Central African Economic and Monetary Community
Staff Report on Common Policies of Member Countries; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Central African Economic and Monetary Community
Author:
International Monetary Fund
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Publication Date:
14 Aug 2012
eISBN:
9781475504842
Language:
English
Keywords:
ISCR; CR; CEMAC Commission; CEMAC country; CEMAC authorities; CEMAC economy; SDR; government securities market; reform plan; government cash holding; BEAC authority; Fiscal stance; Oil; CEMAC data
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This paper discusses the common policies adopted by the members of the Central African Economic and Monetary Community (CEMAC). The macroeconomic performance was good in 2011 with improved fiscal balances, public investment programs, and higher reserves. However, CEMAC is facing challenges from deep-seated structural problems, including uncoordinated fiscal policy, financial sector weaknesses, and obstacles to growth and competitiveness. The Executive Board recommends monetary policies for financial stability and suggest making monetary policies an efficient tool of macroeconomic management. Also, the Board recommends strengthening of governance of CEMAC’s common institutions.

Abstract

This paper discusses the common policies adopted by the members of the Central African Economic and Monetary Community (CEMAC). The macroeconomic performance was good in 2011 with improved fiscal balances, public investment programs, and higher reserves. However, CEMAC is facing challenges from deep-seated structural problems, including uncoordinated fiscal policy, financial sector weaknesses, and obstacles to growth and competitiveness. The Executive Board recommends monetary policies for financial stability and suggest making monetary policies an efficient tool of macroeconomic management. Also, the Board recommends strengthening of governance of CEMAC’s common institutions.

Introduction

1. Macroeconomic performance in 2011 was good, supported by high oil-related inflows. Oil revenue allowed oil-producing member countries to comfortably finance ambitious investment programs while further strengthening international reserves.

2. Despite its vast oil wealth, the CEMAC faces substantial development challenges. Five of the six CEMAC countries are oil producers; oil accounts for 41 percent of regional GDP (Figure 1) and 86 percent of total goods exports. Oil-related surpluses have posed challenges for macroeconomic policymaking. Channeled through government spending, oil revenue is the main driver of economic activity. Volatile oil prices and procyclical fiscal policy have caused boom and bust cycles, exacerbated by high wages, in a fixed exchange rate regime. Spending out of oil wealth has not led to more inclusive growth. The Central African Republic (C.A.R.), the only member country without oil, continues to grapple with the challenges of a fragile postconflict state. With high inequality, poverty, and unemployment, it is unlikely that the region will meet the Millennium Development Goals by 2015 (Table 2).

Figure 1.
Figure 1.

CEMAC: GDP Composition, 2011

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Source: IMF African Department (AFR) database.

3. Implementation of long-standing IMF policy advice has been slow. National fiscal policies are not well coordinated, in part because the current convergence criteria are not appropriate for a region dominated by oil-producers (Appendix I). On monetary policy, long-standing recommendations on improving policy instruments have not yet been implemented. However, government cash holdings have largely been centralized at the regional central bank, statutory advances are being phased out, and a regional government securities market is now operating. Regarding the financial sector, core recommendations of the 2006 Financial Sector Assessment Program (FSAP) report (Appendix III) have not been implemented. Notably, the principal prudential regulations are still out of line with international best practices and are poorly enforced. The regional supervisor’s (the Central African Banking Commission (COBAC)) severe staffing problems continue to undermine the credibility of supervision, with serious reputational risks for the financial sector. The new regulation on banking crisis management has yet to be adopted, and little progress has been made on addressing the problems of weak banks, including a systemically important regional banking group. Regarding trade reforms, more needs to be done to remove barriers to internal and external trade. On safeguards and governance issues, the BEAC has made progress in implementing its action plan, but risks remain in core functions and at the higher level of governance and oversight bodies.

4. The CEMAC would benefit from improved regional integration. The ongoing crisis in the euro area has brought to the forefront a currency union’s policy challenges stemming from loss of competitiveness, lack of fiscal coordination, and loose economic and financial integration. To safeguard the CEMAC’s currency union and enhance the benefits of regional integration, the authorities need to ensure progress in three areas:1 (i) ensuring economic stability and external sustainability; (ii) ensuring financial stability and development; and (iii) enhancing growth and competitiveness. To this end, there is an urgent need to further strengthen the CEMAC’s common institutions.

Economic Context

A. Recent Economic Developments

5. Economic activity in 2011 was affected by lower oil output (Tables 1 and 3, and Figure 2). Real GDP growth in 2011 fell slightly to 4.5 percent, driven by a decline in oil output growth in Republic of Congo and Gabon. Non-oil real GDP growth was somewhat below sub-Saharan African (SSA) oil exporters’ average, but exceeded the West African Economic and Monetary Union’s (WAEMU) average.

Table 1.

CEMAC: Selected Economic and Financial Indicators, 2007–13

article image
Sources: Authorities’ actual data and IMF staff estimates and projections.

CEMAC data are weighted by GDP in purchasing power parity US dollar.

Excluding grants and foreign-financed investment and interest payments.

Excluding grants and foreign-financed investment.

Table 2.

CEMAC: Millennium Development Goals, 1990 and 2010

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Source: World Development Indicators.
Table 3.

CEMAC: National Accounts, 2007–13

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Sources: Authorities’ actual data and IMF staff estimates and projections.

CEMAC data are weighted by GDP in purchasing power parity US dollar.

Figure 2.
Figure 2.

Recent Economic Developments, 2008–11

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Source: IMF AFR database.

6. Regional inflation picked up, but the real effective exchange rate (REER) was stable (Table 4). Because of rising food and fuel prices, average annual consumer price inflation increased markedly from 2.4 percent in 2010 to 3.1 percent in 2011, slightly above the regional convergence criterion of 3 percent, but close to inflation in the WAEMU. The regional REER was stable because the appreciation in Republic of Congo and Equatorial Guinea outweighed the depreciation in other CEMAC countries. The REER remains below its predevaluation level.

Table 4.

CEMAC: Nominal and Real Effective Exchange Rates, 2006–11

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Sources: IMF, Information Notice System.

CEMAC data are weighted by GDP in purchasing power parity US dollar.

7. The monetary stance was accommodative (Figure 3). Despite inflation slightly above the convergence criterion of 3 percent and high excess liquidity, the BEAC left its policy rate unchanged. The spread between the BEAC and the European Central Bank (ECB) policy rates was about 200 basis points during 2011. Regarding monetary aggregates in 2011, government deposits increased, driven by oil-related inflows. However, broad money and credit to private sector grew by double digits driven by commercial bank deposits (Tables 8, 9, and 10). Commercial bank excess liquidity also remained elevated.

Figure 3.
Figure 3.

CEMAC: Monetary Developments, 2007–11

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Sources: International Financial Statistics (IFS), BEAC, and ECB.
Table 5.

CEMAC: Balance of Payments, 2007–13

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Sources: Authorities’ actual data and IMF staff estimates and projections.
Table 6a.

CEMAC: Fiscal Balances, 2007–13

(Percent of GDP)

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Sources: Country authorities’ actual data and IMF staff projections.

Overall budget balance excluding grants and foreign-financed investment.

Table 6b.

CEMAC: Fiscal Non-oil Balances, 2007–13

(Percent of non-oil GDP)

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Sources: Country authorities’ actual data and IMF staff projections.

Overall budget balance excluding grants and foreign-financed investment.

Table 7.

CEMAC: Compliance with Convergence Criteria, 2007–13

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Sources: Country authorities’ actual data and IMF staff projections.

Overall budget balance, excluding grants and foreign-financed investment.

External and domestic arrears.

Table 8.

CEMAC: Monetary Survey, 2007–11

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Source: BEAC.
Table 9.

CEMAC: Summary Accounts of Central Bank, 2007–11

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Source: BEAC.
Table 10.

CEMAC: Summary Accounts of Commercial Banks, 2007–11

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Source: BEAC.

8. The fiscal stance was expansionary (Figure 4). The region’s non-oil primary deficit widened, driven by public investment. It is estimated to have increased from about 23.5 percent of non-oil GDP in 2010 to about 26 percent of non-oil GDP in 2011, because the fiscal position deteriorated markedly in Republic of Congo and Gabon. Public debt remained low at about 18 percent of GDP, as the scaled-up investment was primarily financed from buoyant oil revenue.

Figure 4.
Figure 4.

CEMAC: Fiscal Developments, 2000–11

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Sources: IMF AFR database and staff estimates.

9. The external position strengthened (Table 5 and Figure 2). Owing to high commodity prices, the current account deficit narrowed despite high import demand from the expansionary fiscal stance. Consequently, international reserves strengthened to about five months of total imports or nearly 100 percent of broad money in 2011.

10. Compliance with convergence criteria improved, but structural differences remain significant (Table 7). The number of criteria violations declined further from six in 2010 to three in 2011. The public debt criterion (70 percent of GDP) was met by all countries. The oil-exporting CEMAC countries, except Cameroon, complied with all fiscal criteria, which are no longer binding because of oil inflows. Equatorial Guinea missed the inflation criterion and the Central African Republic the basic fiscal balance criterion. Overall, crosscountry differences in economic variables remain, in spite of oil production in five out of six countries.

