, but cautioned about continued reliance on such schemes and questioned whether companies received any advantages for advance payments. The authorities noted that recourse to advance tax payments—the stock of which was about 0.2 percent of GDP at end-2003—was unlikely to grow, if only because of the tight liquidity position of enterprises and banks. They also stressed that companies paying taxes in advance received no advantages for doing so.

Technical Assistance Needs in the Fiscal Area

The C.A.R. will need considerable technical assistance (TA) in the fiscal area to strengthen fiscal management and implement economic reforms. Since November 2003, France has been providing TA in the areas of revenue administration and public expenditure management and has indicated it would provide up to EUR 1.4 million to support efforts to enhance macroeconomic management. The EU will also be providing TA for the implementation of a public finance road map adopted by the government on November 19, 2003. The EU’s support will include the assignment to Bangui of 18 technical experts. The Fund’s Fiscal Affairs Department plans to provide TA in the first quarter of 2004 through two diagnostic missions, one on tax and customs administration, and the other on public expenditure management; both of these missions will also identify future TA needs. Some of the authorities’ priority measures may be modified in light of the missions’ findings. Coordination of all these efforts will be necessary, in order to ensure consistency with regard to recommendations, avoid redundancy, and prevent excessive demands being placed on the administration’s limited resources.

C. Monetary and Financial Sector Policies

30. Monetary policy is carried out at the regional level by the BEAC, with little scope for action at the national level. in this context, the authorities’ main objective has been to support the maintenance of the current fixed exchange rate regime. The authorities expected money demand to recover slightly in 2004 as the security situation gradually improves, and, with the mild upturn in economic activity in 2004, the banks should be able to mobilize additional resources, thereby alleviating the liquidity shortage (Table 4). No increase in net credit to government is projected, which would allow growth in both credit to the economy and net foreign assets.

Table 4.

Central African Republic: Monetary Survey, 2000–04

article image
Sources: C.A.R. authorities; and Fund staff estimates and projections.

31. While the staff considered this scenario realistic, it encouraged the authorities to reestablish the conditions for ensuring a stronger liquidity position of the financial sector. In particular, an improved fiscal position would be central to boosting the liquidity of the banks. The staff agreed that, under the current conditions, it would be sensible to extend further the deadline for repayment of the balance of earlier cotton refinancing provided by the BEAC. Efforts to increase the share of bank credits eligible for central bank refinancing might also be warranted. Eventually, as the liquidity position of the banks improves, the authorities should consider a return to regional reserve requirements.

32. The authorities explained that efforts were being made to identify a qualified investor who would be willing to help recapitalize the BICA, which is not meeting the prudential ratios.7 The staff emphasized that any investor must be accepted by the regional supervisory agency (COBAC) before being allowed to participate in the capital of the bank, in accordance with existing regulations, and that, in the meantime, existing shareholders should be responsible for restoring net equity to positive levels and meeting prudential standards.

33. The staff was encouraged by the authorities’ expressed determination to implement the new regional regulatory framework for the microfinance sector enacted in 2002 by the COBAC, and thereby foster the development of the sector. The institutional arrangements arc being put in place, including the establishment in December 2003 of a monitoring unit at the Ministry of Finance. The microfinance institutions—the biggest of which is by far the Crédit Mutuel de Centrafrique (CMCA)—have two years to adjust their structures and balance sheets to conform to the new regulations and meet the prudential ratios.8 To reduce opportunities for corruption generated by cash payments of civil service wages (almost 40 percent of these wages are paid in cash), the authorities intend to negotiate an arrangement with the CMCA to process the payment of salaries to civil servants who do not have a bank account.

D. The External Sector and Regional Integration

34. The C.A.R. has for the most part not been servicing its external debt for almost two years and will most likely continue to accumulate arrears, at least through the first part of 2004.9 Total arrears on external debt stood at about $335 million, 26 percent of GDP, with arrears to multilateral creditors alone at close to $95 million, about 8 percent of GDP, as of end-December 2003. The staff encouraged the authorities to initiate discussions on arrears settlement plans with their multilateral and bilateral creditors. It stressed that any newly contracted debt should be on highly concessional terms, and that assistance should preferably be in the form of grants.

Arrears Due to Multilateral Creditors, As of end-December 2003

article image
Source: Fund staff estimates.

35. A preliminary debt sustainability analysis conducted in 2002 pointed to an unsustainable external debt situation, with the net present value (NPV) of debt-to-exports ratio projected at about 350 percent in 2002. Updated data indicate that, even after clearance of arrears to multilateral creditors and debt relief from bilateral creditors, the C.A.R.’s debt indicators would be very high, suggesting an unsustainable burden. The ratio of the NPV of public debt to exports would remain well over 300 percent over the medium term (Table 7), while the ratio of debt service to revenue and grants would be above 30 percent in most years (Table 8). In this respect, the C.A.R. could be in position to benefit from debt relief under the HIPC initiative, but would need to establish a track record of policy implementation under a PRGF arrangement and prepare a full PRSP before reaching the HIPC decision point.

Table 5.

Central African Republic: Indicators of Fund Credit, 2000–08

article image
Sources: International Monetary Fund, Finance Department; and Fund staff estimates and projections.

Excluding SDR charges.

Table 6.

Central African Republic: Income and Social Indicators, 1970–2001

article image
Source: World Bank, World Development Indicators, 2003.