Central African Republic: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Central African Republic

This paper discusses Central African Republic’s Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility. Performance under the authorities’ Emergency Post-Conflict Assistance (EPCA) program has been generally satisfactory through end-September 2006, taking into account the difficult external environment. Overall, the main objectives of the EPCA program for this year should be achieved, with a moderate increase in economic growth, an improved fiscal position, and some progress in structural policies. The authorities’ program for 2007–09 aims to build a firm foundation for accelerating private sector-led growth and alleviating poverty.

Abstract

This paper discusses Central African Republic’s Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility. Performance under the authorities’ Emergency Post-Conflict Assistance (EPCA) program has been generally satisfactory through end-September 2006, taking into account the difficult external environment. Overall, the main objectives of the EPCA program for this year should be achieved, with a moderate increase in economic growth, an improved fiscal position, and some progress in structural policies. The authorities’ program for 2007–09 aims to build a firm foundation for accelerating private sector-led growth and alleviating poverty.

I. Retrospective

A. Political Developments

1. François Bozizé was elected President of the Central African Republic (C.A.R.) in May 2005 at the end of the political transition from the March 2003 coup d’état. The presidential and parliamentary elections were considered free and fair and the political situation has been generally peaceful since. However, tensions remain, partly because the economic recovery has been modest and the financial situation is difficult. The banditry that persists in the rural areas is particularly problematic for the agriculture sector but also affects transportation through the economic corridor with Cameroon. There is instability and some actual conflict in the border areas with Chad and Sudan in the north. The authorities have expressed confidence that economic reform and program implementation would not be adversely affected by these developments.

B. Obstacles to Growth and Poverty Reduction

2. The economic situation in the C.A.R. has deteriorated markedly in the last two decades. Real domestic per capita income has plummeted since the late 1980s, owing to political and social instability, economic mismanagement, and a worsening of the terms of trade. Fortunately, this trend is subsiding as political and social conditions become more stable and the authorities turn their attention to economic management. Not surprisingly, there has been virtually no progress—and perhaps some setbacks—towards achieving the Millennium Development Goals (MDGs).

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Central African Republic: Real GDP and GDI per Capita

(Index, 1988=100)

Citation: IMF Staff Country Reports 2007, 073; 10.5089/9781451806656.002.A001

Source: Fund staff estimates.

3. The C.A.R. must deal with major obstacles to growth and poverty reduction:

  • The country is landlocked and import-dependent, and the agriculture-based economy has a narrow export base which makes it vulnerable to adverse changes in the terms of trade.

  • The cost of doing business is high because physical and human capital deteriorated during the long period of conflict and disinvestment. The lack of adequate transportation and its high cost are major impediments to building a competitive export sector.

  • The fiscal position is weak: the tax-revenue ratio is among the lowest in developing countries, public expenditures fall short of the country’s vast social and public investment needs, and the government has accumulated a large domestic debt, part of which is payments arrears.

  • Financial intermediation and access to financial services are minimal. Total bank credit to the private sector is equivalent to less than 7 percent of GDP.

  • The external debt burden is unsustainable. The estimated net present value of external debt-to-exports ratio was above 500 percent at the end of 2005.

  • Weak governance and institutional and administrative capacity limits government ability to formulate, implement, and evaluate economic policy. This also provides an avenue for corruption that undermines the effective use of public resources, resource mobilization, and drives economic activity into the informal sector.

  • Finally, the C.A.R.’s suspension of all external debt service payments in 2001 led to a period of low and intermittent support from the international community.

C. Reengagement with the International Community

4. As the political situation and C.A.R.’s economic policies have been improving, the international community is showing increasing interest in reengaging with and increasing support for the country. The World Bank has now cleared the C.A.R.’s arrears to it and an operation to clear the country’s arrears to the African Development Bank (AfDB) is expected ahead of the Executive Board discussion of the authorities’ request for a new arrangement;1 some of the other multilateral creditors have recently rescheduled the C.A.R.’s debt, resulting in a positive resource transfer flow over the program period; and the donor base has been widened.

Central African Republic: Nominal Stock of External Debt and Arrears at end-2005 by Creditor Groups

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Sources: Central African authorities; and Fund staff estimates.

5. Since 2004, when the C.A.R. began to pay debt service to the Fund, there has been gradual but steady Fund reengagement. The Executive Board approved a first Emergency Post-Conflict Assistance (EPCA) program in July 2004 with a disbursement of 10 percent of quota and a second in January 2006 with a disbursement of 12.5 percent of quota. The EPCA disbursements were designed to support the authorities’ early efforts to reform the economy after the civil war ended and to act as a catalyst for wider donor support. Also, the Fund has helped build institutional and administrative capacity through assistance in public financial management and statistics.