B. Outlook and Risks

11. The regional economic outlook is generally positive (Figure 5). Non-oil real GDP growth is projected to moderate to about 5.5 percent in 2012, while overall real GDP growth would remain broadly stable at about 4.5 percent, supported by a rebound in oil output. End-of-period inflation is forecast to decline, mostly because of limited pass-through of higher fuel prices (Table 1). Over the medium-term, non-oil real GDP growth will average about 5 percent, supported by the growth effects of infrastructure projects in the last few years. At the same time, overall GDP growth is projected to decline to about 3.5 percent on average, because of declining oil output growth.

Figure 5.
Figure 5.

Medium-Term Outlook, 2011–16

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Source: IMF AFR database.

12. The foremost risk is a weaker-than-expected global environment (Appendix IV). A possible global slowdown stemming from the euro area crisis could affect the region through the financial and real sectors. Regarding the financial sector, staff and the authorities agreed that the spillover risk from the euro crisis to the CEMAC’s financial sector appears limited because domestic banks rely relatively little on external funding. Even banks with European parent banks (about one fourth of total bank deposits in the region) rely mainly on domestic funding and are exposed to lower credit risks according to the stress test (Box 3). Concerning the spillover to the CEMAC’s real sector, staff and the authorities agreed that the main transmission channel would be a decline in commodity prices, especially oil, because commodities account for about 90 percent of total exports of goods and 50 percent of nominal GDP in 2011. In Box 1, staff assessed how the region would be affected if the spring 2012 WEO adverse scenario materialized. The findings show that the impact on export receipts would be an 8.7 percent decline from the baseline level. Real GDP growth would decline from 4.6 percent in the baseline scenario to about -0.7 in the downside scenario, reflecting a decline in non-oil GDP on account of public demand withdrawal. As seen during the 2009 global recession, the region’s reserves provide a comfortable cushion, unless a prolonged crisis severely depresses oil prices. A risk to the reserve buffer is noncompliance with rules for pooling official reserves at the BEAC. The authorities are working toward addressing this issue (see Paragraphs 33 and 34 on External Sustainability).

13. Another risk to the outlook stems from financial sector vulnerabilities. Weak supervision and the increasing number of troubled banks are serious threats to financial stability. Staff urged the authorities to take decisive and urgent actions to safeguard financial stability (see section on Ensuring Financial Stability and Development).

How Would a Weaker Global Environment Affect the CEMAC Region?

This analysis assesses how the region would be affected if the spring 2012 WEO adverse scenario materialized. In this scenario, oil prices are 12 percentage points lower than in the baseline scenario in 2012. The findings show that real GDP growth would be about 5 percentage points lower than in the baseline and export receipts would decline by about 9 percentage points from their baseline level.

Trade would be the dominant transmission channel because of the region’s dependence on commodities, especially oil. With commodities accounting for about 90 percent of total exports of goods and 50 percent of regional GDP in 2011, changes in commodity prices would have a major impact on the CEMAC’s external accounts and income. For instance, during the 2008/09 crisis, the commodity price decline triggered a substantial drop in export receipts and the current account. The fiscal balance also deteriorated because the share of oil revenue in total government revenue is high (close to 65 percent over the last five years). Thanks to the comfortable reserves cushion and fiscal buffers, the CEMAC region was able to absorb this shock.

Transmission through financial flows, aid, and remittances plays a minor role. Because of the region’s limited international financial linkages, direct spillovers through financial flows are marginal as evidenced by the 2008 crisis. However, a global slowdown, which depresses oil prices, could lead to a deterioration of the loan portfolio (Box 3). Regarding aid and remittances, they also play a marginal role as transmission channels for shocks because they represent less than 1 percent of regional GDP.

The analysis of the impact of a global recession on the CEMAC is based on the reactions of macro variables to oil price changes. Because of substantial data limitations, estimating price-elasticities specific to the CEMAC region was challenging. Therefore, the analysis is based on the historical averages of oil price-elasticities. The elasticity is about 0.4 for real GDP, 0.7 for oil revenue, and 1.3 for exports of goods. The elasticity of non-oil GDP to oil price is about 0.5. The response of macro variables to the oil price changes is derived through a partial equilibrium analysis, using the above elasticity values.

The findings show a significant decline in real GDP compared to the baseline. In 2012, real GDP growth falls from 4.6 percent under the baseline to -0.7 percent in the adverse scenario. Exports of goods shrink by about 2 percent instead of growing by 6.5 percent as forecast in the baseline. On the fiscal side, oil revenues shrink by 1 percent in 2012 as opposed to a baseline growth of 6 percent. These responses assume no counter-cyclical policy response. The impact of the shock on reserves would be a decline in the 2012 reserve to import ratio from 6.4 months in the baseline to 6.1 in the downside scenario.

uA01fig02

Simulation Results

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Source: IMF AFR database and staff estimates.

Ensuring Economic Stability and External Sustainability

A. Monetary Policy and Liquidity Management

14. Although the exchange rate is fixed, the BEAC has some monetary independence because of capital controls.2 The BEAC formulates a regional reserve money program, but, in practice, monetary policy has been largely passive over the past few years with high oil-related inflows. The BEAC policy instruments consist of refinancing and deposit windows for banks, interest rates, and reserve requirements. In addition, BEAC advances to governments have been abolished, and the stock at end-December 2011 will be phased out over 10 years.

15. Monetary policy instruments are ineffective. First, country-specific banks’ reserve requirement rates hinder the effectiveness of this policy instrument and undermine the BEAC’s common monetary policy for the region. Second, in conducting its liquidity management, the BEAC does not take into account regional liquidity conditions, but is reactive to banks’ demand and supply. As a result, the BEAC simultaneously injects and absorbs liquidity. Finally, the BEAC’s interest rate structure does not reflect the liquidity conditions in the banking system.

16. In practice, monetary policy remains constrained by structural factors. First, the region suffers from structural excess liquidity because of high oil-related inflows. Second, regional financial infrastructure and markets are underdeveloped. For instance, a regional government securities market has just been launched; and the quasi-inexistence of an inter-bank market limits the effectiveness of the monetary transmission mechanism by preventing the emergence of a benchmark rate and impeding the BEAC’s control of liquidity injections. Factors constraining the development of the inter-bank market include the lack of a well-functioning regional securities market and the absence of a legal framework for collateralized inter-bank trading and repo agreements. Finally, the BEAC’s capacity to conduct studies to underpin monetary policy decisions is limited, because of staff shortages in the directorates in charge of monetary analysis. The IMF’s Monetary and Capital Market Department (MCM) has been providing advice on developing collateral instruments for the BEAC’s operations and regional government securities and inter-bank markets.

Staff’s advice

17. Staff noted that progress in revamping monetary policy has been slow and urged the central bank to give priority to this reform. Notably, in line with MCM advice, the authorities should:

  • Enhance the effectiveness of monetary policy instruments, including unifying the BEAC’s windows for liquidity provision, rationalizing its interventions, harmonizing the required reserves ratios, and supporting the development of an active inter-bank market.

  • Improve the coordination between fiscal and monetary policies, by setting up a system to monitor the member states’ debt and cash positions.

  • Strengthen monetary analysis, including developing a better understanding of the determinants of autonomous factors and the monetary transmission mechanisms. Increase staffing for monetary analysis.

Authorities’ views

18. The authorities noted that a comprehensive reform is underway. Long-standing technical assistance (TA) recommendations have not been implemented because of lack of human capital. Because this is now being addressed, the monetary policy committee has just approved the reform proposals, which build on the 2006 FSAP recommendations and IMF technical assistance. The reform consists of three components (institutional, analytical, and operational framework) with the objective of moving to market-based instruments in the context of a fully developed inter-bank market.

19. Required reserve ratios will be harmonized, as the proposed reform of monetary policy takes hold. Given the cross-country differences in liquidity and the still fragmented regional financial markets, country-specific reserve requirements should be seen as a second-best and transitory measure.

20. The newly established regional government securities market could help reduce excess liquidity. The operational framework will be enhanced through a regional repo agreement, thereby allowing for collateralization of operations among banks.

21. Coordination between fiscal and monetary policies will be enhanced. As governments start using the regional government securities market, the BEAC will have better data on their fiscal positions to help improve coordination between fiscal and monetary policies. The BEAC will also encourage member states to establish cash management committees and public debt committees, with the effective participation of the BEAC national directorates.

B. Fiscal Policy Coordination

22. The regional surveillance framework needs to be enhanced so that fiscal policies support the peg. The CEMAC Commission carries out regional surveillance, with the objective of preventing excessive fiscal deficits. The framework relies on four mandatory convergence criteria, complemented by non-binding sub-criteria (Appendix I). Currently, the convergence criteria on fiscal balances and public debt are not binding, owing to high oil receipts. Moreover, the debt ceiling of 70 percent of GDP is too high in light of current debt levels. To address the fiscal sustainability problem, the CEMAC monitors the non-oil basic balance, without setting a convergence criterion on this variable. Overall, the coexistence of a strict deficit criterion with a lax debt criterion undermines credibility, without addressing the sustainability of national fiscal policies.

