This Selected Issues paper and Statistical Appendix analyzes economic developments over the past decade in the Central African Republic (CAR). It examines the regional integration efforts of the CAR in the context of the Central African Economic and Monetary Community (CEMAC). The paper presents an overview of the CEMAC customs union reform, and investigates the status of the implementation of the CEMAC trade reform in the CAR. The paper also evaluates the impact of the regional trade reform on the CAR’s trade performance, based on trade developments in the CAR during 1994–2002.

Abstract

This Selected Issues paper and Statistical Appendix analyzes economic developments over the past decade in the Central African Republic (CAR). It examines the regional integration efforts of the CAR in the context of the Central African Economic and Monetary Community (CEMAC). The paper presents an overview of the CEMAC customs union reform, and investigates the status of the implementation of the CEMAC trade reform in the CAR. The paper also evaluates the impact of the regional trade reform on the CAR’s trade performance, based on trade developments in the CAR during 1994–2002.

I. Economic Developments over the Past Decade1

1. The political situation in the Central African Republic (C.A.R.) since the mid-1990s has been marked by recurrent military disturbances, which have hindered the country’s economic development and prospects for financial support from the international community. The vicious cycle of weak governance, tax evasion and inadequate revenue mobilization, and resulting wage arrears to civil servants and military personnel, has fueled the instability. Real GDP per capita is on a declining trend. The fiscal situation is dire. Since 1990, total revenue hovers around the average of 9 percent of GDP, while total expenditure averages 18 percent of GDP. While the deficit has been reduced through time, the adjustment occurred mainly through a sharp contraction of expenditures rather than an increase in revenue, in a way that does not foster the strengthening of the state’s ability to provide public goods.

2. This chapter focuses on 1990–2002. The survey is divided into four periods to reflect broadly the phases of relations with the Fund and other donors with respect to program implementation: 1990–93, during which the economy experienced a recession; 1994–97, after the CFA franc devaluation, during which economic growth was interrupted by poor program implementation and mutinies; the period 1998–2000, during which economic growth was somewhat more sustained; and 2001–02, which was marked by two failed coups and military disturbances, and the implementation of the staff-monitored program. Developments since the conflict that followed the October 2002 failed coup and ended with the coup d’état of March 2003 are covered in detail by the staff report and are not discussed in this chapter.

A. Recession, 1990–93

3. The period 1990–93 was marked by a severe economic crisis that manifested itself in a 9 percent drop in per capita real GDP (on a cumulative basis) and a tense sociopolitical situation. Economic activity shrank in most areas, particularly in cash crops, forestry, construction and public works, and services. The deterioration in the C.A.R’s economic and financial situation during this period can be explained by three main factors. First, there was a sharp deterioration in the terms of trade; the latter fell by some 17 percent during 1988–92. Second, the country underwent a protracted democratization process during which the country’s fragile institutions progressively floundered, and the public administration stopped functioning. The fiscal situation worsened, leading to a large accumulation of domestic and external arrears. Social tensions emerged in 1991 when a conflict with the labor movement led to a drawn-out general strike. As the public administration was paralyzed, tax collections fell, depriving the government of resources. In particular, the government could not pay salaries on a regular basis, and arrears were accumulated. Third, the country, as a member of a currency area, suffered from an over-valuation of the CFA franc, which caused a decline in the main exports (coffee, cotton, and timber) and a worsening of the external current account deficit from about 4½ percent on average per year during 1987–89 to about 7 percent per year on average during 1990–93.

4. The social unrest and political turmoil preceding the democratization process which culminated in the election to the presidency of Mr. Patasse in 1993 and the disappointing macroeconomic performance impeded the government’s efforts to strengthen financial management and reduce imbalances.2 Total government revenue declined from 11 percent of GDP in 1990 to 7.9 percent in 1993, owing to the failure to implement most of the revenue-boosting measures envisaged in successive budget laws; a surge in tax evasion and fraud; prolonged strikes; and a rapid deterioration in staff efficiency because of the nonpayment of salaries. In response to the decline in revenue, the authorities cut both current and capital expenditures. Nonetheless, the cut in expenditure was not in line with the reduction in revenue and the fiscal deficit deteriorated by about 2½ percentage points of GDP on average between 1986–89 and 1990–93. The increased deficit was financed from two main sources: the domestic banking system and the accumulation of domestic and external arrears.