6. Fund support to the C.A.R. under a PRGF arrangement would be an integral part of an international community’s coordinated effort to bolster support to the country. It would help to sustain improved economic policies and facilitate the clearance of external arrears and efforts to regularize relations with external creditors. While improving the country’s economic prospects will require strong internal program ownership and economic management, financial and technical support from the international community will also be essential because domestic resources will be comparatively small even with stepped-up efforts to mobilize revenue.

II. Recent Developments and Performance

7. Economic performance has been improving, to a large extent attributable to better economic management. The implementation of the EPCA-supported program has generally been satisfactory, taking account of the difficult external environment—in particular, instability in the north of the country, high world oil prices, and a low level of foreign assistance. Overall, the objectives of the authorities’ program for this year should be achieved, with a moderate increase in economic growth, an improved fiscal position, and some progress in structural reform.

8. Economic activity began to recover in 2004 and real GDP growth is projected to rise to about 3½ percent this year (Table 1). The pickup mainly reflects improvements in the mining and forestry sectors, but also more activity in the secondary and tertiary sectors. The 12-month rate of inflation was about 5 percent in September, partly due to an adjustment of petroleum product prices and an increase in indirect taxes, but is on a declining trend.

Table 1.

Central African Republic: Selected Economic and Financial Indicators, 2004–09

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Sources: C.A.R. authorities; and IMF staff estimates and projections.

Program supported by the ECPA policy, approved in January 2006.

In percent of broad money at beginning of the period.

Excludes interest payments, foreign-financed investment, and grants.

Excludes foreign-financed investment and grants.

In percent of exports of goods and services.

9. The current account deficit is projected to widen moderately this year, to 3.3 percent of GDP. This mainly reflects lower official transfers. The impact of higher world oil prices on the trade balance will be broadly offset by higher prices for C.A.R. commodity exports. The real effective exchange rate appreciated by about 6 percent in the first half of 2006, mainly because of relatively high inflation in the C.A.R.

10. The fiscal position is projected to improve noticeably this year. Revenue is expected to increase, while expenditure would fall markedly as a result of measures to reduce the wage bill, a retrenchment from last year’s election-related spending, and a decline in foreign-financed investment (due in part to the completion of some projects). Consequently, the domestic primary balance is projected to move from a deficit of 3½ percent of GDP in 2005 to a primary surplus of about ½ percent of GDP in 2006.

11. Compared with the EPCA-supported program, revenue is expected to perform better than anticipated. This is because of stronger growth and measures to enhance tax administration (increasing compliance and collections, and more effective audits). Through September, tax revenue exceeded the authorities’ target by 0.2 percent of GDP (Table 2). Performance is expected to remain strong through the rest of the year, and the tax revenue ratio should reach its highest level in a number of years.

Table 2.

Central African Republic: Authorities’ Indicative Targets, March 1– December 31, 2006

(In billions of CFA francs; cumulative from January 1, 2006; ceilings, unless otherwise indicated)

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Including withholding taxes on government salaries, earmarked revenue, and taxes and duties on project-related imports.

Including withholding taxes on government salaries.

The narrow primary balance compares revenue on a cash basis (that is, excluding withholding taxes on government salaries, earmarked revenue, and taxes and duties on project-related imports) with total expenditure on a cash basis, excluding interest payments and foreign-financed investment and including treasury operations. The target has been adjusted (downward) to account for the receipt of unprogrammed budget support.

Wage arrears (including unpaid pensions and bonuses) and arrears on goods and services excluding arrears on utility consumption. Arrears on goods and services include unpaid spending commitments vis-à-vis suppliers as well as deposit accounts of enterprises at the Treasury.

The actual net claims on the government is adjusted to reflect the CFAF 12 billion exceptional advance from the central bank that was not included earlier and a change in the BEAC accounting rules for interest capitalization.

Contracted or guaranteed by the government.

The narrow primary balance compares revenue on a cash basis (that is, excluding withholding taxes on government salaries, earmarked revenue, and taxes and duties on project-related imports) with total expenditure on a payment order basis, excluding interest payments and foreign-financed investment and including treasury operations. The target has been adjusted (downward) to account for the receipt of unprogrammed budget support.

Arrears on spending measured on a commitment basis.