23. The CEMAC adopted in late 2011 six directives to better coordinate and harmonize fiscal policies. These public financial management (PFM) directives are on budget law and the medium-term fiscal framework (MTFF), public accounting, payroll management, implementation of the Government Finance Statistics Manual (GFSM) 2001, metadata related to the budget system, and transparency and good governance in PFM. They are required to be transposed into national legal frameworks within two years. However, the directives are expected to be fully implemented over ten years, taking into account country-specific capacity. The reform process is supported by technical assistance from the IMF’s Fiscal Affairs Department (FAD), which also assisted the commission in developing the directives (see Informational Annex), and other development partners.

Staff’s advice

24. The regional surveillance framework should be reformed. Notably, binding fiscal rules cast in an MTFF are needed to ensure fiscal sustainability. While there is no one solution for fiscal rules, several options could be considered. These include mandatory limits on the non-oil primary deficit, an oil price-based rule, country specific limits on expenditure growth, and a binding debt ceiling. The CEMAC could adopt a fiscal rule at the regional level, while setting country-specific quantitative targets that reflect the oil depletion, investment profiles, as well as the C.A.R.’s needs as the only country without oil in the region.3

25. It is essential to monitor the implementation of the CEMAC directives on PFM. First, the transposition of the CEMAC directives on PFM in national legal frameworks should be a priority. Next, effective implementation should be planned based on a clear and binding timeline.

Authorities’ views

26. The authorities agreed with the need to reform the regional surveillance framework. They welcomed staff’s proposal for binding fiscal rules. They acknowledged the need to accommodate cross-country structural differences (e.g., country-specific oil depletion and investment profiles). However, they noted that country-specific quantitative targets could weaken the credibility of the convergence criteria. To move forward with the reform of the convergence criteria, they proposed holding a workshop in 2012 for senior officials of member countries and the BEAC, in close coordination with staff.

27. The CEMAC directives should help strengthen regional surveillance. A time-bound action plan has been finalized, and training of national officials will start in the second half of 2012. This process is fully supported by all the CEMAC finance ministers, who see the directives as an effective way to enforce efficient and transparent PFM.

C. External Sustainability

28. The REER is broadly aligned with fundamentals, but other indicators could signal a deterioration of competitiveness. For the CEMAC as a whole, the appreciating trend of the REER since the 1994 devaluation has been moderated by the recent euro depreciation (Figure 6). However, there is concern that high public sector wages could spill over to the private sector. Although wage data are scarce, a cross-country comparison of minimum wages shows that a number of the CEMAC countries have some of the highest minimum wages among a sample of 16 SSA countries.4 Staff assessed the REER and the external position, using two methodologies that take into account the specificities of oil producing countries, especially the temporary nature of oil revenue (Box 2). Both approaches suggest that the external position and the REER are broadly consistent with equilibrium under current policies. However, poor non-oil export performance underlines the need to remove structural obstacles to competitiveness (the section on Strengthening Growth and Competitiveness).

Figure 6.
Figure 6.

Real Effective Exchange Rate (2005=100), 1990–2011

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Source: Information Notification System (INS).

29. The fixed exchange rate regime is secured in the near term by adequate reserves. At about five months of total imports or nearly 100 percent of broad money, the region’s official reserves comfortably exceed traditional benchmarks. An analysis of reserve adequacy on the basis of observed exchange market pressure events finds that reserves are adequate to withstand a three-standard-deviation shock to the oil price lasting two years with unchanged policies (Appendix II).

30. However, a longer-term risk stems from some member countries’ failure to fully comply with the rule for pooling official reserves. A BEAC working group is studying ways to enhance compliance with the reserve-pooling requirement. Compliance has been weakened by recent BEAC safeguards concerns and low interest rates on government deposits at the BEAC, including those on the Fund for Future Generations. Based on preliminary information, reserves held outside the BEAC are equivalent to about 50 percent of the BEAC’s reserves. Gabon has recently transformed its Fund for Future Generations into a Strategic Investment Fund, raising the question of countries’ ability to invest independently. The Gabonese government assured the BEAC management that its obligations under the regional reserve-pooling requirement will be respected.

Staff’s advice

31. The authorities should strengthen oil-savings management. The BEAC could invest excess foreign assets (above the desired level of monetary reserves) in investment portfolios, reflecting countries’ investment horizon, return objectives, and risk profile. Countries should also have a say in how long-term oil savings are invested.

32. Member countries should adhere fully to the reserve-pooling requirement. Notably, the Council of Finance Ministers and the BEAC Board should be updated regularly on the progress of the working group that is seeking to enhance compliance.

Authorities’ views

33. The authorities shared staff’s assessment of external sustainability. The BEAC’s own analysis pointed to similar conclusions that the reserves are adequate to support the fixed exchange rate regime and that the CEMAC’s external position and the REER are broadly consistent with external stability. The longer-term risk from noncompliance with the rule for pooling reserves is expected to be addressed by a successful reform of oil-savings management.

34. The reform of oil-savings management is a priority. The BEAC is working on analytical tools that will help distinguish between monetary reserves and funds that could be invested in longer-term instruments. The Funds for Future Generations will also be reformed so that its remuneration is tightly linked to investment returns, thus giving member governments incentives to pool reserves. Regarding member countries’ setting up their own sovereign wealth funds, the BEAC is concerned that this may undermine the foundation of the currency union, which rests on reserve pooling. Nonetheless, the BEAC plans to seek member states’ views on reforming oil-savings management, including setting up a sovereign wealth fund compatible with the regional reserve pooling requirement. To this end, a high-level workshop will be held in late 2012 in close coordination with staff.

CEMAC: External Stability Assessment

Staff’s assessment of the CEMAC’s external sustainability is based on two methodologies that take into account the specificities of oil-producing countries, especially the temporary nature of oil revenue. Both approaches suggest that the estimated overvaluation (around 10 percent) is within the margin of error. As a result, the external position and the REER are broadly consistent with equilibrium under current policies. However, poor non-oil export performance underlines the need to remove structural obstacles to competitiveness.

Model based assessment 1

The Bems and Carvalho (2009) model applies the balance sheet-based methodology and smoothes intertemporal consumption from oil wealth. Using this methodology, staff derives a current account norm for the oil producing CEMAC countries.

The exchange rate assessment compares this norm to the underlying 2016 current account, which takes into account the temporarily high public investment. 2 This amounts to a very stringent test because the norm presumes that investment should be smoothed across generations.

Comparing this norm to the underlying (medium-term) current account deficit yields an overvaluation of about 11 percent. The Consultative Group on Exchange Rate Issues (CGER)’s external sustainability approach—based on stabilizing the net foreign assets (NFA) at the 2011 level without any correction for the temporary nature of oil revenue—also points to an overvaluation of the same magnitude.

uA01fig03

CEMAC: Current Account Balance, 2011–16

(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Sources: IMF AFR database and staff estimates.

CEMAC: External Sustainability Analysis, 2016

article image
Source: IMF staff estimates.

Elasticities are based on total exports and imports.

Reserve adequacy

With gross international reserves at about five months of total imports or about 100 percent of broad money, the fixed exchange rate regime is adequately secured in the near term. An analysis of reserve adequacy in the CEMAC shows that the current coverage of about five months of total imports would allow the region to withstand a three-standard-deviation shock to the trade balance (Appendix II). Under current fiscal policies, gross international reserves are projected to stabilize at about four months of total imports by 2015.

A risk to this outlook over the long term is possible widespread noncompliance with the rule for pooling reserves. Low interest rates on CFAF-denominated government deposits at the BEAC discourage the pooling of reserves. In addition, recent safeguards concerns at the BEAC have weakened the member states’ confidence in the BEAC, thus reducing the incentive for pooling reserves.

Non-oil export performance and competitiveness

The CEMAC’s export performance suggests there is room for improving competitiveness in non-commodity sectors. The region’s non-oil exports have stagnated at about 0.05 percent of world exports. At the same time, the non-commodity exports growth between 2000 and 2008 has been lagging behind SSA (4.5 percent compared with 14.2 percent).

CEMAC: Exports of Goods, 1995–2011

(In percent of total world exports)

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Sources: IMF 2012 World Economic Outlook (WEO) and IMF staff estimates.

Structural factors have been a constraint to competitiveness. A wide range of indicators measuring the business environment (the World Bank’s Doing Business and Country Policy and Institutional Assessments (CPIA), and the World Economic Forum’s competitiveness index) rank the CEMAC in the lowest quartile. Specific areas for improvement include the limited access to financing and inadequate supply of infrastructure.

1 The equilibrium exchange rate approach was not used in this analysis because it is backward looking and does not take into account the temporary nature of oil income. 2 Average gross public capital formation is projected to increase from around 8 percent of GDP between 2006 and 2008 to 10.5 percent in 2016. The underlying current account estimate assumes long-term gross public capital formation of 9 percent of GDP.

Ensuring Financial Stability and Development

35. The health of the financial sector is a source of concern. Overall compliance with the regional prudential ratios is weak, and on-site examinations routinely find an even weaker than reported observance of prudential regulations. There are also concerns about a systemically important regional banking group and weak state-owned banks in Cameroon and Gabon. Preliminary data for 2011 show that the violations of main prudential ratios are high (Table 13), although the principal prudential regulations appear lax. Staff’s stress tests suggest that the banking system is generally vulnerable to a wide range of risks, particularly to credit risk (Box 3). In addition, a recent survey of microfinance institutions shows that 80 percent of them are deemed insolvent. At the same time, the COBAC’s staffing issues undermine its capacity to address these concerns (see Paragraph 65).

