Central African Economic and Monetary Community (CEMAC): Staff Report on Common Policies of Member Countries
Author:
International Monetary Fund. African Dept.
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Publication Date:
26 Aug 2014
eISBN:
9781498315685
Language:
English
Keywords:
ISCR; CR; CEMAC authorities; CEMAC commission; authority; CEMAC member countries well; CEMAC country; debt ceiling; country authorities; exchange rate; broad money; nominal GDP; Fiscal stance
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Regional growth weakened in 2013 due to a fall in oil production in most countries. GDP growth is expected to pick-up in 2014 due to the recovery of oil production and the continuation of the implementation of public investment plans in most of CEMAC countries. Despite large spending of oil wealth during the last years, poverty, income inequality and unemployment remain high. The business climate is one of the most challenging in Africa. The region’s most pressing challenge is to implement structural reforms to promote sustainable and inclusive growth while adopting macro policies to preserve financial stability, ensure an efficient use of oil revenues and increase resilience to shocks.

Abstract

Regional growth weakened in 2013 due to a fall in oil production in most countries. GDP growth is expected to pick-up in 2014 due to the recovery of oil production and the continuation of the implementation of public investment plans in most of CEMAC countries. Despite large spending of oil wealth during the last years, poverty, income inequality and unemployment remain high. The business climate is one of the most challenging in Africa. The region’s most pressing challenge is to implement structural reforms to promote sustainable and inclusive growth while adopting macro policies to preserve financial stability, ensure an efficient use of oil revenues and increase resilience to shocks.

Introduction

1. The CEMAC region has recorded robust growth for more than a decade but substantial development challenges remain. Oil producing countries (all CEMAC countries except CAR) have benefited from a prolonged period of high oil prices and launched ambitious public investment programs to fill infrastructure gaps.1 Despite large spending of oil wealth, poverty, income inequality and unemployment (especially among the young) remain high as public spending was often poorly targeted and used unproductively.2 The business climate is one of the most challenging in Africa. The region’s most pressing challenge is to implement structural reforms to promote sustainable and inclusive growth while adopting macro policies to preserve financial stability, ensure an efficient use of oil revenues and increase resilience against shocks. Regional institutions face important capacity constraints and should be strengthened to support reform efforts.

2. Policy direction has been broadly in line with IMF recommendations but reform implementation has been too slow (see Annex 1). Weak governance and capacity of CEMAC institutions (i.e. regional central bank -Banque Centrale des Etats d’Afrique Centrale, BEAC, the Banking Commission—Commission Bancaire, COBAC, the CEMAC Commission and the Central African Development Bank—Banque de Développment des Etats d’Afrique Centrale, BDEAC) hamper regional integration and growth. Following serious governance challenges, the BEAC launched an ambitious reform agenda and has made progress in some areas. The CEMAC Commission activities were substantially affected by the conflict in Central African Republic (CAR) where it was headquartered, seriously limiting progress in various policy coordination initiatives. The issue of non-full repatriation of foreign assets by some member states remains unresolved, the monetary policy framework is unchanged despite the extensive technical assistance provided by the Fund, and preparation for possible reform of the surveillance framework has not progressed much.

Recent Economic Developments, Medium-Term Outlook and Risks

3. Overall macroeconomic performance weakened in 2013, due to a further decline in oil production. Real GDP growth decelerated in 2013 to 2½ percent, due to falls in oil production in most member countries (Chad, Congo, Equatorial Guinea and Gabon). Non-oil GDP growth remained solid, largely driven by the continuation of large public investment programs (Cameroon, Congo, Gabon) and buoyant domestic consumption contributing to a 4½ percent growth in the non-oil sectors. Inflation declined to 1.8 percent, below the regional convergence ceiling of 3 percent due to the decline of food prices and an appreciation of the nominal effective exchange rate.

4. The regional fiscal position further deteriorated in 2013. The continuation of expansionary fiscal policies and declining oil revenues turned the regional primary balance into a deficit for the first time since 2009 and the non-oil primary deficit reached 24.6 percent of non-oil GDP (NOGDP)3. With all but one eligible country (Chad) having benefited from debt relief, the average public debt for the region has slightly increased but remains low at around 23 percent of GDP, well below the 70 percent of GDP ceiling set by the regional surveillance framework for individual countries. The debt sustainability analyses (DSAs) for the individual countries show only low risk of debt distress.

5. The external current account widened in 2013 but the external reserves position remains sound. The current account deficit increased to 3.1 percent of GDP as oil exports declined and investment-related imports remained large. Foreign reserves (not taking into account the non-repatriated foreign assets) decreased slightly but remained around US$17.5 billion, equivalent to 5.1 months of imports at end-2013.

6. Large unsterilized surpluses resulting from the surge in oil export revenues over the last decade continue to impair the monetary policy transmission mechanism and make monetary policy largely ineffective. The growth of bank deposits slowed in 2013 but remained strong, while the growth of credit accelerated due to the dynamism of the non-oil sector and domestic consumption. Liquidity in the banking system decreased following a decline in foreign assets. Nevertheless, excess liquidity in the system remains high in part due to some liquidity injection by the BEAC to support some financial institutions.

7. In 2014, regional growth is projected to pick-up to 5 to 5½ percent. The increase in oil production (mostly in Cameroon and Chad) and the continued implementation of public investment plans in a large number of CEMAC countries is expected to support growth. The inflation rate should remain moderate, reflecting favorable trends in food prices. The continuation of expansionary fiscal policies in some countries (Cameroon, Republic of Congo and Gabon) will maintain the fiscal deficit at around 3 percent of GDP on average despite an increase in hydrocarbon revenues. The current account deficit is expected to remain around 3 percent of GDP as higher hydrocarbon export revenues (nearly 90 percent of the total exports) will be offset by strong imports.

8. CEMAC’s medium-term outlook would remain relatively positive, provided significant reforms are implemented4. Assuming the implementation of reforms to promote private investment, including an improved business climate and deepening of the financial sector, non-oil growth could average around 5½ percent per annum over the 2014-19 period, while oil output would initially grow by 1 to 1½ percent before declining at the end of the period. The regional fiscal balance would remain in deficit due to declining hydrocarbon revenue, which would be partially offset by a considerable improvement of the non-oil primary deficit (from 28 percent of non-oil GDP in 2013 to 16 percent in 2019) resulting from a substantial scaling back of public investment in Equatorial Guinea, Republic of Congo and Chad. The current account deficit is expected to stay between 3 and 4 percent of GDP owing to lower oil prices and continued high levels of imports associated with public and private investment. However, capital account surpluses would support the steady growth of reserves, which should be around the equivalent of six months of goods and services imports in 2019.5

9. The CEMAC could face potentially significant risks in the coming years (see Annex 2). The region remains highly dependent on oil revenues, and a significant, prolonged drop in oil and other commodity prices represents the main risk for the CEMAC. It would have a significant impact on fiscal balances and the current account balance.6 Although the baseline scenario already asssumes a substiantial scaling down in public investment, the materialization of the downside scenario would require a larger and more abrupt fiscal consolidation effort. In addition, in a context where an extremely difficult business climate severely limits private investment growth, the lack of reforms could weigh on the potential for medium-term growth. Without enhanced capacity of regional institutions and stronger political support by member states, regional integration will remain limited.7 Finally, increased political instability and security risks in the region with the deepening of the crisis in the Central African Republic and a number of attacks by Boko Haram could weigh on FDI and growth.

Figure 1.
Figure 1.

CEMAC Nominal GDP, 2013

(CFAF, Billions)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: WEO Database and IMF Staff Estimates
Figure 2.
Figure 2.