12. Domestic non-interest spending, on the other hand, was above the target by about 0.4 percent of GDP through September, and the slippage is likely to increase slightly in the fourth quarter. The overspending is attributable to a subsidy (0.2 percent of GDP) to jump-start the cotton sector, which the government deems imperative to enhance growth and alleviate poverty in rural areas, unanticipated defense spending related to the conflict in the north, and increased petroleum-related subsidies to offset higher world oil prices. Wages and salaries were slightly above budget through September because of outlays (tied to a French grant) to support early retirements, and salary payments to 720 civil servants (including military personnel) who had been inadvertently left off the payroll census earlier this year. On the positive side, there were payments on domestic arrears including for wages and salaries, goods and services, and pensions from 2005, equivalent to 0.5 percent of GDP.2

13. The improvement in the fiscal situation has been supported by enhanced financial management. Reforms in tax administration, such as the audit and control of large taxpayers, and efforts to strengthen taxpayer compliance have improved tax collection. The control and monitoring of public expenditures have been enhanced with the help of FAD technical assistance, by closing a significant number of government commercial bank accounts (100 during this year), using the payroll census to eliminate fraud and duplication in the civil service, and limiting the issuance of treasury checks which have been a major source of slippage. The recent adoption of a new budget classification system and budget law should further enhance public financial management.

14. Net credit to the government from the banking system was slightly higher than planned in the first eight months of the year. The government resorted to some commercial borrowing to alleviate a short-term liquidity constraint, but these liabilities are expected to be repaid by the end of the year. The liquidity constraint should ease somewhat because the C.A.R.’s CEMAC partners agreed recently to reschedule the country’s debt to the regional central bank (BEAC) on concessional terms.3 Credit to the private sector increased only slightly.

15. Structural policies have been directed to enhancing governance and improving the ability of the legal system to address financial and commercial crime. All the structural benchmarks for the EPCA have been implemented, a few with a delay (Table 5). The government has a website on which it posts fiscal data, real sector indicators, and information on progress in combating corruption and impunity.4 The State Judicial Agent and the financial unit in charge of prosecuting financial corruption in the Ministry of Justice are operational, although their work is hampered by the lack of staff and equipment. Reform of the judiciary has begun, with assistance from development partners.

Table 3.

Central African Republic: Central Government Operations, 2004–09

(In billions of CFA francs, unless otherwise indicated)

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Sources: C.A.R. authorities; and IMF staff estimates and projections.

Program supported by the ECPA policy, approved in January 2006.

Increase in 2006 reflects the counterpart for the capitalization of unpaid interest due to change in BEAC accounting rules.

Excludes interest payments, foreign-financed investment, and grants.

This corresponds to the financing required to service external debt falling due. It does not reflect the gross impact of the World Bank and African Development Bank arrears clearance operations equivalent to about $62.4 million and $42.8 million respectively, which will be financed by grants in late 2006.

Except for 2006 Prog., this gap is equivalent to the proposed disbursement under the PRGF arrangement. For 2006 Prog. it corresponds to external debt service.

Table 4.

Central African Republic: Central Government Operations, 2004–09

(In percent of GDP)

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Sources: C.A.R. authorities; and IMF staff estimates and projections.

Program supported by the ECPA policy, approved in January 2006.

Increase in 2006 reflects the counterpart for the capitalization of unpaid interest due to change in BEAC accounting rules.

Excludes interest payments, foreign-financed investment, and grants.

This corresponds to the financing required to service external debt falling due. It does not reflect the gross impact of the World Bank and African Development Bank arrears clearance operations equivalent to about $62.4 million and $42.8 million respectively, which will be financed by grants in late 2006.

Except for 2006 Prog., this gap is equivalent to the proposed disbursement under the PRGF arrangement. For 2006 Prog. it corresponds to external debt service.

Table 5.

Central African Republic: Structural Measures under the 2006 EPCA Program

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III. The Foundations For Growth and Poverty Reduction

16. The medium-term program agreed with the authorities aims to build a firm foundation for accelerating private-sector led growth and alleviating poverty. The program seeks to address the obstacles to growth and the constraints to development so as to achieve annual real GDP growth of 4–5 percent through 2009 to allow for modest but continued progress toward meeting the income and other MDGs. The program also envisages a reduction of annual inflation to below the CEMAC convergence criterion, which should help preserve the country’s international competitiveness under the fixed exchange rate regime.

Central African Republic: Medium-Term Macroeconomic Framework, Selected Indicators, 2006-09

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

Excludes interest payments, foreign-financed investment, and grants.

In percent of exports of goods and services, before debt relief.

17. The medium-term policies to achieve these broad objectives include:

  • Fiscal consolidation to gradually eliminate the overhang of domestic debt, and a reorientation of spending priorities to support growth-enhancing and poverty-reducing social policies. In this regard, strengthening public financial management is a high priority.