5. The fiscal difficulties undermined the civil service throughout this period. Public employees worked only sporadically, and, by the end of 1993, were owed about one year in back pay. Many government expenditure controls and procedures were abandoned; most public schools closed; and government arrears on external and domestic payments had risen significantly.

6. Throughout the late 1980s and early 1990s, the government, constrained by the C.A.R.’s membership in a common currency area, attempted to follow a strategy aiming at restoring the competitiveness of the C.A.R. and growth through internal adjustment measures. This strategy consisted mainly of maintaining the fixed common peg, attempting to reduce the fiscal deficit through increases in tax rates and cuts in the wage bill, and attempting to restore external competitiveness by reducing domestic costs and restructuring public enterprises, including in the cotton and coffee sector. Nevertheless, given the magnitude of the macroeconomic imbalances, it became clear by end-1993 that strategies based exclusively on internal adjustment would not be sufficient to put the economy back on a sustainable track of economic recovery. The internal adjustment strategy alone was unable to restore external competitiveness, as nominal domestic prices (including wages and producer prices) showed considerable downward rigidity. In particular, it was not possible to cut the wage bill significantly in relation to GDP, and transfers and subsidies increased (instead of declining).

B. Postdevaluation, 1994–97

7. Given the inability of internal adjustment strategies alone to revive economic performance in the countries of the CFA franc zone, the C.A.R., in collaboration with other member countries of the zone, devalued its currency by 50 percent in January 1994. With a view to complementing the government’s adjustment efforts, a 12-month Stand-By Arrangement was approved in March 1994. The primary objectives included further fiscal tightening, as well as the implementation of structural reforms related to the reorganization and downsizing of the civil service, privatization of public enterprises, bank restructuring, and the liberalization of domestic prices and interest rates.

8. Economic and financial developments at the outset of the 1994 program were mainly influenced by the adjustment of the CFA franc parity and normalization of the political and social situation. After four years of decline, real GDP recovered in 1994. This primarily reflected the positive impact of the January 1994 devaluation of the CFA franc on the country’s competitive position, which had been continuously eroding since the mid-1980s. Given the completion of structural reforms in the export sectors of cotton and, to a lesser extent, coffee, the economy was in a favorable position to take full advantage of the sharp rise in the world market price for these commodities. Moreover, the return to greater social and political stability following the democratic election of a president and the formation of a new government in the fall of 1993 restored conditions that were overall favorable to recovery. The public administration started functioning again, as civil servants returned to work and regular current salary payments were resumed by the government.

9. Thus, the improved competitiveness resulting from the change in parity and the accompanying structural measures, together with a strengthening of commodity prices in world markets, boosted the output of the tradable goods sector. In particular, cotton and timber production grew rapidly, neglected coffee plantations were rehabilitated, and livestock exports to neighboring countries rose sharply. While export volume rose by more than 20 percent during 1993–97 (on a cumulative basis), import volume growth decelerated, owing to the higher prices of tradable relative to nontradable goods. The current account balance improved by about 2 percentage points of GDP on average between 1990–93 and 1994–97. The economy also benefited from the regular payments of salaries, which boosted domestic demand and output.

10. Notwithstanding these positive outcomes, fiscal performance under the 1994 Stand-By Arrangement was weak, and the program veered off track. Several of the targets for end-June 1994 were not met, including the performance criteria on net bank credit to the government, cash payment of arrears, and nonaccumulation of new arrears, as well as the quantitative benchmarks on government revenue and the wage bill. The implementation of many revenue-enhancing measures was delayed, while expenditure controls were ineffective. The overall fiscal deficit increased by 1 percentage point of GDP between 1993 and 1994. The financing of the deficit was complicated by a shortfall in external financial assistance, which ceased altogether once the program went off track. As a result, new external arrears were accumulated, and little headway was made in clearing domestic arrears.