GDP Growth Contribution, 2013

(in percentage points)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: WEO Database and IMF Staff Estimates
Figure 3.
Figure 3.

CEMAC Selected Economic Indicators, 2011–13

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: Country authorities and IMF Staff Estimates.
Figure 4.
Figure 4.

Recent Economic Developments, 2010–13

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Source: IMF Regional Economic Outlook, April, 2014.
Figure 5.
Figure 5.

Medium-term Outlook, 2014–19

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Source: IMF Regional Economic Outlook, April, 2014.

Policy Discussions

The discussions covered four major challenges: a) improving the fiscal surveillance framework to ensure stability and sustainability of the Monetary Union; b) making the conduct of monetary policy more effective; c) ensuring the stability and development of the financial sector and financing of the economy; and d) promoting regional integration and enhancing the potential for regional growth. The strengthening of regional institutions needed to overcome these challenges was also discussed. A number of reforms will require stronger support by CEMAC member states.

A. Improving the Regional Surveillance Framework to Ensure the Stability of the Union

Fiscal surveillance framework reform

10. The CEMAC’s current fiscal surveillance framework does not provide an appropriate anchor for fiscal policies of CEMAC member states. Natural resources, particularly oil, offer a unique opportunity to foster economic development but also pose significant challenges to macroeconomic management (IMF, 2012).8 In this context, the current fiscal convergence criteria do not provide an effective basis to ensure the sustainability of fiscal policies. For example, the budget balance rule based on the basic fiscal balance9 could contribute to procyclicality of fiscal policies, and the failure to include investment expenditure financed from external resources could mask an unsustainable debt dynamic. In a monetary union, this challenge is even more complex because fiscal policy management at the individual country level can have implications for the stability of the entire zone. Also, following debt relief and the increase in hydrocarbon resources, the public debt criterion of 70 percent of GDP no longer presents a constraint and would not prevent the risk of another debt crisis.

Staff advice

11. The CEMAC’s budget rule could be improved to address current challenges. As discussed also during the 2013 regional consultations, staff identified potential avenues of reform to ensure sustainability and reduce procyclicality of fiscal policies while remaining simple, transparent, and as uniform as possible.10 One option could be to adopt a rule based on a structural primary fiscal balance with an oil price smoothing formula. Fiscal objectives should be calibrated to ensure building-up or preserving adequate fiscal buffers. The new rule could also include country-specific objectives on the level of fiscal savings accumulated, for example in stabilization funds. These types of funds could be important for those countries most dependent on hydrocarbon resources, which need to protect themselves against large and prolonged commodity price fluctuations and avoid sudden, drastic adjustments in public spending.

12. The reform of the budget rule could be supplemented with a downward revision of the public debt ceiling. Staff conducted an analysis to determine an appropriate debt ceiling and concluded that the risk of debt distress for the region would increase considerably if public debt exceeded 50 percent of GDP (see Annex 4). On this basis, the debt ceiling could be lowered from 70 percent to around 50 percent of GDP to limit the risk of debt distress in the future. The aim should also be to establish consistency among the fiscal surveillance criteria to ensure, for instance, that an excessively high limit on the primary fiscal balance does not lead countries to exceed the debt ceiling. In addition, complementary fiscal rules, consistent with the regional rules, could be considered at the national level to provide better anchoring of policies taking account of the economies’ specific structural characteristics. The criteria should be simple, transparent, and easy to implement and monitor.

13. The authorities should design a comprehensive regional medium-term debt strategy. The definition of an optimal composition of debt in CEMAC would help the authorities to balance the cost-risk debt management objectives. A regional medium-term debt strategy11 should play a supportive role in strengthening the regional debt market by setting harmonized rules for government debt issuance, while preventing crowding-out one country by another when issuing debt at the regional market. A regional debt strategy would have to go in tandem with capacity building at the individual country level.

14. Enforcement of the fiscal surveillance framework should be strengthened. Fiscal convergence criteria are often not respected, with no consequence (Table 7). First of all, ownership of the surveillance framework by member states should be enhanced. To this end, an inclusive, participatory approach should be adopted in any reform of the regional surveillance mechanism. The regional institutions (especially the CEMAC commission) should be strengthened to ensure wider dissemination of the results of regional surveillance, and should be more involved in the preparation of national budgets. Authorities should also consider improving compliance with fiscal criteria, by expanding the role of national supervisory entities in monitoring and disseminating regional rules. Finally, the regional surveillance framework should be supplemented by additional structural changes at the national level, including strengthening public financial management in the selection of investment projects.

Table 1.

CEMAC: Selected Economic and Financial Indicators, 2011–19

article image
Sources: IMF staff compilations.

Using as weights the shares of member countries in CEMAC’s 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, 2012

article image
Source: World Development Indicators.
Table 3.

CEMAC: National Accounts, 2011–19

article image
Sources: Authorities’ actual data and IMF staff estimates and projections.
Table 4.

CEMAC: Nominal and Real Effective Exchange Rates, 2005–13

article image
Sources: IMF, Information Notice System.

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

Table 5a.

CEMAC: Balance of Payments, 2011–19

article image
Sources: BEAC and IMF staff estimates and projections.
Table 5b.

CEMAC: Balance of Payments Indicators by Country, 2011–19

(Percent of GDP)

article image
Sources: BEAC and IMF staff estimates and projections.
Table 6a.

CEMAC: Fiscal Balances, 2011–19

(Percent of GDP)

article image
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, 2011–19

(Percent of non-oil GDP)

article image
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, 2011–19

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

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

External debt only. Calculated by converting the foreign-currency denominated external debt in CFA francs using end-year exchange rates. The CEMAC’s convergence criterion also includes domestic debt, on which the World Economic Outlook database provides insufficient information.

External and domestic arrears.

15. Authorities should pursue their efforts to strengthen fiscal coordination and harmonization. Staff welcomed the progress made in the implementation of the CEMAC public financial management (PFM) directives but noted substantial delays in their implementation. Moreover, regional authorities should ensure that measures taken by several member states such as tax exemptions, which have tended to proliferate and erode the tax base, remain within the limits proposed by regional legislation.

Authorities’ views

16. The regional authorities concurred on the need to revise the fiscal convergence criteria. The CEMAC commission held a Regional Surveillance Committee meeting in late June to discuss possible reform of the fiscal surveillance framework with national authorities. The commission will also prepare a study with specific recommendations on the reform of the regional surveillance framework for the Franc Zone meeting in 2015. The regional authorities also agreed on the need to review the debt ceiling criterion to make it consistent with the budget rule while leaving enough room for financing public investment. However, they considered it would be difficult to strike the right balance between calibrating fiscal rules in each country to reflect the large structural differences among the area’s economies and keeping the rules simple and transparent. They also suggested that the quality and efficiency of use of funds being borrowed should be taken into account when assessing the debt level.

17. The authorities stressed that the implementation of CEMAC’s PFM directives would strengthen the surveillance framework. The CEMAC Commission noted that the action plan developed in cooperation with the IMF Fiscal Affairs Department has enabled substantial progress in four countries of the region (Cameroon, Congo, Gabon, and Chad). The monitoring and implementation will continue based on clear roadmaps discussed with all the partners and with additional technical assistance from AFRITAC.

Ensuring a sustainable external position

18. The external position remains sustainable, but vulnerabilities have increased. The regional current account deficit widened to about 3 percent of GDP in 2013 due to higher public investment and the deterioration of the balance of trade in most CEMAC countries. Nevertheless, according to various analyses, the current account balance and real effective exchange rate (REER) remain broadly in line with regional fundamentals (Annex 3). REERs vary across CEMAC members but none of them shows a significant misalignment. The deterioration of the member states’ current accounts in the last couple of years is more related to an excessively expansionary fiscal stance in certain countries than exchange rate overvaluation. The regional official reserves, which declined slightly in 2013, remain adequate but not excessive according to different metrics.