Table 11.

CEMAC: Summary Medium-Term Projections, 2011–16

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Sources: Country authorities’ actual data and IMF staff projections.

CEMAC data are weighted by GDP in purchasing power parity US dollar.

Table 12.

CEMAC: Relative Size of CEMAC Economies and Importance of Oil Sector, 2007–12

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Sources: Country authorities’ actual data and IMF staff projections.
Table 13.

CEMAC: Violations of Main Prudential Ratios, 2009–11

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Source: Banking Commission of Central Africa (COBAC).

Short-term assets of up to one month (remaining maturity) over short-term liabilities of up to one month (remaining maturity).

Net capital and other premanent resources over fixed assets.

Long-term assets of more than five years over long term liabilities of more than five years.

Minimum capital varied by country until May 2010 (CFA millions): Cameroon 1000; Central African Republic 200; Chad 150; Republic of Congo 150; Equatorial Guinea 300; and Gabon 1000. From June 2010, minimum capital is 5 billion CFAF for all the countries.

Single large exposure is limited to 45 percent of capital.

Percentage of deposits represented by the number of banks in violation in the country.

36. The resolution of problem banks takes a long time. Notably, the resolution of a systemically important regional banking group, the Commercial Bank Group (CBG), is taking longer than expected because the CEMAC Court has suspended the COBAC’s decision to revoke the CBG’s license in Cameroon, pending a long overdue restructuring plan. Meanwhile, the restructuring plans of the CBG’s banks in Chad and the C.A.R. are proceeding, focusing on recapitalization with public funds and a search for strategic investors. The protracted failure to address the CBG’s problems points to the need to strengthen the crisis prevention, management, and resolution framework.

37. The work on the crisis resolution framework is taking longer than anticipated. The CEMAC authorities have prepared a new region-wide regulation for a special resolution regime (SRR). It is expected to (i) allow the authorities to intervene early to resolve banking crises, (ii) define clearly the responsibilities of regional and national bodies and the scope of judicial review, and (iii) prevent shareholders of an insolvent bank from participating in its restructuring. The new SRR, which has been awaiting final adoption for months, is a step in the right direction, but more needs to be done to (i) further strengthen the regulator’s powers to take prompt action, (ii) allow out-of-court resolution, and (iii) unify the liquidation process. To complement this framework, the COBAC introduced in 2009 a deposit insurance scheme, funded by fees from financial institutions (Appendix III).

38. Financial access in the CEMAC region is among the lowest in SSA (Figure 7). The penetration rate, defined as the ratio of deposit account holders over the adult population, is low (about 6 percent), and credit to the private sector is well below the average for SSA. Structural factors that explain the low levels of access include (i) high operating costs because of low population density; (ii) weak investor protection; (iii) poor institutional and legal environments; and (iv) under-developed markets and payment systems.

Figure 7.
Figure 7.

Financial Depth, 2004–10

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Sources: IFS and IMF Financial Access Survey.Note: Frontier markets include Botswana, Ghana, Kenya, Mozambique, Tanzania, and Zambia.

39. Microfinance institutions have so far played a limited role in expanding access to financial services. They claim just 8 percent of total deposits of the banking system and 7 percent of total credit. About 65 percent of microfinance institutions are in Cameroon, followed by 23 percent in Chad. Given the limited role of microfinance institutions, most small and medium-sized enterprises (SMEs) find it difficult to obtain credit.

Findings from the CEMAC Banking Stress Test

The health of the financial sector is a source of concern (Table 13). The CEMAC banks’ solvency ratio, while remaining above the 8 percent regulatory threshold, fell by 2.5 percentage points in 2011. Profitability declined sharply in 2011 with return on equity dropping by 3 points to 5.3 percent, despite banks’ efforts to contain personnel spending and noninterest costs. One third of banks need additional capital to meet all equity-based prudential requirements. Rising noncompliance with the prudential liquidity requirement, particularly in Gabon, and noncompliance with the limit on single large exposure are a source of concern, as is the high level of nonperforming loans for state-owned banks.

Stress tests were conducted to identify vulnerabilities in the banking sector (Table below). Stress test results were analyzed at the national and the regional level, based on individual banks’ unaudited data provided by the COBAC. Banks under restructuring were not included in the exercise. Three subgroups of banks were identified: (i) foreign banks, with majority shareholders outside the CEMAC region (76 percent of assets); (ii) domestic private banks (16 percent of assets); and (iii) state-owned banks (8 percent of assets). The mission simulated extreme, but plausible shocks in line with the economic structure of the CEMAC and other regions. The type of shocks and their magnitude were discussed in detail with the COBAC which also received all information about the methodology, the results, and the relevant spreadsheets to facilitate a replication of the tests.

The results of the stress tests suggest that the banking system in the CEMAC is generally vulnerable to a wide range of risks, particularly to credit risk (Table 16). The tests found that the concentration of lending to large borrowers and to the public sector is the major source of risk. Nine shocks were tested based on three broad categories of credit risk. Under the most damaging scenario, the recapitalization costs to meet minimum capital requirements would remain limited (at most 1.4 percent of GDP in the C.A.R. and 1.3 percent of GDP in Cameroon). This reflects, to a large extent, the small size of the banking sector and more generally the low financial intermediation in the CEMAC. The vulnerability of the banking system to credit risks confirms the need to strengthen supervision, including regular monitoring.

Stress Test: Credit Risk

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Source: IMF staff.

Liquidity risks vary across countries. Liquidity shocks were applied by simulating a run on the banks for five consecutive business days, giving the banks no recourse to emergency funds (from other banks or from the central bank). Results show that some national banking systems are more liquid than others and would show resilience to a run on deposits, while others would be comparatively more vulnerable.

Table 14.

CEMAC: Bank Ratings, December 20111

(Number of banks)

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Source: COBAC.

Ratings: 1 = strong; 2=good; 3A=fragile; 3B = moderately fragile; 3C = highly fragile; 4A=critical; and 4B = highly critical.

Table 15.

CEMAC: Quality of Loan Portfolio, 2010–11

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Sources: COBAC and IMF staff calculations.
Table 16.

CEMAC: Summary of Stress Test Results

(In percent, unless otherwise indicated)1

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Source: IMF staff estimates.

Seven banks under restructuring and/or conservatorship were included in the stress tests exercise.

This ratio was adjusted to compensate for under-reporting and under-provisioning of NPLs in compliance with COBAC regulations.

The capital adequacy ratio required by the law is 8 percent.

A critical liquidity situation is defined as a situation where liquid assets are smaller than liquid liabilities.

Staff’s advice

On financial stability:

40. Given the rising risks in the CEMAC financial system and the limited resources available to the institutions overseeing the financial system, staff urges the authorities to implement the following recommendations (some of which were in the 2006 FSAP), with assistance from the IMF’s MCM department:

  • Bring the prudential regulations up to international standards and best practices.

  • Enhance banking supervision practices by promptly enforcing prudential requirements and avoiding forbearance.

  • Focus supervision of microfinance institutions on the 20 percent that collect 80 percent of deposits, given the COBAC’s limited human resources. Encourage consolidation or mergers of microfinance institutions and develop a resolution plan for the insolvent ones. Moreover, consider relicensing of microfinance institutions.

  • Improve crisis preparedness by adopting the regulations on bank crisis management and developing macroprudential regulations and policies. Given the complexity of the new regulation, seek advice from the IMF’s Legal Department.

  • Clarify the BEAC’s role regarding the lender of last resort and emergency liquidity assistance; and enhance the COBAC’s crisis contingency planning by conducting stress tests, scenario analyses, and simulation exercises.

41. Regarding troubled banks, the authorities should take swift action to resolve the banks’ financial problems. Troubled banks with no viable and credible restructuring plans should be liquidated as soon as possible. For the others, quick implementation of their restructuring plans is needed. The longer the conditions facing weak banking institutions are allowed to persist, the higher the cost for the government, for the credibility of supervision agencies, and for the reputation of the CEMAC financial sector. The authorities should:

  • Closely monitor liquidity conditions to avoid any suspension of payments by these banks;

  • Require full loss absorption by previous shareholders; and

  • Pursue maximum recovery of loans owed by related parties to minimize the financial costs to governments.

On financial development:

  • Devise and implement a coherent strategy to develop regional inter-bank and debt markets, consistent with efforts to improve systemic liquidity management.

  • Accelerate the payment systems project initiated in 2003 with assistance from the World Bank.

  • Adopt an institutional and operational debt management framework to monitor countries’ debt sustainability and ensure that country specific risks are disclosed to market participants and properly priced.

  • Focus institutional reforms to (i) improve the operations of land and commercial registries, (ii) streamline procedures for recording and enforcing guarantees, and (iii) strengthen creditor rights enforcement by enhancing governance of the courts.5

Authorities’ views

On financial stability:

42. The authorities agreed with the need to review the prudential regulations. They noted that a comprehensive reform is expected to take two to three years to ensure sound preparation and a smooth transition. With MCM TA, a study is underway on how to move forward with the reform. In the meantime, a number of steps have been taken to strengthen the CEMAC’s financial stability. In particular, minimum capital requirements have been increased, a regional deposit insurance scheme established, and a financial stability committee will soon become operational.