11. To correct the slippages in the fiscal area, the government adopted a set of measures that eliminated the primary deficit in 1995. On the revenue side, these measures included an increase in the turnover tax rate, a reduction in tax exemptions, and increased contributions from the state-owned oil company (PETROCA). Accordingly, government revenue rose by 2 percentage points of GDP to some 9 percent in 1995. On the expenditure side, the authorities strengthened control over government expenditure, and primary spending fell by 1.3 percentage points of GDP, to 9 percent. The overall fiscal deficit, on a commitment basis, was reduced by about 2½ percentage points of GDP to about 11 percent. However, in the absence of a formal Fund-supported program, the C. A.R. did not benefit from external financial assistance other than for investment projects and the debt relief granted in 1994 under the auspices of the Paris Club. Hence, the government’s financing needs were largely covered by a further accumulation of arrears on external and domestic payments.

12. In spite of the progress achieved in 1995, for the period 1994–97 as a whole revenue performance was weak; total revenue fell by about 1½ percentage points of GDP between 1990–93 and 1994–97. In an effort to consolidate the fiscal situation, the government had to drastically cut expenditures. Total primary expenditure declined by 6 percentage points of GDP on average between 1990–93 and 1994–97, and the overall budget deficit declined by about 4 percentage points on average between these two subperiods. The government’s effort to consolidate the fiscal situation helped to contain the inflationary pressures from the devaluation, which, in turn, enabled the country to largely restore the gains in external competitiveness that were obtained following the devaluation. Real GDP increased by about 11 percent during 1993–97 (on a cumulative basis), but this was not sufficient to raise per capita real GDP.

13. Notwithstanding its efforts to consolidate the fiscal situation, the government was no longer able to pay wages on a regular basis, including to the military personnel. The ensuing discontent within the army led to three mutinies between May 1996 and January 1997 that deepened the economic and financial crises, and further decreased investors’ confidence. The unrest, which was largely localized in Bangui—the administrative and economic capital—halted most economic activity, shut down the public administration, caused widespread damage and looting, and forced the departure of most foreign technical experts. The destruction of manufacturing industries and large distribution companies in Bangui idled thousands of workers. The government could no longer service its external debt, including to the World Bank and the African Development Bank (AfDB). These events prevented the conclusion of the discussions on a possible Fund-supported program.

C. Brief Economic Revival, 1998–2000

14. In the aftermath of the military mutinies in 1996–97, the authorities undertook to restore peace with the help of the international community. At the root of the crisis were ethnic conflicts within the C.A.R. armed forces and the accumulation of salary arrears. The international community intervened in a variety of interdependent ways. First, an inter-African intervention force (MISAB) was replaced by UN peacekeeping troops (MINURCA) in April 1998. Second, a large part of the salary arrears accumulated since the late 1980s were paid with French financial assistance to reduce social tensions. Third, in order to address the fundamental security and political problems, the UN opened a peace-building support office (BONUCA), which helped develop a restructuring plan for the army and strived to facilitate the dialogue between the party in power and the opposition parties. Fourth, with assistance from MINURCA, legislative elections were conducted in November 1998 and presidential elections in September 1999, which observers judged free and fair. MINURCA left in February 2000.

15. With the return of peace in April 1997, the government increasingly turned its attention to the severe domestic financial issues and stepped up its efforts from October 1997 onward with Bank and Fund assistance. To set the stage for the resumption of a formal program with the Fund in 1998, the authorities had already implemented a number of institutional and public finance measures during April-December 1997. The constitution of the Interministerial Committee on Economic and Structural Reforms and its Permanent Technical Committee, in mid-1997, enabled the authorities to strengthen public sector management, especially government finances, as well as to resume laying the groundwork for civil service and public enterprise reform (Box I.1).

16. A three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) (originally the Enhanced Structural Adjustment Facility—ESAF) was approved in July 1998.3 The program aimed at halting the deterioration in public finances by reinforcing revenue mobilization and controlling expenditure execution; strengthening macroeconomic management and institutional capacity; and formulating and implementing a prioritized structural reform agenda related to the privatization of nonfinancial public enterprises, and reform of the banking and financial sector, legal and regulatory framework, as well as the civil service.