Staff advice

19. While the reserve coverage appears adequate, the continued only-partial compliance of several member states with the foreign assets centralization requirement is a potential risk for the union. Foreign assets directly held abroad by member states appear to be substantial, although only limited data are made available by member countries on their external assets held abroad. Staff encouraged the BEAC to continue discussions with member states to agree on a framework for managing foreign reserves and fiscal savings that could include a requirement to maintain an adequate level of regional reserves, allow more effective and transparent management of the member states’ fiscal savings, and ensure adherence to regional rules vis-à-vis emerging donors. Staff initiated discussions with the BEAC on possible options for such a framework and encouraged a more proactive process to find appropriate solutions to this issue.

Figure 6.
Figure 6.

CEMAC Real and Nominal Effective Exchange Rates

(2007-14, 2005=100)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Source: IMF Staff Estimates.
Figure 7.
Figure 7.

Real Effective Exchange Rate of CEMAC Countries

(2007-14; 2003 = 100)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Source: IMF Staff Estimates.
Authorities’ views

20. The BEAC is exploring options to solve noncompliance of the reserve pooling requirement. The authorities reiterated that this issue does not endanger the area’s stability and that they are working with member states to find a suitable solution. One alternative could be the creation of a more diversified portfolio of financial assets for foreign exchange holdings in excess of balance of payment needs managed by the BEAC and offering higher returns to member states.

B. Making the Conduct of Monetary Policy more Effective

21. Excess liquidity weakens monetary policy transmission. The BEAC’s main monetary policy rate is disconnected from lending rates, reflecting the ineffective interest rate channel while the shallow banking system and the underdeveloped financial markets induce weaknesses of both the credit and asset price channels. Further, the peg of the Franc CFA to the Euro leaves little room for the exchange rate channel to play a role in the monetary policy transmission mechanism.

22. Despite the low volume of interventions, BEAC’s monetary policy actions end up injecting liquidity in a banking system already in surplus. In view of the absence of a well functioning interbank market to allocate the ample liquidity available in the region, the BEAC had to provide liquidity to some banks unable to mobilize funding through the market because of a lack of trust among banks. Simultaneous liquidity injections and withdrawals are constraining market development, as the BEAC is substituting the market. Excess reserves represented around 200 percent of reserves requirements in August 2013. In an effort to encourage banks to trade in the interbank market, the BEAC suspended its liquidity-absorbing operations in 2012. Nevertheless, the interbank market activity has remained virtually nonexistent in recent years.

Staff advice12

23. The BEAC can enhance the effectiveness of its monetary policy through a well planned, accelerated transition to a market-based monetary policy. The fixed exchange rate regime and government subsidies in some CEMAC countries for key products including petroleum products help stabilize inflation. The existence of capital controls provides some narrow space for monetary policy actions and prevents structural liquidity surpluses to flow outside the CEMAC. These features create an environment favorable to a reform of monetary policy without running the risk of endangering monetary stability. In this context, enhancing the capacity of the BEAC to manage liquidity effectively is particularly critical. As a first step, the BEAC could accelerate the implementation of the 2011 decision of the Monetary Policy Committee to freeze and gradually eliminate over 10 years the stock of central bank advances to governments, including by encouraging government to issue T-Bills to repay the central bank. While the excess liquidity in the banking system has not led to inflationary pressures so far, the BEAC could start undertaking monetary operations aimed at sterilizing the structural liquidity surpluses with a view to develop the interbank market.

24. Looking forward, monetary policy modernization in the CEMAC involves a number of challenges, the most important being:

  • Calibrating BEAC’s interventions based on standard liquidity forecasting processes. BEAC staff in charge of liquidity forecasting should analyze the effect of autonomous factors underlying the decline of bank reserves in 2013, in relation with the decrease of foreign assets. To this end, the creation of daily databases and the development of forecasting techniques for autonomous liquidity factors will help understand and anticipate trends in banks reserves;

  • Streamlining monetary policy instruments. To this end, the reform plan should include eliminating the refinancing facility for long-term loans and excluding the troubled banks from monetary policy counterparties. Furthermore, while the list of eligible collateral may be expanded to take into account the development of new financial instruments and new monetary instruments may be introduced, caution is warranted to ensure that these measures do not lead to more than necessary liquidity injection;

  • Taking concrete actions to revitalize the money market. In particular, the BEAC should play an important role in the development of the government securities markets during the transitional phase;

  • Providing rapidly the human and IT resources needed to implement its reform plan; and

  • Strengthening policy coordination between the different stakeholders (i.e. COBAC, the national governments, and primary dealers), given that it will be a key factor for the success of the reform.

Figure 8.
Figure 8.

CEMAC Policy Rate

(Jan 2000- Dec. 2013)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: IMF staff estimates.
Figure 9.
Figure 9.

CEMAC Reserve Requirements (RR) and Excess Reserves (ER)

(in billions of CFA Francs) (Oct 2001- Aug. 2013)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: IMF staff estimates.
Figure 10
Figure 10

CEMAC. BEAC’s interventions

(in billions of CFAF) (Jan 2000-Dec. 2013)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: Country Authorities.
Figure 11.
Figure 11.

CEMAC: Liquidity withdrawals and Interbank volumes

(Jan 2000-Dec. 2013)

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Sources: Country Authorities.
Authorities’ views

25. The BEAC is aware of the limits of its interventions and is planning an ambitious reform of its monetary policy framework. The reform under consideration will entail the transformation of the organization of monetary policy activities as well as a better linkage of monetary policy strategic and operational frameworks. This linkage would consist of reinstating monetary policy transmission channels by revitalizing the interbank and governments securities market.

C. Ensuring the Stability of the Financial Sector and Adequate Financing of the Economy

Financial sector stability

26. The banking system continues to be vulnerable to a number of risks. Credit risk appears to be predominant but the banking system also remains vulnerable to liquidity, operational, reputational, and legal risks. Banks’ exposures stemming from lending to connected parties have contributed to the capital erosion of some banks that have been restructured or placed under provisional administration. Banks are also potentially exposed to liquidity shocks caused by fluctuations in oil revenues or by troubled banks. Microfinance institutions have started to gain importance in some countries (Cameroon and the Congo), and their financial linkages with the banking sector have been strengthened through their deposits at the banks.

27. Financial soundness indicators in the region vary considerably across countries and banks. While overall asset quality indicators and solvency ratios remained broadly stable in 2013, non-performing loans and solvency ratios vary considerably across countries and institutions. Moreover, the situation of unviable and undercapitalized banks did not improve. The aggregate solvency ratio in Cameroon, while remaining below the regulatory minimum of 8 percent, continued to improve from 6.3 percent at end-December 2012 to 7.9 percent at end-December 2013, while the nonperforming loans ratio deteriorated substantially in Equatorial Guinea.

28. The strengthening of COBAC capacities should improve financial sector surveillance. The COBAC, which lacked sufficient resources to carry out all its banking supervision missions, has substantially increased its staffing very recently. The additional human resources, after proper training, should enable COBAC to enhance its capacity to enforce compliance with prudential regulations. However, additional staff will also be needed in the analytical and regulation areas. The expansion of the nonbank financial sector and the development of microfinance and mobile banking services will also require increased and targeted monitoring by COBAC.

Staff advice

29. Staff recommended accelerating bank resolution plans and strengthening banks’ internal controls. While progress was made in the reform of the regulatory framework, it should be accompanied by reforms to enhance the internal capacity at the COBAC with regard to the rating of financial institutions under its purview, as well as external credit ratings.