43. The upcoming regulation on bank crisis management will facilitate the resolution of weak banks. The draft regulation was submitted to the BEAC Board in late March, but the Board asked for clarifications on a number of provisions, especially on the division of responsibilities between the regional supervisor and national authorities. While the COBAC continues to have the powers to withdraw bank’s licenses, weak cooperation from national authorities limits its effectiveness in dealing with troubled banks.

On financial development:

44. There is a need to improve the institutional environment for the financial sector. Specific measures taken and actions in progress to deepen the financial sector include (i) regular publication of lending costs and related fees to promote banking transparency and competition, and also consumer protection; (ii) creation of a regional deposit insurance fund to protect small savers; (iii) creation of credit bureaus with World Bank technical assistance; and (iv) establishment of a credit rating agency and a central registry of corporate balance sheets to reduce information asymmetry in credit activities.

45. Progress was made on enhancing collaterals. With implementation of Organisation pour l’Harmonisation en Afrique du Droit des Affaires (OHADA) recommendations, most of the CEMAC countries have been enhancing land registration and the bookkeeping of titles. Gabon has recently improved the process of getting credit by broadening the range of assets that can legally be used as collateral.

Strengthening Growth and Competitiveness

46. Oil wealth has not led to more inclusive growth. Although the CEMAC has earned significant revenue from oil production in past decades, poverty and unemployment remain widespread because few employment opportunities have been generated in the non-oil sector. Non-oil sector growth has been constrained by structural obstacles, including inadequate infrastructure.6 Although the zone has outperformed the WAEMU in overall growth performance, it has lagged growth in SSA oil-producing countries. Regional policies to enhance growth should tackle challenges in the financial sector, regional and external trade, and common infrastructure.

47. The CEMAC’s low intraregional trade limits the gains from regional integration. In theory, regional integration fosters growth through trade promotion. At about 1.2 percent of total trade, intraregional trade is, however, the lowest among regional trade groups in SSA (Figure 8).

Figure 8.
Figure 8.

Intraregional Trade: Selected Regions

(In percent of total imports and exports)

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Sources: IMF Direction of Trade Statistics and staff estimates.

48. Poor infrastructure largely explains this disappointing performance. The lack of functional transportation corridors among CEMAC countries is the prominent infrastructure bottleneck that hampers trade. Moreover, at the country level, institutional capacity is low, raising concerns about the quality of ongoing public investment.

49. Trade barriers also remain pervasive. At 30 percent, the common external tariff (CET) is higher than in most other African regions, and a CEMAC decision to cut the CET has not been implemented. Yet some member states still impose additional surcharges and other fees. Moreover, border procedures are cumbersome and lack of coordination of customs administrations sometimes gives rise to double taxation of goods going to the hinterland, in violation of the free trade rules.

50. Negotiations on the Economic Partnership Agreement (EPA) with the European Union (EU) could help reduce trade barriers. Cameroon signed an interim EPA in 2009 that called for a gradual removal of duties and quotas on up to 80 percent of the EU exports to Cameron. Gabon and Republic of Congo have not yet signed an EPA and, as a result, their trade with the EU continues under the Generalized System of Preferences scheme. Chad, the C.A.R., and Equatorial Guinea continue to benefit from duty and quota-free EU access under the “Everything but Arms” scheme.

51. Labor mobility continues to be an issue. The free movement of persons within the CEMAC has been hampered by Gabon’s and Equatorial Guinea’s visa requirements, on security grounds. Moreover, a CEMAC directive on the rights of establishment for CEMAC citizens, which guarantees labor mobility, is not effectively implemented. Instead, some member countries have signed bilateral agreements on labor mobility, but these agreements are also hardly implemented.

52. The Regional Economic Program (REP) holds the promise of enhancing growth and competitiveness. The REP intends to strengthen economic integration and transform the region into an emerging market by 2025. The program recognizes the importance of improving governance and transparency in the region. The total cost for implementing the REP is estimated at about CFAF 3.2 trillion through 2025, of which 94 percent will be allocated to infrastructure and land development. Financing will be covered by national budgets. Regional infrastructure projects will be derived from a “bottom up” approach, integrating national investment programs, thus ensuring synergy and coordination among national investment programs.

Staff’s advice

53. The following reforms are critical to strengthening growth and competitiveness:

  • Remove barriers to internal and external trade. The priorities are to (i) expedite the intended lowering of the CET, (ii) implement the rules of origin, and (iii) coordinate the customs administrations. Surcharges should be limited across the CEMAC to a uniform, low level that is justified by import processing costs.

  • Address labor market mobility issues at the CEMAC ministerial meetings.

  • Move forward with the implementation of the REP, including development of the necessary capacity at the CEMAC Commission. Seek World Bank TA to strengthen the appraisal, selection, and monitoring of regional infrastructure projects, particularly those that connect the CEMAC countries. Over the medium term, when institutional capacity improves and the CEMAC guidelines on public-private partnerships (PPP) are fully implemented, the authorities could complement public investment with PPP’s, while containing the risk to public finances.7

Authorities’ views

54. Although the authorities reiterated their commitment to regional integration, they recognized that national governments’ compliance with regional directives has been slow. A strong political will, therefore, is needed to renew the momentum on trade and regional issues.

55. Coordination of customs administrations is being strengthened. With EU assistance, the move to the Asycuda++ system is expected to facilitate coordination and effectiveness of customs procedures. Recently, coordination between the C.A.R. (a landlocked country) and Cameroon has also been facilitated by the establishment of a transit stop shop in the port of Douala.

56. The planned reduction in the CET is awaiting an economic impact study. A second study on the impact of lowering the CET has been initiated, given that the first was considered unsatisfactory by some member states. Once this has been completed, an action plan will be submitted to the Council of

Finance Ministers, but no timeline has been set.

57. Efforts have been made to remove barriers to intraregional trade. First, to avoid arbitrary interpretation of the rules of origin, all decisions on that matter have now been centralized at the regional level, thus removing an important barrier to intraregional trade. Second, with the financial and technical support of the World Bank and the EU, projects are being implemented with the objective of reducing physical and nonphysical barriers on the two main transportation corridors (Douala-N’Djaména and Douala-Bangui). The CEMAC Commission monitors these internal trade barriers and produces annual reports to spur actions.

58. Labor mobility issues will be taken up at the CEMAC ministerial meetings. The ministers will have to discuss ways to effectively implement the directive on the rights of establishment for CEMAC citizens. It is expected that the introduction of the CEMAC passport will make the free movement of persons a reality. This is a pre-condition for labor mobility.

59. Efforts to implement the REP are well under way. The REP’s first five-year operational plan (2011–15) was approved by the CEMAC’s ministerial committee in December 2011. The CEMAC Commission is working with development partners on enhancing the capacity needed to assist member countries in implementing regional projects.

60. A renewed drive for reforms in the region will make growth more inclusive. So far, several member countries achieved little in addressing poverty because of the poor management of oil revenue. Efforts to diversify the economy in line with the REP will generate employment. With the approval of the PFM directives, the CEMAC has set a foundation for improved spending efficiency that will also benefit social services.

Strengthening Common Institutions

61. In 2009, the BEAC’s ability to safeguard IMF resources was called into question. The safeguards concerns stemmed from investigations into fraud in the BEAC Paris Office in 2009 and worrisome findings from the special audit of the BEAC’s accounting and procedures. Since then, staff has worked closely with the BEAC authorities to address shortcomings in five areas: (i) the external audit mechanism, (ii) the legal structure and autonomy, (iii) the financial reporting framework, (iv) the internal audit mechanism, and (v) the system of internal controls. The BEAC has been implementing an action plan during the last two years to address short-term vulnerabilities and a medium-term reform plan with assistance from the IMF and development partners (see Informational Annex).

62. Some progress has been made in addressing safeguards concerns, but risks remain elevated in core functions. The March 2012 safeguards mission found that some progress was made in strengthening the audit committee, improving internal audits, and clearing suspense accounts. Notably, internal audit reports covering the BEAC headquarters became more focused during the past year, partly because of assistance by an external co-sourcing firm. The audit committee’s performance was much improved, partly as a result of an external expert assisting the audit committee. The external auditors have expanded their scope to cover national directorates, but the dissemination, timeliness, and discussion of the findings should be strengthened. Internal audit reports covering the BEAC headquarters became more focused during the past year, partly because of assistance by external auditors. The suspense accounts credits and debits that could not be allocated to any specific account were analyzed, and the sources and wrong practices leading to these suspense accounts were identified. However, budget monitoring and oversight of capital and recurrent expenditure are still weak.

63. Progress on the BEAC medium-term reform plan has been slow. Beyond the short-term safeguards measures, the plan aims to address medium-term issues relating to accounting and information technology (IT), internal controls, human resources (HR), reserves management, and the national directorates. Most reform actions, including several actions relevant to safeguards, are behind schedule, and the authorities will need to update their timeline for credibility.

64. Fundamental governance reform should continue to be of paramount importance. Country representation practices within the BEAC impede the effectiveness of the governance bodies, decision making, transparency, and the autonomy of the central bank. The recent practice of having a minister of finance chairing the Board of the BEAC infringes on its independence and has led to increased political interference in the central bank’s decision making process. In addition, the BEAC governance and legal frameworks do not address the challenge of making the pooling of reserves more attractive for CEMAC member countries.