17. Program implementation was weak, and delays were encountered in completing the first review under the program. Revenue collection fell short of the program target; for this reason as well as delays in the disbursement of external assistance (linked in part to delays in privatizing the petroleum company), the treasury cash position prevented the full settlement of government wage and salaries and external debt service due. In the face of slippages in program implementation, the authorities agreed to take corrective actions. They set revised revenue targets for December 1998 and March 1999, and adopted a series of measures to improve revenue collection. They also undertook to accelerate the implementation of structural reforms under the ESAF-supported program and to adopt additional measures to reduce the deficit of the national cotton company (SOCOCA).

18. The new government appointed in January 19994 made progress in the implementation of the corrective actions, thus providing the basis for the completion of the midterm review discussions. The measures included primarily the following: the significant mobilization of government revenue; administrative measures to strengthen collection agencies, including completion of an audit of the customs computer systems; payment by the petroleum company of its tax arrears; completion of the inventory of domestic debt and arrears as of end-1997; privatization of one commercial bank (BICA); issuance of the tenders for the privatization of another state bank (UBAC); completion of the closure of all nonfinancial public enterprises and commercial banks that had ceased operations; reinforcement of the framework for the privatization of the petroleum company; and adoption of measures to reduce the deficit of the cotton company.

19. The authorities’ efforts to strengthen the fiscal position in 1999 were thwarted by extensive fraud, particularly at the level of customs, as well as expenditure overruns in the run-up to presidential elections. At slightly over 9 percent of GDP, government revenue in 1999 was essentially unchanged from 1998, despite the measures adopted by the authorities to improve tax and customs administration and widen the tax base. Revenue collection suffered from persistent evasion, especially of customs duties, and a large-scale fraud on petroleum taxes and duties.5 The poor results at customs stemmed from weak administrative capacity, outdated computer systems, the evasion of duties and import turnover taxes, and difficulties in recovering tax and duty arrears. In addition, there were disturbances in regional trade owing to civil wars in the Republic of Congo and the Democratic Republic of the Congo (which hampered transit from Brazzaville and Kinshasa), and to transport bottlenecks, owing to the strikes in Cameroon.

20. The international community’s assistance in bringing about political stability and establishing a framework for macroeconomic stability had beneficial effects on overall economic performance during 1998–2000, compared with the period 1994–97. Total government revenue increased on average by 1½ percentage points of GDP between 1994–97 and 1998–2000, while average total expenditure as a ratio to GDP remained unchanged. Within the tight expenditure execution, the government reallocated outlays from current to capital expenditures; thus, current expenditure as a ratio to GDP declined on average by about 1½ percentage points, while domestically financed capital expenditure increased by the same amount. The overall budget deficit declined by 1½ percentage points of GDP on average between 1994–97 and 1998–2000. Real GDP grew by an average of about 3 percent during the period 1998–2000, propelled in large part by logging, manufacturing, and construction.

21. Nevertheless, economic activity slowed considerably in 2000, mainly on account of poor weather, a hike in energy costs, and a strike. The negative impact of rising oil prices was compounded by a doubling of the transportation costs of petroleum products caused by the shift from river transportation from Kinshasa, Democratic Republic of the Congo (DRC), to road transportation from Douala, Cameroon.6 To help cover the higher import and transportation costs, the government raised the supplier prices of petroleum products to by 33–44 percent in mid-October 2000. However, taxes were also reduced substantially to limit the increase in retail prices, especially for kerosene and cooking oil. In October 2000, the labor unions called a general strike, which paralyzed the public administration for months.

D. Stagnation, PRGF Arrangement and Staff-Monitored Program, 2001–02

22. The Fund’s Board approved a second annual program under the PRGF arrangement on January 10, 2001. The program aimed at strengthening economic management and, in particular, moving toward fiscal sustainability. A key objective was to raise the revenue-GDP ratio from 8.9 percent in 2000 to 9.8 percent in 2001. This was to be achieved through the implementation of measures to strengthen tax administration, and legal and regulatory changes to streamline and improve the tax system. Reflecting primarily the revenue mobilization effort, but also a slight decrease of primary expenditures (excluding foreign-financed investment) as a percentage of GDP, the primary budget balance was projected to increase from 0.4 percent of GDP in 2000 to 1.1 percent of GDP in 2001.