30. Staff welcomed COBAC’s efforts to implement the regulatory reform, particularly relating to: (i) banks resolution, (ii) non-performing loans classification; (iii) consolidated and cross-border supervision; and (iv) licensing mechanism and pre-authorization. Furthermore, the mission encouraged BEAC and COBAC to initiate preparations for the upcoming financial sector assessment program (FSAP) update planned for the second half of 2014. The assessment will provide an opportunity for a more detailed review of the reforms undertaken in the past few years and identification of the remaining challenges.

Authorities’ views

31. COBAC considered that significant progress was made to improve banking supervision and strengthen financial sector stability. In addition to the adoption of new regulation, new recruitments will allow to double the frequency and the speed of banking inspections. Moreover, the full implementation of ECERBER, a remote financial reporting system for financial institutions, improved the quality of financial information disclosure and off-site supervision tools.

32. The authorities considered that the situation of troubled banks in the region has improved—especially in Cameroon. However, there are still significant constraints to liquidate insolvent institutions. The COBAC has been monitoring closely all the troubled banks, but faces difficulties due to weaknesses in the regional judicial system and the delays in the adoption of a new regulation on crisis management. COBAC’s relocation to Libreville in early July 2014 will slowdown its activities for a few months but should not result in major disruptions.

Financial sector development and financing of the regional economy

33. The size and structure of the financial sector constrain its capacity to finance the regional economy. Total assets represent 25 percent of regional GDP, and sector activity is dominated by banks whose business model is largely based on a restrictive credit policy geared toward attracting large companies and charging high service fees. Access to finance for individuals and small and medium-size businesses is limited and represents a significant challenge in the region. Difficulties in assessing credit risk and issues involving securing collateral and title instruments are significant obstacles to the development of banking intermediation. Moreover, the presence of large foreign banks and local banks, and the lack of trust among these two groups of institutions, represent an important challenge for monetary policy and banking supervision.

34. Financial inclusion in the CEMAC remains extremely limited. For most countries, the proportion of the population with access to financial services—financial inclusion—is well below the expected level given the structure of the economies and their level of development (see Selected Issues Paper (SIP) on Financial Inclusion in the CEMAC).

Staff advice

35. Measures to foster financial deepening should help resolve the constraints on financing the Community’s economies. The measures should focus essentially on: (i) creating a genuine regional debt market; (ii) creating credit bureaus and rating systems for businesses; (iii) merging the two regional stock exchanges; (iv) improving the guarantee and collateral system; (v) improving the financial infrastructure—including the payment system—; and (vi) improving the regional business climate. The authorities could develop strategies to provide access to financial services for the most vulnerable segments of the population and small businesses, including regulatory reforms and the development of financial infrastructure. The regulatory reforms could aim to promote financing for rural areas and adopt regulations on virtual and mobile banking services.

36. Staff advised against the BEAC using government deposits to create new financing instruments for infrastructure projects. It stressed that this type of measures would be equivalent to direct lending to government and interfere with the conduct of monetary policy. Instead, staff encouraged the authorities to boost efforts toward coordination and transparency for the development of the government securities markets. These efforts should include: (i) improved governments cash and debt management; (ii) the resolution of potential constraints relating to syndication; and (iii) enhancing the role of primary dealers in improving the liquidity of CEMAC governments’ securities secondary market. A more developed medium—and long—term securities market should provide adequate financing for budget deficits related to infrastructure development projects. Staff also encouraged the authorities to strengthen the capacities of BDEAC to finance large regional infrastructure projects.

37. Larger financing for infrastructure projects could also be based on an institutional framework promoting private sector participation.13 This could include more public-private partnerships, and a strengthened role for financial markets and commercial banks through the targeted use of innovative financing methods. These mechanisms would help limiting the buildup of public debt related to infrastructure investment scaling-up provided that proper safeguards are put in place to limit fiscal contingent liabilities and other fiscal risks14. To facilitate bank lending, infrastructure projects could be unbundled into successive sub-projects corresponding to different stages of maturity. Moreover, regional authorities could also implement guarantee systems to reduce investors’ exposure to risk.

Authorities’ views

38. The authorities considered that they have taken significant steps to support financial sector development. They made progress to create a credit information bureau and rating system which should become operational by end 2015. Moreover, they have taken steps to enhance the financial infrastructure through an enhanced payment system to support the development of mobile banking and regional banking networks. The authorities noted however that important measures to develop the financial system such as undertaking judicial reforms to address lengthy and inefficient court proceedings or developing new financial products (e.g. leasing) are the competence of member states.

39. The authorities stressed the need to find alternative and innovative sources of financing to support growth. They saw the need to better use governments’ savings to finance the region’s infrastructure needs and considered that BEAC could support mechanisms to channel resources from countries with financial surpluses to finance infrastructure projects in deficit countries. At the same time, they agreed that greater private sector participation should be sought in order to limit public debt.

D. Promoting Regional Integration and Enhancing Regional Growth Potential

40. Limited regional integration and weak coordination of national development policies undermine regional growth potential. CEMAC intra-regional trade levels are around 3 percent of total trade and below other African regional integration initiatives. Greater integration could boost regional growth by two percentage points by promoting regional trade and a more efficient implementation of regional policies.15 The signature of an economic partnership agreement (EPA) with the European Union could also open new markets to the CEMAC countries and promote greater consolidation of the common market.

41. Weak regional competitiveness and productivity hamper private investment growth. In comparison with other fast-growing sub-Saharan African countries, the growth of real per capita GDP in the CEMAC has been relatively modest (see SIP on Growth and Competitiveness in CEMAC). CEMAC’s weak structural competitiveness and low factor productivity are largely due to limited investment absorption capacities, difficulties for the private sector in accessing financing, and a challenging business climate that constrains private investment. In addition, the recurrence of shocks coupled with ineffective absorption mechanisms have also undermined growth prospects. The combination of these factors reduces the effectiveness of investment and limits the advantages of regional macroeconomic stability and a favorable international environment.

Staff advice

42. Greater coordination between regional and national authorities is needed to promote regional integration and development. Staff considered that better cooperation among member states and with regional authorities was necessary for the successful implementation of key regional initiatives. For example, member states should try to reach a common standing on the EPA negotiations to avoid a multiple speed negotiation process which could create distortions within the CEMAC. Regional and national authorities should also define a regional action plan to improve the business environment, drawing on international best practices. Similarly, the management of public investment projects should be improved through the creation of monitoring committees for major national and regional projects, focusing on projects that generate growth. In this context, efforts to strengthen the role of the BDEAC in supporting regional development policies could be particularly important.

Authorities’ views

43. Despite important operational constraints, the regional authorities pursued a number of regional initiatives, such as (i) monitoring the adoption of PFM directives at the national level; (ii) implementing the organizational and budgetary reform of the CEMAC commission; (iii) preparing a review of the regional development plan by 2015 to ensure consistency among national development plans; (iv) preparing-with the support of the World Bank-a feasibility study to create a business climate regional observatory; (v) continuing the implementation of measures to reduce regional trade barriers; and (vi) preparing a study to reduce the common external tariff, eliminate double taxation to third-country products and create CEMAC–wide rules of origin.

E. Strengthening Institutional Capacity

44. The BEAC has made some progress on its reform and modernization plan but institutional autonomy should be strengthened. The current framework does not provide the BEAC management with sufficient latitude to make management decisions. In addition, progress is still needed in the area of human resource management. The BEAC should also review budget allocations according to priorities, especially to ensure the success of the monetary policy reform.

