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© 2008 International Monetary Fund

January 2008

IMF Country Report No. 08/14

Central African Republic: Enhanced Initiative for Heavily Indebted Poor Countries—Decision Point Document

This paper was prepared by staff of the International Monetary Fund and the World Bank in connection with the Executive Board’s consideration of the Central African Republic’s decision point document under the Enhanced Initiative for Heavily Indebted Poor Countries. It is based on the information available at the time it was completed on September 11, 2007. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the Central African Republic or the Executive Board of the IMF.

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Front Matter Page

INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL MONETARY FUND

CENTRAL AFRICAN REPUBLIC

Enhanced Heavily Indebted Poor Countries (HIPC) Initiative—Decision Point Document

Prepared by the Staffs of the International Development Association and the International Monetary Fund

Approved by Obiageli Katryn Ezekwesili and Danny Leipziger (IDA) and Hugh Bredenkamp and Mark Plant (IMF)

September 11, 2007

Contents

• Executive Summary

• I. Introduction

• II. Background and Eligibility for HIPC Initiative Assistance

  • A. PRGF and IDA Status

  • B. Recent Political and Security Developments

  • C. Dimensions of Poverty

  • D. Policy Track Record and Reform Agenda

• III. Medium-to-Long-Term Macroeconomic Framework

• IV. Possible Assistance under the HIPC Initiative and Debt Relief Analysis

  • A. Debt Reconciliation Status and Key Assumptions

  • B. Structure of External Debt

  • C. Possible Assistance Under the HIPC Initiative

  • D. Possible Assistance beyond HIPC: MDRI and Additional Bilateral Debt Relief

  • E. Impact of Debt Relief on Debt Ratios and Sensitivity Analysis

• V. The Floating Completion Point

  • A. PRSP Process

  • B. Triggers for the Floating Completion Point

  • C. Monitoring Poverty-Reducing Expenditures and Completion Point Triggers

  • D. The Authorities’ Views

• VI. Issues for Discussion

• Figures

• 1. Central African Republic: Composition of Stock of External Debt as of December 31, 2006 by Creditor Group

• 2. Central African Republic: Potential Costs of the HIPC Initiative by Creditor Group

• 3. Central African Republic: External Debt Burden Indicators, 2006–2026

• 4. Central African Republic: Sensitivity Analysis, 2006–2026

• Boxes

• 1. External Arrears Clearance

• 2. Amounts and Possible Modalities of Delivery of HIPC Debt Relief by Creditor

• 3. Triggers for the Floating Completion Point

• 4. Medium-Term Expenditure Priorities

• Tables

• 1. Central African Republic: Discount and Exchange Rate Assumptions as of end-December, 2006

• 2. Central African Republic: Nominal Stock and Net Present Value of Debt as of December 31 2006, by Creditor Groups

• 3. Central African Republic: External Debt Service, 2007–2026

• 4. Central African Republic: Net Present Value of External Debt, 2006–2026

• 5. Central African Republic: External Debt Indicators, 2006–2026

• 6. Central African Republic: Sensitivity Analysis, 2006–2026

• 7. Central African Republic: Status of Creditor Participation Under the Enhanced HIPC Initiative

• 8. Central African Republic: Possible Delivery of IDA Assistance Under the Enhanced HIPC Initiative, 2007–2027

• 9. Central African Republic: Possible Delivery of IMF Assistance Under the Enhanced HIPC Initiative, 2007–2017

• 10. Central African Republic: Long-Term Macroeconomic Assumptions, 2006–2027

• 11. HIPC Initiative: Status of Country Cases Considered Under the Initiative, August, 2006

• 12. Paris Club Creditors’ Delivery of Debt Relief Under Bilateral Initiatives

• Appendices

• I. Triggers for the Floating Completion Point: Technical Annex

• II. Debt Management Capacity

• III. Joint Bank-Fund Debt Sustainability Analysis

  • A. Background

  • B. Assumptions Underlying the DSA

  • C. External Debt Sustainability Analysis

  • D. Public Sector Debt Sustainability Analysis

  • E. Debt Distress Classification and Conclusions

List of Acronyms

Executive Summary

This document presents an assessment of the Central African Republic’s (C.A.R.) qualification for assistance under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, as well as the corresponding amount of debt relief, and sets forth the conditions for reaching the completion point that have been agreed between the authorities and IDA and IMF staffs.

The C.A.R. continues to make the transformation from post-conflict to recovery, supported by a strengthening of the political and security situation, although some tensions persist. The country’s social indicators remain among the weakest in the world, but economic performance has been improving, with a modest increase in growth during 2006, an improved fiscal position, and some progress in structural reforms. As a reflection of stronger policy implementation, the C.A.R. has maintained satisfactory performance under the IMF’s Poverty Reduction and Growth Facility (PRGF) arrangement.

Looking ahead, the authorities’ economic reform agenda, rooted in a Poverty Reduction Strategy that is close to completion, aims at further fiscal consolidation and private-sector led growth. The fiscal effort will be supported by policies to enhance revenue mobilization, further tighten expenditure control, and reorient spending toward growth-enhancing and poverty-reducing areas. Structural reform will be directed toward reducing the cost of doing business and addressing the obstacles to growth and poverty reduction, including in the areas of financial intermediation, trade liberalization, and the regulatory and legal framework in the natural resource sector.

The C.A.R.’s debt ratios as of end-2006 remain above the HIPC thresholds even after the full application of traditional debt relief mechanisms.

The C.A.R.’s public- and publicly-guaranteed external debt is estimated at US1.1 billion in nominal terms as of end-December 2006, equivalent to about US856 million in net present value (NPV) terms. The reduction of the C.A.R.’s NPV of debt-to-exports ratio from 470 percent to 150 percent would require HIPC debt relief of US583 million in NPV terms. This implies a common reduction factor of 68 percent. Based on proportional burden sharing, multilateral debt relief would amount to US365 million (in NPV terms) and bilateral and commercial debt relief to US218 million (also in NPV terms). Upon reaching the HIPC completion point, the C.A.R. would also qualify for relief under the Multilateral Debt Relief Initiative (MDRI), which is estimated to reduce the NPV of debt owed to IDA, the IMF, and the African Development Fund by approximately US110 million (in end-2006 NPV terms).

A sensitivity analysis of the C.A.R.’s projected external debt burden after full delivery of HIPC Initiative assistance highlights the need for economic reform to diversify and enhance export performance, and for sustained foreign assistance on favorable terms, to avoid the risk of renewed debt distress.