23. Within a generally unfavorable domestic climate (with 2001 real GDP growth down to 0.3 percent), the authorities undertook a number of measures aimed at strengthening economic management and governance. In particular, a value-added tax (VAT) was introduced; the scope for exemptions from VAT was narrowed; a new organizational structure was introduced for the tax and customs administration; a committee to review and revise, when necessary, the petroleum price structure became fully operational; and the liquidation of the state-owned petroleum company (PETROCA) was completed. In addition, the provisions of the regional Organization for the Harmonization of Business Law in Africa (OHADA) treaty to reinforce the rule of law, combat corruption, and harmonize business law became effective.

24. However, in the context of stagnating economic growth (compared with the program projection), there were significant slippages in other aspects of program implementation. At end-March 2001, the time of the first program review, revenue collection was more than 10 percent short of the program target. Moreover, after having settled two months of salary arrears in January and February, the authorities fell again short of their wage payments commitments in March, as well as on the schedule agreed under the program to clear arrears to external creditors, notably the AfDB. At the same time, in March, the authorities used about CFAF 2 billion, equivalent to one month of wage payments, to clear arrears to the national cotton company (SOCOCA). To a large extent, these payments were financed with a loan from the Libyan Arab Foreign Bank, contracted on nonconcessional terms, which was not envisaged under the program.

25. In the second quarter of the program, the revenue collection effort weakened considerably, and the government stopped servicing external debt and made recourse to an already overstretched banking system to cover domestic expenditure commitments. At end-June, government revenue was 26 percent short of the program target, none of the program’s quantitative and structural benchmarks were met, and it was clear that the authorities could not bring the PRGF-supported program for 2001 back on track. During the third quarter of 2001, revenue collection, while recovering slowly, remained significantly below the targets set under the PRGF-supported program. With the government cut off from any additional domestic or external financing sources, another month of wage payments arrears was accumulated in September 2001.

26. In October 2001, the C.A.R. authorities asked the IMF staff to help them in monitoring their adjustment effort by means of a six-month staff-monitored program (SMP) covering the period October 2001 to March 2002. Performance during the first quarter of the SMP (October-December 2001) was poor. The primary budget surplus fell short of the target by CFAF 3.9 billion, owing entirely to lower-than-programmed cash revenue.7 Also, net bank claims on the government exceeded the program ceiling. Moreover, the program adjuster was not fully respected, as part of the available resources was devoted to cash settlements of domestic nonwage arrears (including pensions), while wage arrears were permitted to accumulate. As regards the structural benchmarks that should have been met by end-December 2001, compliance with the VAT was verified for 47 rather than 150 large companies, while the study on the economic impact of the trade regime for sugar imports was not completed.

27. Performance improved during the second quarter of the SMP (January-March 2002), contributing to a catching up on the shortfalls registered during the last quarter of 2001. In particular, fiscal revenues largely exceeded estimates and current expenditures were contained within the target. Wages and salaries were below target, due to arrears accumulation in January and February, but that trend was reversed in March and salary payments resumed normally. Capital spending by the government was higher than projected, owing to a program of buildings rehabilitation subsequent to the military events of November 2001. Revenue performance was sustained during the second and third quarters of 2002, and continued to exceed targets agreed with the Fund staff. Tax collection was boosted by enhanced control of large enterprises (VAT receipts) and improved surveillance of the borders (customs receipts). For the same period, current expenditures were higher than targeted, owing to the payment of some salary arrears and higher spending on goods and services. Spending on goods and services exceeded the target agreed with the staff in every quarter of 2002. Extra borrowing from the banking sector helped to face the payment of those arrears. Overall, efforts on the revenue side started to bear fruit, while, in contrast, expenditure control needed tightening.