65. The common supervisory agency (COBAC) faces severe capacity constraints. Although efforts have been made to increase the COBAC staffing, the institution remains understaffed compared to the number of banks and microfinance establishments it supervises. In addition, the COBAC keeps losing qualified staff to the BEAC, where career prospects are more attractive. This undermines the COBAC’s effectiveness and threatens the quality of financial supervision in the region.

66. The CEMAC Commission’s capacity and governance need to be enhanced. It is constrained by inadequate administrative capacity and limited financial resources, given the non-payment by some member states of agreed contributions. Notably, the community integration tax (CIT), the commission’s main source of financing, is not transferred in full by member countries. As a result, the commission is limited in its role of promoting regional integration and enforcing the regional regulatory framework. Regarding the commission’s governance, more needs to be done to instill transparency and accountability in its financial management. In particular, strict budget control and regular audits would help build up the member states’ confidence in the commission.

67. The regional development bank’s governance should be strengthened. The Banque de Développement des Etats de l’Afrique Centrale (BDEAC) does not comply with the legal requirement of conducting and publishing regular audits (the last published report is for 2008). Given its tight liquidity situation, in 2009 it received a line of credit from the BEAC of CFAF 10 billion, of which CFAF 6.2 billion was still outstanding in January 2012.

Staff’s advice

68. Staff made the following recommendations to strengthen the common institutions:

  • Put the reform of the BEAC’s governance on the CEMAC ministerial committee’s agenda. Continue to implement safeguards measures to help build up confidence in the central bank.

  • Adopt a binding medium-term plan to bring the COBAC staffing to the optimal level.

  • Strengthen the capacity of the CEMAC Commission, including through the timely transfer of the CIT revenue. Staff suggested that this issue be put on the agenda for the CEMAC’s ministerial committee.

  • Improve transparency and accountability in the management of the budgets of all regional institutions. Notably, they should adhere to the best practices of conducting and publishing annual audit reports on budget execution.

  • Divest the central bank’s stake in the BDEAC and any other development banks (e.g., Gabonese Bank of Development), because the central bank’s status of stakeholder in development banks is incompatible with its role of bank supervisor.

Authorities’ views

69. The BEAC authorities reiterated their commitment to safeguards measures and the central bank reform plan. They appreciated the technical support provided by the IMF, which is instrumental in the ongoing restructuring of the central bank.

70. There is no immediate plan to reform country representation in the BEAC governing bodies. After the recent changes to the BEAC statutes and the management shake-up in 2010, more time is needed to draw lessons and build a new consensus on governance reform.

71. Efforts are under way to recruit more staff for the COBAC. A recruitment committee has been put in place to expedite the planned recruitment of about ten bank supervisors. Consideration will be given to adopting a binding medium-term plan to bring the staffing to the optimal level.

72. The CEMAC Commission’s administrative capacity is being strengthened. An evaluation of the commission’s resource needs has led to the recruitment of fifteen high-level staff in 2011. More staffing is still needed to allow the commission to carry out its duties. With World Bank technical and financial assistance, a capacity building project is being implemented through provision of office equipment, recruitment of consultants, and high-level training in strategic planning, PFM, and development of analytical tools for regional surveillance.

73. Timely transfer of the CIT revenue depends on the national authorities. The CEMAC ministerial committee has already discussed this issue, but most national governments continue to incur delays in transferring the CIT revenue and paying their contributions.

74. Budget monitoring and oversight will be a priority. Budgeting is a critical area that needs further improvement. Renewed efforts will be made to ensure transparency and accountability.

75. Pursuit of the BEAC divesture from development banks will continue. The divesture has not occurred because of lack of interest from national governments to buy the BEAC’s stakes in these development banks. Renewed efforts will be made to convince the national governments of the need to resolve this issue.

Other Issues

A. Capacity Building

76. The IMF is providing wide ranging technical assistance (see Informational Annex). An IMF technical assistance program covering 2011–13 has been put in place to strengthen capacity at the BEAC and the COBAC. One resident advisor has been stationed at the BEAC, and another at the COBAC. More broadly, the IMF technical assistance program covers the following fields: corporate governance of the BEAC and the COBAC; internal and external control systems; management, accounting, and budget supervision; reserves management; monetary policy; and the regional public debt market. The IMF is also providing technical support to the CEMAC Commission for preparation and implementation of regional PFM directives. The main objectives are to (i) promote effective, and transparent public financial management in all member states; and (ii) enable comparability of public finance data for effective multilateral surveillance of national budgetary policies.

77. Other development partners are implementing capacity building projects with all regional institutions. The EU and the Agence Française de Development are providing technical and financial assistance to the CEMAC Commission, in particular related to the Regional Economic Program. The World Bank has a capacity building project covering all the main regional institutions.

B. Data Quality

78. While data provision is generally adequate for surveillance, staff analysis is hampered by shortcomings in data timeliness. In general, limited data sharing among public agencies delays data compilation by national statistical agencies. In addition, the quality of national accounts statistics suffers from methodological and coverage issues, mainly caused by a lack of resources in national statistical agencies. A key shortcoming of monetary and financial statistics is insufficient institutional coverage. Moreover, the BEAC does not collect data on financial institutions’ deposit and lending interest rates. Regarding government financial statistics, more needs to be done for their dissemination. Balance of payments data are not publicly available or are substantially delayed in most of the member countries. In addition, Balance of Payments data collection is constrained by companies’ low response rates to surveys and limited reliability of customs data in some countries. The authorities recognize the need to improve data collection and dissemination and are taking steps to strengthen economic and financial data, with technical assistance from the IMF.

Staff Appraisal

79. Policies in 2011 were dominated by high oil prices. With excess liquidity in the banking system, the monetary stance was accommodative, and oil-related inflows led to expansionary fiscal policy driven by ambitious investment programs. Yet, the external position strengthened owing to high oil prices, and international reserves accumulated. Compliance with convergence criteria also improved, but structural differences remain significant.

80. The regional economic outlook is generally positive, but there are downside risks. Supported by higher oil output, economic activity will remain robust, but inflation is projected to pick up because of rising food and fuel prices. The foremost risk is a possible global slowdown stemming from the euro area crisis, which could lower world oil prices. However, the region’s comfortable reserves provide some buffers. Another risk to the outlook stems from financial sector vulnerabilities.

81. The CEMAC is facing significant policy challenges that need to be addressed. In spite of the common currency and a comprehensive regional institutional setup, fiscal policies are not coordinated, monetary policy remains constrained by structural factors, financial stability is a source of concern, financial markets are shallow and fragmented, and intraregional trade is low.

82. The regional surveillance framework should be reformed to ensure fiscal coordination. Binding fiscal rules cast in a medium-term fiscal framework are critical to ensuring fiscal sustainability. Effective implementation of the CEMAC directives on PFM will also help strengthen regional surveillance.

83. The reform of monetary policy is needed to make it an efficient tool of macroeconomic management. Monetary policy remains constrained by structural excess liquidity, underdeveloped regional infrastructure and markets, country specific reserve requirements, and the central bank’s limited capacity. The reform priorities are to strengthen monetary analysis, rationalize monetary policy instruments, harmonize the required reserves ratios, develop the regional government securities and interbank markets, and improve coordination between fiscal and monetary policies.

84. The CEMAC’s real effective exchange rate is broadly consistent with external stability. The fixed exchange rate regime should continue to anchor the region’s macroeconomic policy. Staff’s assessment of the REER suggests that, notwithstanding some real appreciation, the REER appears to remain broadly in line with fundamentals. The fixed exchange rate regime is also secured in the near term by adequate reserves. However, a longer-term risk stems from noncompliance with the rule for pooling reserves. The reform of oil-savings management would help mitigate this risk.

85. The reform of oil-savings management is critical. Staff urges the BEAC to expedite its ongoing efforts to reform the current reserve management framework. Beyond the sufficient monetary reserves to back the fixed exchange rate regime, excess foreign reserves should be invested in longer-term assets, reflecting countries’ investment horizon, return objectives, and risk profile.

86. Efforts to reform the financial sector should be accelerated. Notably, longstanding IMF recommendations to reform the prudential and regulatory framework need to be implemented expeditiously and rigorously enforced. The current situation of financially weak banks needs to be addressed urgently, including close monitoring of liquidity conditions, minimizing fiscal costs by requiring full loss absorption by previous shareholders, and maximizing loan recovery from related parties. It is also essential to adopt the draft regulation on banking crisis management as soon as possible and to expedite the planned recruitment of bank supervisors. To increase access to financial services, priority should be given to improving the institutional and regulatory environment, specially creditor rights protection and governance of the courts.

87. A strong political will and concerted efforts are needed to foster more integration and boost growth and competitiveness. It will be necessary to reduce the CET, remove non-tariff barriers to internal and external trade, address regional labor market mobility issues, remove regional infrastructure bottlenecks, and enhance the business environment and governance. These reforms will address structural obstacles to competitiveness and enhance growth and economic diversification.