45. The CEMAC Commission faces tight personnel and financial constraints. New staff will be necessary to enable the Commission to fulfill its role as central institution in promoting and implementing regional initiatives. In addition to the challenges related operating outside its headquarters because of the conflict in CAR, the commission also faces serious financial constraints due to problems in collecting its main source of financing, the TCI (i.e. taxe communautaire d’intégration, in French, a regional tax), from member states.

Staff advice

46. Staff encouraged the BEAC and COBAC to strengthen their modernization efforts to enhance their capacities and governance. Efforts should be particularly targeted to areas of reform that have suffered delays, such as the reform of the monetary policy framework. Staff welcomed the significant increase in BEAC’s and—especially—COBAC’s personel, which should strengthen regional supervision. Morever, it welcomed the greater role played by the trading room which is currently managing a large share of BEAC’s reserves, generating reasonable returns. Staff encourages the authorities to continue strengthening the trading rooms’s capacities including with the assistance of the World Bank. However, staff still noted significant staffing needs in BEAC’s and COBAC’s research departments, which could adversely impact the production and monitoring of key economic, monetary and financial indicators.

47. The BEAC has made progress in reinforcing its safeguards framework but continues to face some challenges. Consistent with the safeguards policy requirement for regional central banks, the BEAC was subject to a quadrennial assessment in 2013. It occurred against the backdrop of significant change at the BEAC to address governance challenges and control failures that emerged in 2009, and led to close engagement in the period after through close IMF monitoring of safeguards “rolling measures” in the context of new program requests and reviews for CEMAC countries. The 2013 assessment found that risks remain elevated and that annual IMF staff visits to monitor priority recommendations and progress on the BEAC’s reform plan would continue as part of the safeguards “rolling measures” approach.16 Consistent with this approach, a safeguards staff visit to the BEAC was conducted in early April 2014. Staff concluded that the BEAC has made good progress in implementing recommendations from the 2013 assessment and is advancing its reform plan to strengthen controls at the bank. That said, the BEAC continues to face challenges on institutional autonomy and broader governance reforms remain paramount in the medium-term. Staff will maintain close engagement with the BEAC to assess sustainability of the measures already in place and implementation of the reforms and new safeguards measures going forward. Developments on implementation of these measures will allow staff to consider whether sufficient progress has been made to discontinue the annual monitoring of safeguards rolling measures and thereby revert to the four-year cycle of full safeguards assessments for regional central banks.

48. Staff encouraged the CEMAC commission to continue its efforts to promote the implementation of regional policies. The new Commission organizational chart should be implemented with the necessary new hires. Moreover, the events in the Central African Republic have greatly constrained the CEMAC Commission’s effectiveness over the past year. Following its planned relocation to Libreville (Gabon), the Commission should continue the implementation of several important regional initiatives such as (i) monitoring the countries’ adoption of public financial management directives; (ii) reviewing the regional economic plan and ensuring its consistency with national development initiatives; (iii) ensuring the coordination and complementarities of national infrastructure plans; and (iv) supporting regional integration initiatives (functioning of the single market, intra-community trade, and free movement of persons).

49. Staff underscored the need to strengthen the capacities of regional institutions to improve the quality of economic and financial statistics. The production of balance of payments statistics and verification of national accounts produced by member states are constrained by the lack of resources in the BEAC research and analysis units at headquarters and national directorates. Major improvements are needed to ensure a better monitoring, evaluation and coordination of policies pursued by member states.

Authorities’ views

50. Progress has been made in BEAC’s reform plan but governance reform is more difficult. The authorities considered that the implementation of reforms has accelerated in most areas (e.g. internal accounting, budget management, human resource management and IT) and hoped to complete most of them by end 2014. However, they recognized that progress remains slow in the reform of BEAC’s charter and BEAC’s governance because it requires the approval of member states.

Staff Appraisal

51. Short-term regional growth prospects should remain solid but downside risks are significant. Non-oil growth will continue to rely on public investment programs. However, a prolonged decline in hydrocarbon prices triggered by a global slowdown would have a substantial impact on the fiscal and external current account balances and would likely force a large scaling down of public investment. In addition, a challenging regional business climate severely limits the growth of private investment. The regional institutions continue to face significant capacity constraints and should continue to be strengthened in order to play a greater role in coordinating reform efforts. Finally, increased security risks in the region could weigh on FDI and growth.

52. The policy mix should be adjusted to support stability and growth. High oil prices and debt relief have supported efforts to fill the infrastructure gap but the fiscal stance has become too expansionary in several countries. In a context of declining oil production, the materialization of downsize risks would make it difficult for some countries to withstand a large adverse external shock. The effectiveness of monetary policy is very limited due to weak transmission channels. The level of external reserves remains adequate but widening current account deficits could become a source of concern. The issue of the non-compliance of repatriation of reserves by some member states remains unresolved.

53. The current CEMAC surveillance framework should be adapted to better ensure the stability and sustainability of policies. The current fiscal deficit rule can encourage procyclical policies in face of volatile oil revenues and does not control for external borrowing for capital spending. One option could be to adopt a rule based on a structural primary fiscal balance with an oil price smoothing formula. In addition, the debt ceiling could be lowered from 70 percent to around 50 percent of GDP to limit the risk of debt distress in the future and reinforce the consistency among the fiscal surveillance criteria. Moreover, enforcement of fiscal surveillance needs to be strengthened, based on enhanced ownership by member countries.

54. The monetary policy framework needs to become effective. Excess liquidity, inefficient liquidity management, and underdeveloped regional interbank and debt markets make monetary policy largely ineffective. Stronger reform efforts by the regional central bank are needed to address these challenges. The coordination between the different actors (i.e. BEAC, the national governments, and primary dealers) will be a key factor for the success of any reform.

55. Stronger regulatory and supervisory frameworks are needed to ensure financial stability and support financial sector development in the region. The improvements in COBAC’s operational capacity and new regulation will help reducing excessive risks, ensuring compliance with prudential requirements and improving the soundness of the financial sector. However, further progress is needed in implementing bank resolution plans. Furthermore, the creation of credit registries and judicial system reforms are essential for fostering credit growth. Regional and national authorities should promote strategies to enhance access to finance.

56. Promoting financing of regional economies should be based on greater private sector participation. Regional authorities should be cautious in considering the use of governments’ savings deposited at BEAC to finance infrastructure projects. Adopting these types of measures may have destabilizing effects on CEMAC’s macroeconomic policy implementation. Authorities should rather focus on promoting a greater private sector participation based on the creation of appropriate investment incentives.

57. Greater efforts are needed to foster integration and boost growth and competitiveness. While the real effective exchange rate appears to be in line with fundamentals, the region is facing important structural competitiveness issues. Authorities should devise concerted actions to improve CEMAC’s business environment and governance to boost private investment growth and economic diversification. Efforts should be complemented with a faster implementation of regional institutions’ institutional reform which has been too slow. In particular, BEAC’s institutional autonomy needs to be reinforced.

58. Regional institutions also need to focus on enhancing the quality of economic and financial information to improve the monitoring, assessment and transparency of the policies. In particular, the national accounts and balance of payments analysis are hampered by the poor quality of statistics compiled in these areas.

59. The Fund will continue to provide technical assistance to support modernization and reform efforts of regional institutions (see Informational Annex), provided that its effectiveness can be demonstrated.

60. It is proposed that the discussions with the CEMAC authorities remain on the standard 12-month cycle.

Table 8.

CEMAC: Monetary Survey, 2008–13

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Sources: BEAC.
Table 9.

CEMAC: Summary Accounts of Central Bank, 2008–13

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Sources: BEAC.

Gross foreign reserves, including gold, foreign currency reserves, IMF reserve position, and balance of the operations account at the French Treasury.