28. Although the revenue target was met again during the fourth quarter, thanks to an improved tax yield in the forestry sector and sustained VAT control efforts, expenditures, particularly security and defense expenditures, increased sharply. For the year as a whole, in spite of the contraction of real GDP (by 0.6 percent), total revenue increased by 1.9 percent of GDP. However, expenditures increased faster (by 2.6 percent of GDP on a commitment basis), and new arrears accumulated (by an additional 2.9 percent of GDP).

29. The coup attempt of October 2002 disrupted the fragile fiscal consolidation achieved under the SMP. As documented in the staff report, the military conflict that ensued, and ended with the coup of March 2003, led to a collapse of revenue and a sharp deterioration of the public finance situation in the context of a pronounced contraction in formal sector activity in 2003.

Tax and Customs Measures Implemented During 1998-2001

The C.A.R. has faced serious difficulties in raising government revenue collection in recent years. During 1994-2001, the revenue-to-GDP ratio was about 8½ percent, far below that observed in other developing countries. The low revenue stems from the large share of subsistence agriculture in total GDP (about 30 percent); widespread tax evasion, especially in the diamond sector; and deep-seated weaknesses in the tax and customs administration. The authorities took a series of measures to address these weaknesses in the context of the Central African Economic and Monetary Community (CEMAC) tax reform, as well as with technical assistance from the Fund. Some key measures adopted from 1998–2001 include the following:

  • reduction of the scope of tax exemptions; suspension of all exemptions not provided for by the CEMAC legislation; prohibition of all ad hoc tax and customs exemptions—no exemption can be granted unless it has a legal basis and has been approved by the Minister of Finance;

  • increase in turnover tax and excise duty for tobacco;

  • introduction of Antwerp diamond market prices as reference prices for diamond export taxation;

  • institution of a minimum turnover for diamond-purchasing bureaus, equivalent to US$ l.25 million per month;

  • streamlining of export taxation, with a consolidation of the export turnover tax into a single export tax (droit de sortie);

  • upward adjustment of selected business license fees;

  • systematic issuance of real estate tax assessments;

  • finalization of the update of the computer system used at the main customs frontier offices; upgrade of the main computer systems used at customs (hardware and software);

  • introduction of a new organizational structure for the tax and customs administration;

  • development of closer links between customs administrations in the C.A.R. and in Cameroon, to monitor closely shipments in transit from Douala to Bangui;

  • cross-checking of customs declarations with certificates issued by a private preshipment control company;

  • strengthening of collection efforts for tax arrears by the Tax Directorate and the treasury;

  • creation of a large taxpayers’ unit;

  • intensification of the use of the single taxpayer identification number, including for the informal sector;

  • introduction of a single-rate VAT system in early 2001;

  • narrowing of the scope for exemptions from VAT; and

  • strengthening of the verification of compliance with the VAT system by large enterprises.

1

This section was prepared in 2002 by Dhaneshwar Ghura, and updated by Philippe Callier.

2

Since gaining independence in 1960, the C.A.R. has been marred by recurrent political instability and social unrest. In 1981, Mr. Kolingba overthrew President Dacko, who had ousted Emperor Bokassa in 1979.

3

In September 1998, a Paris Club meeting extended debt relief on Naples terms to the C.A.R. In 1999, the World Bank launched the preparation of a Policy Support Project, and IDA approved a Fiscal Consolidation Credit for an amount equivalent to US$20 million.

4

Following the legislative elections of November 1998.

5

A Bangui-based company, SICOTRANS, purchased tax-free petroleum products from PETROCA, the national petroleum company, with the stated intent of re-exporting them to the Democratic Republic of the Congo via a fictitious company named “Zongo-Oil” (Zongo is a small DRC city located across the Oubangui River from Bangui). In fact, the tax-free petroleum products were sold on the local market at a large profit for SICOTRANS. Based on reports prepared by the tax auditors, losses in tax revenue may have reached CFAF 3–4 billion (0.5 percent of annual GDP) during 1998 and 1999.

6

The decision to suspend river transportation was taken by the river transport company in May 2000 after several attacks on its boats by DRC rebels. River transportation resumed gradually at the end of 2001.

7

Part of this under-performance was caused by a shortfall in rental income from the Mission of the United Nations in the Democratic Republic of the Congo (MONUC), a factor outside the control of the authorities.