88. There is an urgent need to further strengthen the governance of the CEMAC’s common institutions. Good governance and accountability are critical for addressing the policy challenges facing the currency union. The BEAC reform should be sustained and deepened, and the COBAC’s capacity built up through adoption of a binding medium-term staffing plan. The CEMAC Commission’s human resources should be commensurate with its key role in fostering trade and regional integration. Stringent mechanisms should also be in place in all regional institutions to ensure transparency and accountability in the management of their budgets. The IMF will continue to support capacity building through its technical assistance.

89. The data provided to the IMF are generally adequate for surveillance. However, improvements are needed in balance of payments statistics and timeliness of fiscal, monetary, and financial data. The regional authorities should coordinate efforts to improve and harmonize national statistics.

90. Staff proposes that regional discussions with the CEMAC authorities remain on the standard 12-month consultation cycle.

Appendix I. CEMAC: Multilateral Surveillance Framework

(This note was prepared by Christine Dieterich)

CEMAC members agreed in 2001 on a multilateral surveillance framework carried out by the CEMAC Commission, with the objective of preventing excessive fiscal deficits. The framework relies on four mandatory surveillance criteria, complemented by non-binding sub-criteria:

  • Basic fiscal balance in percent of nominal GDP ≥ 0 percent, complemented by:

    • Basic structural fiscal balance in percent of nominal GDP (derived from the main criterion by replacing actual oil revenue with the three-year moving average).

    • Basic non-oil fiscal balance in percent of nominal non-oil GDP.

    • Primary non-oil fiscal balance in percent of non-oil GDP.

    • Average annual inflation < 3 percent, complemented by the adjusted indicator of average annual underlying inflation, obtained by stripping out the food sub-index.

    • Stock of domestic and external debt as a percent of nominal GDP ≤ 70 percent

    • Non-accumulation of domestic and external payment arrears, defined as obligations due for more than 90 days.

In addition, the CEMAC Commission reports on member countries’ performance regarding the non-binding economic indicators to enhance the diagnostic of the surveillance process, including:

  • Ratio of net international reserves to monetary base ≥ 20 percent.

  • Primary fiscal balance in percent of nominal GDP.

  • Non-oil fiscal revenue in percent of nominal GDP.

  • Ratio between the change in the public wage bill and the change in revenue.

  • Current account balance net of grants as percent of nominal GDP.

  • Ratio of debt service to exports.

The CEMAC Commission monitors members’ macroeconomic policies during a semiannual multilateral surveillance mission to member countries. The CEMAC Commission’s draft multilateral surveillance report is discussed and amended during a meeting of the “Collège de Surveillance,” comprising two country representatives, one representative from the BEAC, and one from the CEMAC Commission. At the end, the report is adopted by the CEMAC Council of Ministers. Non-compliant countries are formally required to develop adjustment plans, but no sanctions are envisaged in the directive.

Appendix II. Assessing Reserve Adequacy of the Oil-Rich CEMAC Region

(This note was prepared by Carol Baker with Mpumelelo Nxumalo)

The CEMAC region has experienced a surge in oil revenue over the last decade. In line with recent trends in reserve adequacy analysis, this note assesses the adequacy of reserves. It examines exchange market pressure events such as the 2008–09 oil price shock episode and reserve loss episodes over the past 20 years, as well as through traditional metrics in a heuristic forward-looking reserve adequacy scenario analysis based on large, permanent oil price shocks. Reserve adequacy for the region as a whole appears ample, suggesting there is room for establishing a regional fund for holding a portion of assets as less liquid, higher-yielding wealth.

End-2010 reserve coverage under traditional benchmarks

For the region as a whole, reserve coverage of standard benchmarks is ample. Reserves cover the conservative threshold—3 months coverage of imports—by a significant margin, with reserve holdings of 19 percent of GDP equivalent to 4.6 months of projected 2011 imports; 93 percent of broad money; and more than 14 times short-term external debt falling due.

CEMAC Reserve Coverage of Traditional Reserve Adequacy Benchmarks, 2010

article image
Sources: BEAC and authors’ calculations

Use of total imports may understate reserve adequacy given the large share of self-financed oil sector imports8 and high public investment-related imports. At end-2010 reserve coverage of non-oil imports was 5.8 months, while coverage of (estimated) private sector non-oil imports was 11.6 months—2½ times total import coverage.

uA01app02fig01

CEMAC Foreign Assets and Reserve Money

(In percent)

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Sources: BEAC and authors’ calculations.

Reserve Coverage of Imports, 2010

(In months of imports)

article image
Sources: BEAC and authors’ calculations.

The BEAC has sufficient reserves to run a currency board. In order to run a currency board, the BEAC would need to hold foreign currency reserves sufficient to convert the entire stock of CFA notes into hard currency. In other words, reserves would need to be equal to or greater than base money (BM). At end-2010 the BEAC held reserves in excess of what is required to run a currency board. In fact, if all member governments converted their CFA deposits held in the BEAC into foreign currency, BEAC reserves would still exceed 100 percent of BM.

Reserves and absorption during the 2008–09 oil price shock

The 2008–09 oil price shock provides a unique opportunity to study the impact of, and policy reactions to a low probability negative oil price shock. The regional economy remained resilient, with no decline in absorption or non-oil growth, and underlying reserves increased.

Oil price movements in 2008 and 2009 were volatile. Over the first half of 2008, the price of Brent crude increased by 55 percent, peaking at $143.95 a barrel on July 3, 2008. Prices had moderated to $90 a barrel by the time Lehman Brothers filed for bankruptcy on September 15, and then began to free fall. On December 26, prices reached a low for the year of $33.73, a decline of more than 75 percent relative to the peak. In the first quarter of 2009 prices moved mostly sideways, before rising to a range-bound $70 a barrel one year after the peak. Price volatility was high, but the drop in the average price was much more muted, falling by roughly one-third from $97 dollars a barrel in 2008 to $65 dollars a barrel in 2009—above the break-even price for oil production in the region.

Despite the price volatility experienced in 2008, the economies of the CEMAC countries remained robust. The region accumulated $3.6 billion in reserves (a 32 percent increase). The true impact of the crisis was felt in 2009. Nominal GDP fell by 14½ percent relative to 2008, while exports fell by a third ($15 billion) to 12 percent below 2007 levels. At the same time, imports were flat (dollar terms), swinging the current account into deficit. Despite the current account being over financed by foreign direct investment (FDI) and (to a lesser extent) net external borrowing, official reserve holdings at the BEAC dipped slightly as a result of a onetime payment by the Republic of Congo to settle claims with a vulture fund and a sustained portfolio adjustment by the government of Equatorial Guinea to hold official assets offshore. Excluding these two outflows which are unrelated to the price shock, official reserves would have increased by $1 billion.

uA01app02fig02

Reserve and GDP Growth, 2006-10

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Sources: IMF AFR database and staff estimates.

Yet, although the oil economy took a hit, the regional non-oil economy continued to grow. Non-oil growth rose to 6.8 percent in 2009, with five of the six member countries registering positive growth, and inflation fell below 5 percent as global food prices receded.

Given that oil accounted for over 70 percent of fiscal revenue in 2008, government coffers bore the brunt of the price shock. Regional oil revenue fell by 40 percent in 2009 relative to 2008. Yet, given ample policy buffers and large development needs, expenditure in the region rose by 13¼ percent, a spending injection of about 6½ percentage points of GDP. The overall balance swung from a fiscal surplus (10 percent of GDP) registered in 2008 to a small deficit (0.6 percent of GDP) in 2009, which was financed mostly by external financing.

Despite the oil price shock, real domestic absorption in the CEMAC region rose in 2009. This was due to higher capital expenditure—in that sense, the oil price shock did not lead to a crisis. In fact, although real consumption did dip slightly in 2009, the two year average increase in real absorption was above the pre-shock trend. Average prices above the breakeven point provided fiscal space to maintain spending plans, without recourse to additional debt.

uA01app02fig03

Real Absorption (2000=100), 2005-11

(In billion CFAF)

Citation: IMF Staff Country Reports 2012, 244; 10.5089/9781475504842.002.A001

Source: IMF AFR database.

To summarize, the temporary price shock of 2008–09 did not lead to a fall in either reserves or real absorption, and no resources were required for precautionary purposes.

Reserve Value at Risk 1990–2010

Large reserve loss events have been relatively rare in the CEMAC in the past 20 years, and were concentrated in the 1990s. More recent losses have resulted from member countries holding reserves offshore rather than the volatile nature of underlying oil prices. Since 2000, absolute reserve losses have been recorded in two years, 2001 when oil prices fell by 15 percent and 2009, for reasons unrelated to oil prices.

Under standard assumptions regarding the distribution of reserve losses, the expected loss in any given year is small relative to current reserve holdings. There is a 0.1 percent probability that reserves losses exceed $842 million. Such a loss is equivalent to 1.2 percent of 2010 GDP and 6 percent of the end-2010 stock of official reserves. Such a reserve loss would leave reserve coverage ample.

Reserve Coverage Following 0.1% Shock

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Sources: IMF AFR database and authors’ calculations.

Forward Looking Scenario Analysis

Having found that end-2010 reserves are ample relative to traditional metrics and onetime shock events, we now assess reserve adequacy over the medium term, both under the April 2011 IMF staff baseline scenario and in the event of a large, protracted price shock.