Includes cash in vault and deposits of commercial banks with the BEAC.

Table 10.

CEMAC: Summary Accounts of Commercial Banks, 2008–13

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Sources: BEAC.
Table 11.

CEMAC: Summary Medium-Term Projections, 2011–19

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Sources: Country authorities’ actual data and IMF staff projections. The export volume, import volume, and terms of trade are calculated as PPP weighted averages of member countries’ values.
Table 12.

CEMAC: Relative Size of CEMAC Economies and Importance of Oil Sector, 2011–19

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

CEMAC: Violations of Main Prudential Ratios, 2011–2013

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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; 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.

Table 14.

CEMAC: Bank Ratings, December 2013

(Number of Banks)

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Source: Banking Commission of Central Africa (COBAC). 1 Ratings: 1=strong; 2=good; 3A=fragile; 3B=moderately fragile; 3C=highly fragile; 4A=critical; and 4B=highly critical. Please note that this table will be updated as soon as data are available.
Table 15.

CEMAC: Quality of Loan Portfolio, 2011–2013

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Sources: Banking Commission of Central Africa (COBAC) and IMF staff calculations.

According COBAC Definition

According to CEMAC Definition

Annex 1. Regional Authorities’ Responses to 2013 Policy Recommendations

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Annex 2. Risk Assessment Matrix1

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Annex 3. External Sustainability Assessment1

The regional current account balance has fallen in the recent period due to higher levels of imports related to public investment and a deterioration in the trade balance. In the medium term, CEMAC’s current account is projected to oscillate at around 3–4 percent of GDP as public investment gradual scaling down will be largely offset by declining oil-related exports. FDI remains a stable source of external financing. Reserves continue to be adequate according to different metrics. Various analyses of the current account balance and real effective exchange rate do not indicate significant misalignments and price—competitiveness concern, but in the light of recent developments, they warrant monitoring. Survey-based indicators, however, point to important structural competitiveness issues.

A. Balance of Payments

1. The regional current account balance has deteriorated recently reflecting important investment efforts and a deterioration in the trade balance in most of CEMAC countries (Figure 1). The regional current account balance has turned from a surplus of 1.8 percent of GDP in 2011 to a deficit of 0.6 percent of GDP in 2012 and 3.1 percent in 2013. The current account deficit is expected to increase slightly to 3.2 percent in 2014. This overall deterioration has been driven mainly by substantial investment efforts in most of the member states -which contributed to higher imports—and a gradual fall in oil-related exports. In 2014, the current account balance in individual members is projected to range from—14 percent of GDP in Central African Republic to 6.5 percent of GDP in Gabon. In the medium term, although the pace of public investment would be reduced, falling exports are expected to maintain the regional current account deficit at around 3-4 percent of GDP

Figure 1.
Figure 1.

CEMAC: External Sector Developments

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

2. Foreign direct investment (FDI) constitutes a stable source of external financing. FDI has been a steady source of external financing averaging around 6 percent of GDP over the last decade. Portfolio investment and aid have averaged about 0.5 percent of GDP over the same period. Debt-creating flows averaged around 1 percent of GDP over the last decade and are expected to remain limited over the medium term.

B. Reserves Adequacy

3. Official reserves coverage appears adequate according to different metrics.2 Regional official reserves are projected to remain stable from US$17. 5 billion at the end-2013 to US$17.7 billion at the end-2014. Reserves coverage remains adequate at about 5 months of next year imports, 80 percent of broad money, and about 1000 percent of short-term liabilities. Reserves also cover around 260 percent of the RA ratio, remaining well above the optimal level to provide adequate buffers for crisis prevention.3 The cost-benefit analysis4 indicates that the level of reserve is at the low end of the optimal reserves range which varies between 5.6 to 13 months of imports depending on the interest rate differential with the rest of the world.

C. Price Competitiveness

4. The assessments of the current account and real effective exchange rate at the regional level do not indicate any significant misalignment and price-competitiveness issues. The effective real exchange rate (REER) appreciated slightly by about 5 percent during the last 12 months, reflecting essentially the evolution of the nominal effective exchange rate and euro appreciation. Some divergences could be noticed at the individual country level with about 1 percent appreciation in Cameroon and Chad, 7–8 percent in Republic of Congo, and more than 10 percent appreciation in Gabon and the CAR. Model-based assessments (Box 1) continue to not indicate significant misalignments of the current account balance and real effective exchange rate.

Model-based Real Effective Exchange Rate Assessments

Three alternative approaches applied to assess the regional current account and real effective exchange misalignments.

  • The first CGER-based external sustainability method comparing the underlying current account balance with the balance that stabilizes net foreign assets at its 2013 level shows a positive deviation of about 10.5 percent.

  • To better account for natural resources windfalls in CEMAC countries, the Bems and Carvalho1 real annuity method is used. It computes the current account norm consistent with a long-term trend in net foreign assets to account for the impact of the oil revenues pointing out to about 11.5-percent positive deviation. However, the model ignores other factors such as temporary investment needs, financial frictions, and low investment productivity in CEMAC countries.2

  • The third method developed using Araujo et al. model 3 corrects theses drawbacks. In particular, it estimates the current account norm consistent with the natural resources revenue, investment needs and real and financial frictions (absorptive capacities, investment productivity and efficiency, and borrowing constraints). The model indicates about 7.5-percent REER overvaluation.

Taking into account CEMAC-specific factors the results do not indicate significant misalignments of the regional current account and real effective exchange rate provided that the current account deficit narrows as expected over the medium term.

CEMAC: Model-based current account equilibrium

article image
Source: IMF staff estimates.

The medium-term current account deficit.

Elasticities are based on total exports and imports.

1 Bems, R., Carvalho I. (2009) “Exchange Rate Assessments: Methodologies for Oil Exporting Countries”, IMF Working Papers 09/281. 2 IMF (2012) “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries”. 3 Araujo, J., Li B., Poplawski-Ribeiro M., Zanna L-F., (2013), “Current Account Norms in Natural Resource Rich and Capital Scare Economies”, IMF Working Paper 13/80.

D. Structural Competitiveness

5. Survey-based indicators, however, point to important structural competitiveness issues. Various competitiveness indicators continue to rank CEMAC countries among the worst performers.

  • The World Bank’s “Doing Business” indicators show an overall worsening of the CEMAC countries’ situation over the last 5 years (Figure 2, upper panels).5 In particular, the region faces challenges in starting a business, enforcing contracts, and trading across borders. Supply of infrastructure and electricity remains inadequate and procedures for paying taxes and registering properties continue to be cumbersome.

  • The World Bank’s Governance Indicators (WGI) also rank CEMAC countries behind the peers show a relative deterioration in terms of governance over the last 5 years (Figure 2, middle and lower panels). In particular, the CEMAC lags behind its peers in terms of government effectiveness, accountability, and quality of regulation.

Figure 2.
Figure 2.

CEMAC: Business Environment and Governance

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Annex 4. Revising the Debt Limit Criterion1

The regional fiscal framework has suffered from a number of weaknesses to effectively anchor fiscal policies. The debt criterion, for instance, is no longer a binding constraint to provide effective policy guidance, as the public debt ratio in all CEMAC countries decreased substantially below the 70 percent ceiling. As shocks are frequent and development needs remain important, lowering the debt criterion is needed to better control debt accumulation and ensure the long-term sustainability of the Union.

1. Public debt ratios of CEMAC countries remain well below the regional debt criterion. With Republic of Congo and Central African Republic reaching the HIPC completion point and a substantial increase in oil-related revenue, the average CEMAC public debt decreased to about 18 percent of GDP in 2010 (its lowest historical level). Over the last 3 years, the public debt ratio has been increasing moderately, remaining, however, well below the 70 percent ceiling established by the regional surveillance framework. The debt-to-GDP ratio is expected to increase moderately over the medium term as public investment stabilizes and oil revenues decrease.