  • Reforms in the financial sector that will enhance financial intermediation and deepening, and allow for an expansion of credit to the private sector.

  • Trade and investment liberalization that will help diversify the economy, expand the export base, and address some of the constraints of being a landlocked and import-dependent country. Establishing a level playing field in the natural resource sector is important in this context, since this will be a source of potential export growth.

  • Making external debt sustainable by regularizing relations with external creditors and benefiting from debt relief under the enhanced HIPC and Multilateral Debt Relief (MDRI) Initiatives. A debt sustainability analysis confirms that the current situation is unsustainable, even after traditional debt relief mechanisms are applied (Box 1). The external current-account deficit (including grants) is projected to widen to about 4 percent of GDP over the medium term as imports linked to stronger growth and public investment pick up. Annual growth in export volumes is projected to be modest (increasing from a relatively low base), in the 6–7 percent range, because it is constrained by the high cost of doing business and slow progress in rebuilding the country’s infrastructure and transportation network. The C.A.R.’s financing needs would continue to be covered by a mix of grants, highly concessional loans, and a projected increase in foreign direct investment.

A. Sound Public Finances

18. The C.A.R. medium-term fiscal strategy is based on the premise that sound public finances will enhance social stability and bring about improvement in the business climate, after a prolonged period of unproductive spending. The strategy has several elements: fiscal consolidation to reduce the overhang of domestic debt that narrows the room to maneuver; a reorientation of spending priorities; and well-targeted support for vulnerable households and key economic activities, such as cotton production (which is also being supported by development partners).

Debt Sustainability Analysis

Based on the outstanding external (public- and publicly-guaranteed) debt through 2005, the debt sustainability analysis using the Low-Income Country template (conducted jointly with the World Bank) shows that the C.A.R.’s debt burden is unsustainable, even under the baseline scenario. This scenario includes the prospective arrears clearance to multilateral creditors and a rescheduling of bilateral and commercial debt on Naples terms; also, over the long term real GDP growth averages 4.2 percent (compared with 0.8 percent during 1995–2005) and the current account deficit declines to about 2 percent of GDP (for more details, see Tables 11 and 12). The financing gap is filled by external grants and new borrowing with a 50 percent grant element. The 2005 World Bank’s CPIA ranks the C.A.R. as a poor performer, for which the debt-burden thresholds are NPV of debt-to-exports of 100 percent, NPV of debt-to-GDP of 30 percent, and debt service-to-exports of 15 percent.

In the baseline scenario, the C.A.R’s ratios remain above the indicative thresholds until 2025 except for the debt service ratio, which falls below 15 percent after 2016. In an alternative scenario (with key variables growing at their ten-year historical levels), all ratios stay above the sustainability thresholds, including the debt service ratio. A stress test suggests that the debt situation is highly vulnerable to an export shock.

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Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005-2025

(In percent)

Citation: IMF Staff Country Reports 2007, 073; 10.5089/9781451806656.002.A001

Source: IMF staff projections and simulations.
Table 6.

Central African Republic: Monetary Survey, 2003–07

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Sources: C.A.R. authorities; and IMF staff estimates and projections.

Data for 2005 have been revised.

Program supported by the ECPA policy, approved in January 2006.

Table 7.

Central African Republic: Balance of Payments, 2004–09

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Sources: C.A.R. authorities; and IMF staff estimates and projections.

Program supported by the ECPA policy, approved in January 2006.

A portion, 52.5 percent, of project grants is included under current transfers to reflect funds for technical assistance, expatriate military pensions, and UN programs.

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

This corresponds to the financing required to service external debt falling due. It does not reflect the gross impact of the World Bank and African Development Bank arrears clearance operations equivalent to about $62.4 million and $42.8 million respectively, which will be financed by grants in late 2006.

Except for 2006 Prog., this gap is equivalent to the proposed disbursement under the PRGF arrangement. For 2006 Prog. it corresponds to external debt service.

Table 8:

Central African Republic: Proposed Access and Phasing Under the Three-Year PRGF Arrangement 1/

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The C.A.R.’s quota is SDR 55.7 million

A test date of end-September 2009 is set to allow the final disbursement to take place before the arrangement expires.

Table 9.

Central African Republic: Indicators of Fund Credit, 2004–2010 1/

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Sources: IMF, Finance Department; and staff estimates and projections.

Includes the proposed PRGF arrangement and the authorities’ intention of repaying all EPCA loans, as indicated in their Letter of Intent.

Excluding SDR charges and assessments.