Under the baseline, reserves exceed traditional reserve adequacy benchmarks. Under IMF WEO projections (April/May 2011, average oil price, 2011–16, of $106), oil production in the CEMAC region is projected to decline by 20 percent over the medium term. However, strong oil prices will stem the decline in fiscal revenue to 6 percent. Falling exports will contribute to a weakening of the trade balance, and the declining regional current account balance will swing into deficit by 2015. Under this baseline scenario, regional international reserves are projected to rise to about $40 billion (about 38 percent of GDP), mostly reflecting projected fiscal and current account surpluses for the Republic of Congo and Gabon.

Reserves would increasingly exceed traditional reserve adequacy benchmarks. Reserve coverage of total imports would rise to more than 11 months of prospective imports by 2015; more than 150 percent of broad money; and 28 times short-term debt on a remaining maturity basis. Reserve coverage is even higher if offshore holdings are included.

CEMAC Reserve Coverage of Traditional Reserve Adequacy Benchmarks, 2011-15

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Sources: IMF 2011 WEO forecasts and authors’ calculations.

Scenario I involves a one-standard-deviation permanent shock to the oil price. We now assess reserve adequacy in the case of a $25 permanent decline in the oil price relative to the baseline with no fiscal adjustment. This amounts to a one-standard-deviation shock. The impact for the region as a whole reduces 2012 oil exports by approximately 20 percent or $8 billion. The regional current account deteriorates by about 5 percentage points of GDP in 2012 from a near balance under the baseline.

Reserve Coverage When Price of Oil Falls by $25 from 2012 to 2015

(In months of imports)

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Sources: IMF AFR database and authors’ calculations.

Under such a scenario, reserve coverage of total imports would remain ample at more than six months of imports. This likely underestimates reserve adequacy given that certain countries in the region with weaker fundamentals would be forced to adjust, reducing fiscal and current account deficits.

Scenario II includes a large and protracted shock to the oil price. Given the resilience of reserve coverage, we now construct a tail-risk scenario in which oil prices fall by around 70 percent to $30 a barrel and remain at that level for two years. Such a shock brings oil prices down to near the breakeven point. To assess the maximum impact on reserve coverage, we (unrealistically) assume no policy adjustment. The shock is severe—reserves fall by $20 billion (70 percent) relative to the baseline in 2013 and Equatorial Guinea would reduce offshore reserves holdings by 40 percent. The region would experience a fiscal deficit of 4½ percent of GDP (4½ percent surplus, baseline).

However, despite the severity of the shock, 2013 reserve coverage (unchanged) of total imports is around three months. This result understates the expected coverage, given that even countries with relatively stronger fundamentals and larger fiscal buffers would be forced to reduce absorption (or contract sizable debt). Even in such an extreme scenario, reserve coverage appears to remain ample.

Reserve Coverage When Price of Oil in 2012 and 2013 is $30

(In months of imports)

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Sources: IMF AFR database and authors’ calculations.

Conclusion

International reserves of the CEMAC region are large, and reserve adequacy is ample and rising over the medium-term. These results are confirmed by the resilience of reserves during the 2008–09 oil price shock.

Scenario analysis indicates that simulating a balance of payments crisis would require heroic assumptions. While a massive and prolonged negative oil price shock with no adjustment would lead to a severe deterioration in reserve adequacy metrics, they would remain above traditional benchmarks.

These results suggest that thought could be given to holding part of the BEAC’s foreign assets in longer-term, higher yielding instruments. Future research should focus on the optimal level of precautionary reserve holdings, and international reserve and wealth management.

Appendix III. CEMAC: Progress in Financial Sector Reform

(This note was prepared by Prosper Youm)

The CEMAC has been slow in reforming the financial sector, with several core recommendations of the 2006 FSAP yet to be implemented. Enhancing the crisis management framework is a reform priority considering the risks from a potential global recession for the financial sector. The draft Special Resolution Regime (SRR) under consideration is a step in the right direction, but more needs to be done to (i) further strengthen the regulator’s powers to take prompt action, (ii) allow out-of-court resolution, and (iii) unify the liquidation process.

Several core recommendations from the 2006 FSAP report have yet to be addressed by the CEMAC authorities (Table 1). This includes the need to increase COBAC staffing, strengthen prudential requirements, limit national governments’ power in withdrawing licenses, and strengthen the institutional framework of the financial sector to facilitate access to financial services. Progress has been made in increasing the minimum capital requirement, the supervision of microfinance institutions, and the systemic liquidity management.

Considering the potential risk of a global recession for CEMAC’s banking sector, reforms to enhance the crisis management framework have priority. An effective crisis management framework consists of (i) sound bank regulation and supervision, (ii) an effective SRR, (iii) an effective Lender of Last Resort (LOLR), and (iv) an accessible fiscal safety net. Many jurisdictions also include an effective and limited Deposit Insurance Scheme (DIS).

While some of these components are in place in the CEMAC or in the process of being developed, some are still missing:

  • Bank regulation and supervision are compromised by inadequate resources. The COBAC aims to conduct on-site supervision for each bank every other year. In practice, it may take up to four years for a bank to receive a comprehensive or even a thematic inspection. Furthermore, it may take the COBAC a long time to detect deterioration in the soundness of a bank because poor off-site supervision mainly focuses on eliminating data inconsistencies. In addition, monthly bank credit reports detailing lending operations and individual payments delinquencies are provided to the BEAC national branches, but the COBAC receives only the processed data.

  • A Special Resolution Regime (SRR) has been prepared, but its adoption needs to be expedited. On the advice of the IMF, the CEMAC authorities have prepared a new region-wide regulation on crisis resolution. The regulation that would strengthen the powers of the COBAC has been awaiting final approval for months. It is expected to (i) allow the authorities to intervene early to resolve banking crises, (ii) define clearly the responsibilities of regional and national bodies and the scope of judicial review, and (iii) prevent shareholders of an insolvent bank from participating in its restructuring. The CEMAC still needs stronger provisions for more effective tools to handle problem banks, in particular mandatory recapitalization, transfer of assets and liabilities, bridge banks, and orderly winding up, including extrajudicial processes.

  • The BEAC does not have de jure the powers of a LOLR. De facto, the BEAC has had to intervene occasionally as LOLR, mostly by using its standing monetary policy facilities. It has not formally set up internal criteria for its interventions.

  • An accessible fiscal safety net has not been established. This has played a role in the protracted failure to resolve the financial problems of a systemically important regional banking group.

  • A regional deposit insurance scheme was established in 2009. The Fonds de Garantie des Dépots en Afrique Centrale (FOGADAC) started accepting contributions in March 2011. The FOGADAC is supervised by COBAC with the oversight of BEAC and banking sector representatives. The scheme, funded by fees from financial institutions, will insure deposits up to CFAF 5 million per account.

Table 1.

Implementation of FSAP Recommendations

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Appendix IV. CEMAC Risk Assessment Matrix

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1

Background paper: Akitoby, B. and S. Coorey “CEMAC: Macroeconomic Challenges” in: Oil Wealth in Central Africa: Policies for Inclusive Growth (forthcoming), ed. by B. Akitoby and S. Coorey (Washington: International Monetary Fund).

2

Some capital controls apply to transactions outside the CFA franc Zone. For example, financial investments abroad above CFAF 100 million require the approval of the Ministry of Finance.

3

At the level of member states, a value at risk analysis could complement an oil-price based rule by defining the optimum balance of stabilization buffers.

4

Source: Based on data from ILO, UNDP, and national government documents.

5

Background paper: Akitoby, B., “Seven Questions on How Institutions Shape Financial Markets,” (IMF Research Bulletin, September 2010).

6

See Akitoby, B. and Coorey, S. “CEMAC: Macroeconomic Challenges” in: Oil Wealth in Central Africa: Policies for Inclusive Growth (forthcoming), ed. by B. Akitoby and S. Coorey (Washington: International Monetary Fund).

7

Akitoby, B. “Public Investment and Private Public Partnerships,” (IMF Economics Issues, Vol. 40. 2007).

8

Summary of Baker C.L., and Nxumalo M., Reserve Adequacy in the CEMAC Region—What Can We Learn from the 2008–09 Oil Price Shock? IMF Working Paper (forthcoming).

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Cover IMF Staff Country Reports
Central African Economic and Monetary Community: Staff Report on Common Policies of Member Countries; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Central African Economic and Monetary Community
Author:
International Monetary Fund
Volume/Issue:
Volume 2012: Issue 244
Publisher:
International Monetary Fund
ISBN:
9781475504842
ISSN:
1934-7685
Pages:
81
DOI:
https://doi.org/10.5089/9781475504842.002
Figure 1.

CEMAC: GDP Composition, 2011
Figure 2.

Recent Economic Developments, 2008–11
Figure 3.

CEMAC: Monetary Developments, 2007–11
Figure 4.

CEMAC: Fiscal Developments, 2000–11
Figure 5.

Medium-Term Outlook, 2011–16

Simulation Results
Figure 6.

Real Effective Exchange Rate (2005=100), 1990–2011

CEMAC: Current Account Balance, 2011–16

(In percent of GDP)
Figure 7.

Financial Depth, 2004–10
Figure 8.

Intraregional Trade: Selected Regions

(In percent of total imports and exports)

CEMAC Foreign Assets and Reserve Money

(In percent)

Reserve and GDP Growth, 2006-10

Real Absorption (2000=100), 2005-11

(In billion CFAF)