2. The increase in the debt-to-GDP ratio in recent years has slightly exceeded expectations. Following a substantial reduction in mid-2000, debt accumulation has increased beyond projections, owing to higher-than-expected public investment and unanticipated shocks in some CEMAC countries (e.g. lower oil-related revenues, unfavorable weather conditions, and social conflicts).

3. There is a need for revising the regional surveillance framework to anchor fiscal policies and ensure long-term sustainability. Regional fiscal rules suffer from a number of weaknesses to anchor policies and ensure long-term sustainability.2 First, the fiscal balance ignores important sources of external indebtedness. Second, the overall compliance with the rules has been weak and many countries have run deficits. Third, the debt criterion is no longer constraining to provide effective policy guidance. Finally, the regional enforcement mechanism has not been effective due to a lack of credibility, transparency, and member states’ ownership.

4. This annex extends previous discussion on the CEMAC surveillance framework3 and focuses on reforming the regional debt criterion. In doing so, first, it uses some elements of the Fund-Bank debt sustainability framework to determine the debt burden threshold for the CEMAC region. Second, it tests if the threshold allows for scaling up investment and quantifies—based on the past experience—the potential cost of debt crises for the region. Finally, it provides suggestions on how to revise the regional surveillance framework.

Figure 1.
Figure 1.

CEMAC: Fiscal and Debt Indicators

Citation: IMF Staff Country Reports 2014, 252; 10.5089/9781498315685.002.A001

Source: BEAC, IMF, IMF Staff estimations

A. Estimating Total Debt Thresholds

5. Limited experience with domestic debt crises makes it difficult to estimate debt thresholds. Compared to external debt crises, it is very difficult to identify when default on domestic debt occurred. First, because domestic debt can easily be monetized or swapped away by financial restrictions. Second because domestic debt crises episodes are very heterogeneous across countries. To overcome these difficulties, this note defines a domestic debt crisis as a failure to meet principals or interest payments to domestic creditors and uses IMF Historical Public Debt Database on domestic arrears to identify these episodes.4

Elements of Debt Sustainability Framework (DSF)

The 2012 DSF methodology estimated a probit model of debt distress following the approach developed by Kraay and Nehru (2004) and IMF (2004). In particular, the following model is estimated:

P ( d e b t ⁢         d i s t r e s s t ) = Φ ( β 1 d e b t ⁢           b u r d e n t − 1 + β 2 g o v e r n a n c e t − 1 + β 3 s h o c k t − 1 + β 4 o t h e r t − 1 ) ( 1 ) ,

where debt distress takes value of 1 if the country experiences a debt crisis and 0 otherwise. Debt burden measures a country’s indebtedness before the crisis, governance captures the quality of policy and institutions, shock denotes real GDP growth, and others is a set of controls including several country features such as the level of income per capita.

The following events are used to characterize debt crises: (i) public and public guaranteed (PPG) external arrears are higher than 5 percent of external debt, (ii) debt is rescheduled, (iii) IMF GRA financing exceeds 50 percent of the quota or (iv) the sovereign failed to meet principal or interest pavement on the due date.

An indicative debt burden threshold is then calibrated by fixing the values for the probability of debt distress, governance, and macroeconomic shocks. Three methods are used to determine the default probability: (i) the medium debt burden indicator, (ii) unconditional probability, and (iii) the noise-to-signal ratio. The DSF probability of the debt distress varies from 12 to 15 percent.

6. Elements of the recently revisited Fund-Bank debt sustainability framework are used to determine the risk of debt default and debt burden thresholds for CEMAC countries.5 In particular, a Probit model is used to determine the risk of debt distress in the CEMAC taking into account the regional indebtedness, repayment capacities, policy and institutional capacity, macroeconomic shocks, and heterogeneity of CEMAC economies (Box 1). Debt burden thresholds are computed as the average unconditional probability of debt distress for low and lower-middle income countries a year before the debt crisis occurrence.6 The probability ranges from 17 to 23 percent, and is a function of policy and institutional capacities of the country.

7. The resulting debt burden threshold varies between about 35 and 65 percent depending on policy and institutional capacity of CEMAC members. Assuming an average real GDP growth of 4.6 percent, the estimated debt burden threshold varies between 35 and 65 percent depending on institutional capacity of each member state. On average, the risk of debt distress increases substantially if the public debt to GDP ratio exceeds the threshold of about 45 percent.

8. A 50-percent debt ceiling would still leave room for scaling up public investment, but its effectiveness and absorption capacity have to improve. The debt-to-GDP ratio is projected to increase moderately to about 32 percent in 2019 and about 46 percent in 20307 as public investment stabilize at about 10 percent of GDP and oil-related revenue continue to decrease. This projection assumes, however, a relative improvement in the return of public capital and the efficiency of public investment.

B. Assessing the Costs of a Debt Crisis

9. Debt crises are associated with significant and long-lasting output losses. Debt crises can affect output limiting access to external financing and increasing the cost of borrowing. The exclusion from international capital and credit markets can last up to 5.5 years after the crisis episode (Richmond and Dias, 2008). Debt crises can also reduce trade flows by approximately 8 percent per year (Rose, 2005). Finally, debt default can lead to banking and/or currency crisis amplifying output losses (De Paoli et al., 2009). Previous empirical analyses suggest that debt crises can reduce output by about 6-10 percent in the short term and by about 10 percent over the medium term. A similar approach applied to the CEMAC indicates that debt crises have lowered output by about 9 percent in the short term and about 1 percent over the medium term (i.e. after 5 years of the crisis episode).8

10. Output growth can also be reduced when total public debt exceeds certain levels. A high debt level increases significantly risk of debt distress and for similar reason as in case of a debt crisis can lead to output contraction. While there is still debate in the literature, previous empirical studies find that growth is reduced by about 1.8 percentage point when total debt exceeded 70 percent of GDP, and by about 2 percentage point when debt exceed 90 percent of GDP (Kumar and Woo, 2010, Carner et al., 2010, Furceri and Zdzienicka, 2012).

C. Reforming the Regional Surveillance Framework

11. The reform of the regional surveillance framework should follow few simple principles while taking into account CEMAC specific features:

  • First, the regional convergence criteria should be simplified and refocus on the ultimate objective: the stability of the monetary union. Simplifying regional criteria implies reducing their number from 8 to two-three main criteria while continuing to monitor others as important economic and financial indicators. The fiscal balance criteria should be aim at reducing pro-cyclicality with the objective of long-term stability. A non-resource primary balance should be set in a way to allow a temporary scaling up of investment.9

  • Second, the mutual consistency between main criteria should be ensured. For instance, the fiscal balance criterion should not be set too high and lead to a medium-term breach of the debt criterion. Also, more tailored fiscal rules could be implemented at the national level to improve policy guidance as long as they are consistent with the regional surveillance framework.

  • Third, debt criterion should be lowered to ensure long-term sustainability and avoid significant output losses. The debt sustainability framework could be used to determine the level of the debt criterion. The debt criterion—as in the case of the fiscal balance criterion—should be seen as a ceiling to not breach rather than the optimal debt level.

  • Forth, criteria should be simple, transparent, and easy to implement and monitor, while the effectiveness of regional surveillance mechanism should improved.

