Statement by Kossi Assimaidou, Executive Director for Central African Republic January 30, 2012

The Staff Report for the 2011 Article IV Consultation found the macroeconomic performance of the Central African Republic (CAR) satisfactory despite its below-average growth compared with other countries of the region. The report has identified lack of resources, institutional frailties, overdependence on external assistance among other factors responsible for the tardy economic growth and increase in poverty. However, the report has observed that the economy is poised for a medium-term recovery with budgetary discipline and transparency, and effective management of public debt.

Abstract

The Staff Report for the 2011 Article IV Consultation found the macroeconomic performance of the Central African Republic (CAR) satisfactory despite its below-average growth compared with other countries of the region. The report has identified lack of resources, institutional frailties, overdependence on external assistance among other factors responsible for the tardy economic growth and increase in poverty. However, the report has observed that the economy is poised for a medium-term recovery with budgetary discipline and transparency, and effective management of public debt.

On behalf of my Central African Republic (CAR) authorities, I would like to thank management and staff for the constructive policy dialogue with the authorities during the discussions held in Bangui, in the context of the 2011 Article IV consultations, and in Washington D.C during the visit of the Prime Minister. There is broad agreement between the authorities and staff on the assessment of the key challenges facing the CAR and the policy response.

The Central African Republic is gradually recovering from the impact of the global financial crisis, which at its height severely contracted its exports, notably of timber and diamond. It also faced a difficult security environment, and a protracted presidential and legislative electoral cycle which led to significant disruptions in the civil service, as well as fiscal slippages.

The authorities endeavored to address these crises, and to secure the re-engagement of the international community whose support is critical to the achievement of sustainable gains in poverty reduction and growth. They also stepped up efforts to improve security, and regional stability. They are appreciative of the support received from the international community to that regard, both in the context of the Disarmament Demobilization and Reinsertion process, and bilaterally.

As regards the economy, the authorities sought to mitigate the impact of the global economic crisis, rebuild capacity, and intensify structural reforms with the view to making inroads in poverty reduction and growth. Given the daunting challenges the country continues to face, the authorities view as essential the resumption of program relations with the IMF, whose advice and financial support are critical in the conception and implementation of policies to preserve macroeconomic stability, rebuild capacity, and in catalyzing donors’ assistance.

Recent Economic Developments

Real GDP growth benefited from a recovery in agricultural production and external demand. However, due to the protracted uncertainty related to the elections, and the lingering security challenges, which delayed mining and oil explorations projects, real GDP growth has been lower than anticipated, at 3.1 percent in 2011. Inflation fell to 0.7 percent during the same period following a good harvest and contained domestic oil price increases.

Although domestic revenue performance continued to improve, expenditures increased as well, especially during the electoral period, which resulted in a significant increase in the domestic primary deficit.

The external position weakened due to an increase in import prices, notably in petroleum products. International reserves are projected to fall to about 2.7 months of imports.

Looking forward, the authorities expect the recovery to firm up, as security and election-related uncertainties are being resolved, aid flows resume, and investors regain confidence. However, they are fully aware of the substantial downside risks to the outlook, including global uncertainties.

Mobilizing Internal Resources for Poverty Reduction

The authorities are committed to creating the fiscal space required to support their development agenda. In this regard, they reiterated their resolve to mobilize additional resources, prioritize spending, and reign on fiscal slippages in line with staff’s recommendations.

On the revenue side, they agreed with staff on the need for an automatic adjustment mechanism for retail oil prices, to reflect the evolution of international prices. A ministerial order has since been issued on December 30, 2011 implementing an adjustment of petroleum prices for January 2012. The authorities are also committed to reforms aimed at improving the efficiency of tax and customs administration, and at broadening the tax base.

On spending, the authorities aimed at the reallocation of spending towards priority sectors. The 2012 budget adopted by parliament provides for increased spending in health, and education sectors. Provisions were also made to help vulnerable households cope with increased petroleum product prices.

The authorities are also determined to improve public financial management, and strengthen governance. They are committed to ensuring that spending follows the expenditure chain established by the budget approved by parliament. To that effect, instructions were given to ensure that payments were made only for expenditures processed through GESCO, the public expenditure management computerized system. They are taking steps to commit expenditures on a weekly basis, and to ensure that these outlays are provisioned for in periodic cash flow plans. A technical committee tasked more generally with monitoring budget execution has also been created.

In order to preserve debt sustainability and prevent a recurrence of debt payments arrears, the authorities will intensify efforts to strengthen their debt management capabilities, and seek concessional financing for their development agenda. They will also continue to make good faith efforts to secure additional debt relief, under HIPC terms, from the remaining creditors.

Strengthening Institutional Capacity for Economic Management

The Central African Republic continues to face severe administrative capacity constraints. In line with recommendations of the National Forum on Public Finance held

in September 2011, the authorities took steps to strengthen the capacity and operations of key economic management institutions, such as the Committees in charge of monitoring macroeconomic developments and structural reforms, and the Liquidity Committee. These measures are in line with recommendations already made by CAR’s development partners, and the authorities are requesting support from the IMF in rebuilding technical capacity.

Preserving External stability and Promoting Growth and Economic Diversification

As part of a monetary and economic union (CEMAC), the Central African Republic shares the regional common currency, the CFA, which is pegged to the Euro. The authorities welcome staff’s finding that the union’s real effective exchange rate is consistent with external stability. They are of the view that the exchange rate regime has served CAR well, including by helping anchor inflation expectations, and facilitating the exchange of goods and services with the country’s main trading partners.

In order to preserve external stability, the authorities’ plan to implement a comprehensive structural reforms agenda to improve the countries’ competitiveness, boost growth prospects, and sustainably reduce poverty. In that regard, they are in the process of finalizing their new poverty reduction strategy paper which will guide their actions going forward.

Amongst others, the authorities’ efforts will focus on removing key infrastructure bottlenecks--particularly in transportation and electricity provision--and at improving the climate for business. Having reached a significant milestone in the management of their natural resources by achieving in 2011, Compliance status with the Extractive Industries Transparency Initiative, they will intensify efforts for sustained improvements in the investment climate.

Future Relations with the IMF

The CAR authorities have expressed an interest in a new ECF arrangement with the IMF to help anchor their macroeconomic stabilization and growth reforms agenda. Under the previous ECF program, they attained key objectives, including by maintaining fiscal discipline when faced with significant exogenous shocks. They also reached the completion point under the HIPC Initiative, creating fiscal space for their development agenda.

CAR is a post-conflict country whose recovery from the impact of the global financial and economic crisis is still fragile. The country also continues to face daunting poverty reduction challenges, which can only be addressed with the full support of the international community, including the IMF. In light of the authorities’ commitment to sound policies going forward, as evidenced by their implementation of corrective measures agreed upon with staff to strengthen fiscal discipline, I call on Directors to support the reengagement of the Fund in the Central African Republic.