  • Fifth, regional rules should be transposed into national laws. The reform of the surveillance framework should involve all stakeholders. Once a consensus is reached, the rules should be transposed into national budget laws and fiscal framework. The compliance with rules should be monitored and communicated to the public to increase political costs of deviations from the rule.10

Selected references

  • Basdevant, O., Imam P., Kinda T., Nguyen H., Zdzienicka A., 2014. Fiscal and Market Insurance Mechanisms in the WAEMU. SDN (mimeo)

  • Carner, M., Grennes, T., Koeheler-Geib, F., 2010. Finding the Tipping Point-When Sovereign Debt Turns Bad. World Bank Policy Research Working Paper 5391.

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  • De Paoli, B., Hoggarth, G., Saporta V., 2009. Output costs of sovereign crises: some empirical estimates. Bank of England Working Paper No. 362.

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  • Furceri, D., Zdzienicka A., 2012. How costly are debt crises? Journal of international Money and Finance 31 726-742.

  • IMF, 2004. Debt-Sustainability in Low-Income Countries - Proposal for an Operational Framework and Policy Implications. SM/04/27.

  • IMF, 2012. Revisiting the Debt Sustainability Framework for Low-Income Countries. SM, 12/10.

  • IMF, 2013. CEMAC. Staff Report on Common Policies for Member Countries. Country Report 13/

  • Kraay, A., Nehru V., 2004. When is Debt Sustainable? World Bank Police Research Working Paper No 3200.

  • Kumar, M.S., Woo, J., 2010. Public Debt and Growth. IMF Working Paper 10/174.

  • Leaven, L., Valencia F., 2008. Systemic banking crises: a new database. IMF Working Paper, WP/08/224.

  • Reinhart C., Rogoff K., Savastano M., 2003. Debt Intolerance. NBER Working Paper 9908.

  • Reinhart, C., Rogoff, K., 2010a. Growth in a time of debt. American Economic Review 100 (2), 573–578.

  • Richmond, C., Dias, D., 2008. Duration of Capital Market Exclusion: Stylized Facts and Determining Factors. http://personal.anderson.ucla.edu/christine.richmond/Marketaccess_0808.pdf.

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  • Rose, A., 2005. One reason countries pay their debts: renegotiation and international trade. Journal of Development Economics 77 (1), 189–206.

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1

CEMAC countries include Cameroon, Chad, Central African Republic, Equatorial Guinea, Gabon, and Republic of Congo.

2

See “Oil Wealth in Central Africa: Policies for Inclusive Growth” Bernardin Akitoby and Sharmini Coorey (eds.), IMF (2012).

3

Regional fiscal figures are weighted averages of individual countries’ fiscal ratios.

4

Regional growth prospects are based on individual country projections which generally consider the implementation of a reform agenda.

5

This projection assumes that foreign exchange receipts from l future balance of payments surpluses would be repatriated and would not be kept in off-shore accounts.

6

Staff’s estimates suggest that lower commodity prices and external demand would immediate reduce the fiscal and current account balance. Under the downside scenario, non-oil and oil commodity prices would decrease by about 3 and 5 percent, respectively, with a larger fall taking place in 2014 (about 15 percent for oil and 8 percent for non-oil commodity prices); the overall fiscal balance (excl. grants) would be reduced by about 2 percentage points of GDP in 2014–15. Similarly, the regional current account balance would decrease by about 1.5 percentage points. This scenario would result in a cumulative reduction of CEMAC official reserves by about US$ 3.5 billion by 2019.

7

As noted at the March 2014 seminar on growth in the region organized by the CEMAC Commission and the international development research foundation FERDI, regional integration and continued reforms could increase the regional growth rate by 2 percent.

8

IMF 2012, Macroeconomic Policy Frameworks for Resource-Rich Developing Countries.

9

The basic fiscal balance is defined as total revenue (net of grants) minus total expenditure excluding foreign-financed capital spending.

10

See Annex 4 of the 2013 Staff Report on Common Policies for CEMAC Member Countries (ID # 5194867). The study presents scenarios suggesting that a zero or slightly positive structural balance should be targeted to ensure sufficient savings to protect against downturns in oil prices.

11

Regional debt strategy means the coordination at the regional level of different national debt strategies for CEMAC member states.

12

See SIP on Improving Liquidity Management and Operational Framework of BEAC Monetary Policy for a more detailed account of staff’s recommendations.

13

See SIP on Financing Public Infrastructure Investments.

14

See also SIP on Public Investment Scaling-Up, Growth and Debt Dynamics.

15

« Évaluation des gains attendus de l’intégration économique régionale dans les pays de la Zone franc», FERDI, Septembre 2012, (http://www.ferdi.fr/uploads/sfCmsContent/html/135/Rapport_ZF_4oct_IMP.pdf)

16

Staff has been conducting annual monitoring of safeguards developments at the BEAC since 2010.

1

Based on March 2014 Global Risk Assessment Matrix (RAM). The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

1

Prepared by Aleksandra Zdzienicka.

2

These approaches, however, do not take into account the access to reserves guaranteed by the French Treasury under the franc zone arrangements. For more details on the methodology, see IMF Country Report 13/322.

3

IMF, (2011), “Assessing Reserves Adequacy” (www.imf.org/external/np/pp/eng/2011/021411b.pdf

4

Dabla-Norris, E., J,. I. Kim, and K. Shorono, (2011), “Optimal Precautionary Reserves for Low-Income Countries: A Cost-Benefits Analysis”, IMF WP 11/249.

5

These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and standardized assumptions on business constraints and information availability.

1

Prepared by Aleksandra Zdzienicka.

4

The database covers debt-to-GDP ratio for 174 countries over 130 years. Data are available upon request.

6

To identity the debt crises, the note relies on several databases: (i) Laeven and Valencia (2008) that includes sovereign default to private sector and debt rescheduling; (ii) Reinhart et al. (2003) that includes data on default and restructuring and Standard and Poor’s Credit Week information. Additionally, episodes of debt default are also identified when the areas on principals on external obligations exceeds 15 percent of the total debt.

7

See SIP on Public investment scaling up, growth and debt dynamics.

8

The methodological approach consist of estimating contemporaneous output growth against a dummy variable that takes values equal to 1 for the crisis occurrence and 0 otherwise. For more details, see Furceri and Zdzienicka (2012).

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Cover IMF Staff Country Reports
Central African Economic and Monetary Community (CEMAC): Staff Report on Common Policies of Member Countries
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2014: Issue 252
Publisher:
International Monetary Fund
ISBN:
9781498315685
ISSN:
1934-7685
Pages:
68
DOI:
https://doi.org/10.5089/9781498315685.002
Figure 1.

CEMAC Nominal GDP, 2013

(CFAF, Billions)
Figure 2.

GDP Growth Contribution, 2013

(in percentage points)
Figure 3.

CEMAC Selected Economic Indicators, 2011–13
Figure 4.

Recent Economic Developments, 2010–13
Figure 5.

Medium-term Outlook, 2014–19
Figure 6.

CEMAC Real and Nominal Effective Exchange Rates

(2007-14, 2005=100)
Figure 7.

Real Effective Exchange Rate of CEMAC Countries

(2007-14; 2003 = 100)
Figure 8.

CEMAC Policy Rate

(Jan 2000- Dec. 2013)
Figure 9.

CEMAC Reserve Requirements (RR) and Excess Reserves (ER)

(in billions of CFA Francs) (Oct 2001- Aug. 2013)
Figure 10

CEMAC. BEAC’s interventions

(in billions of CFAF) (Jan 2000-Dec. 2013)
Figure 11.

CEMAC: Liquidity withdrawals and Interbank volumes

(Jan 2000-Dec. 2013)
Figure 1.

CEMAC: External Sector Developments
Figure 2.

CEMAC: Business Environment and Governance
Figure 1.

CEMAC: Fiscal and Debt Indicators